The story provides a cautionary tale for today’s digital currency market. As with paper money in the United States in the 19th century, digital currencies are financial products that do not yet have the full trust of the public. Worse still, today’s currencies are created by institutions whose primary motivation is profit, rather than public stewardship.
Skepticism about new currencies dates back to colonial America when merchants, officials, workers, and farmers preferred to use coins or credit instead of paper money, which seemed more ephemeral. Out of necessity, Congress and the states funded the Revolutionary War using paper money to pay for soldiers’ salaries, food, ammunition, and other weapons. But many merchants refused to accept it for goods.
In one case in New York, two carters working for the Continental Army were refused tea when they offered to pay a tradesman with paper Continental dollars. In response, the carters threatened to rally a crowd and “blow [his] brains out. Congress directed that individuals refusing the currency would be “an enemy of his country.” Whether justified or not, this mistrust has contributed to monetary inflation. In 1790, the redeemable value of outstanding war money debt was 100 times less than its total face value.
After the war, Congress lacked enough silver coins to redeem all the paper money it had issued to pay for the war. When soldiers’ pay depreciated to almost nothing, it plunged people into deep poverty. Claims by veterans for a military pension in lieu of salary have taken decades to be satisfied. Bankruptcies of veterans and other debtors were common in part because creditors refused to accept certain paper money for debts.
Public trust was an issue. Paper money markets in the 1770s and 1780s were volatile. Yet despite the risks, public and private institutions quickly adopted an unregulated paper money system to mitigate inflation, speculation, or fraud. The banks issued it. Trade was done there. Wages were paid there. Although the use of paper money increased throughout the country over the coming decades, bank failures and counterfeiting added to people’s reluctance to accept paper notes from any bank. Communities often trusted currencies issued by banks close to where they lived and worked more than currencies issued by less familiar banks.
Banks proliferated throughout the country during the first decades of the 19th century. Paper money offered a lucrative opportunity to enrich oneself while financing Continental rule over Indigenous peoples and European settlements west of the Mississippi River. Eventually, thousands of banks issued their own banknotes allegedly backed by gold and silver held in their vaults. Many banks even printed the value of their fixed assets on their banknotes to gain public trust.
Promises of assured performance have also shaken public confidence in monetary systems. From the 1790s and well into the 1850s, proponents of banknotes argued for their merits: easier exchange than money, a reliable money supply, and promises of new wealth in the form of landed and industrial capital. Banknotes stimulated new economic activity. But these arguments ignored the main sources of America’s growing wealth: bonded labor, dispossession of Indigenous lands and assets, and technological innovation created far more wealth.
In the absence of regulation, depreciation exposed the harsh reality of worthless wages and evaporating savings. People would entrust their deposits to banks, the nation’s paper money issuers, and be burned. Hoping to avoid financial ruin, the workers relied on newspaper reports and hearsay assessments of the actual liquidity and management of the banks whose money was circulating.
Even the most up-to-date suffered, however, when the real value of their salaries, paid in banknotes, ended up being worth far less than face value because a bank failed or because creditors refused to pay. assume the risk of acquiring more currencies. . This was especially true during the economic panics of 1819, 1837 and 1857.
Despite continued national frustration with paper money and with no viable alternative, the federal government was again forced to issue paper money to help fund the U.S. military during the Civil War. In 1862, Congress had authorized the Treasury Department to issue paper money known as “greenbacks”, as well as government bonds, to finance the war.
These currencies were in fact unpaid public debts. The Confederation also issued its own paper currency, which depreciated much more than the greenbacks. Some Confederates even preferred the more reliable Union greenbacks. In 1879, the Treasury Department successfully resumed the redemption of government bonds and “greenbacks” that had been issued to finance the war using gold and silver.
Lasting and enforceable federal regulation of the issue, exchange, and value of paper money was delayed until after the Civil War. In addition to the Treasury Department’s successful buyback program, Congress passed the National Banks Act of 1875. This act required any bank that issued paper money to modify its designs to resemble all currencies of other banks.
Yet despite these material assurances for holders of money, the politicization of money and its regulation have continued to limit the public’s ability to implicitly trust paper money. Farmers, who made up a large part of William Jennings Bryan’s electoral coalition when he ran for president in 1896, were divided on whether Congress should authorize large issues of paper money or coins. ‘money.
Successful regulation of paper money was seen by some as proof of its great promise and by others as a measure necessary only in times of war. The chronically indebted universally trusted and wanted silver currency, but critics questioned its underlying economic logic. Bryan’s eventual failure to win the presidency gave way to federal consolidation and stabilization of the nation’s monetary system, helping to end more than a century of monetary instability and disunity.
Today, digital currencies are erratic. The instability of the value of money has always and continues to fuel skepticism, which can lead to volatility. And now, those who invested in digital currencies find themselves squarely in a time as risky as the early US, with some even suffering catastrophic financial losses like in the 1780s.
Performance promises weren’t delivered, further undermining confidence. And although digital currencies were not politicized to the same extent as paper currencies in the 19th century, the risks to the US economy and financial institutions are steadily increasing as more and more people interact with currencies. digital. Much like paper money in the 1780s, 1850s, and on the eve of 1879, the reliability and viability of controversial monetary systems can evaporate or solidify depending on the deployment of regulatory monetary policy.
There is not yet a comprehensive legal or enforcement apparatus to protect those who transact with digital currencies from loss, if a business goes bankrupt or suffers a run on its deposits. As with the first American paper currencies, digital currencies promise to benefit our daily lives in much the same way as cash or credit cards. As an asset, the promise of untold profits can itself pay off when consumer confidence is high. Yet “decentralized” is yet another word for stateless, which poses problems when corporate earnings and statements intended to appease investors replace the full faith and credit of the United States.
The history of paper money shows that regulation and enforcement must match the level of investor confidence in digital currencies. Otherwise, the gaps have and always will increase the risk of economic catastrophe, especially for the most vulnerable people in the market. While the response to the challenges of the 21st century will not match those of the 19th, the story of the invention of money in America foreshadows a dark and protracted period of monetary instability at a time in national and global affairs when we we cannot afford to take a misstep.