Stephen Mihm: America’s reliance on dubious credit goes all the way back to the country’s founding





[Stephen Mihm is the author of “A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States,” which will be published next month by Harvard University Press. He teaches history at the University of Georgia.]

The recent rumbles and ruptures in the financial markets are finally making people reassess the dubious systems of credit that have arisen in the past few years. In retrospect, it seems clear that honest, tried-and-true ways of borrowing money were recklessly abandoned and replaced by financial legerdemain: black-box transactions, synthetic collateralized debt obligations, mezzanine tranches and credit-default swaps — to cite just a few of the exotically named financial instruments now facing scrutiny. America’s once-solid economy became a house of cards, a web of debt masquerading as wealth, a system crying out for correction. As one Wall Street banker quoted by The Financial Times concluded, the recent credit crunch suggests that things are finally “returning to a more ‘normal’ level after ‘abnormally’ loose conditions over the past few years.”

But what if the last few years of playing fast and loose with credit were not a deviation from the norm but a return to America’s economic roots? Though it is hardly the sort of thing you read about in heroic histories of America’s rise to economic greatness, the credit system in the United States has often been, in effect, a confidence game writ large, relying heavily on shaky paper promises, shell games and other trickery. The standard account would have you believe that the road to individual and national wealth was paved by hard-working, honest entrepreneurs who steered clear of get-rich-quick schemes, counterfeiters’ printing presses and suckers’ swindles. But for better and for worse, such shady institutions lie at the heart of the country’s moneymaking past and, if recent events are any indication, its present.

The very phrase “making money” had a curiously literal meaning in the years between the founding of the United States and the onset of the Civil War. Throughout that era — a time before the federal government issued its own, exclusive paper money — hundreds and eventually thousands of individual banks extended credit and conducted business by printing and circulating their own “bank notes” in denominations and designs of their choosing. Unlike today’s currency, bank notes were promises to pay, not cool, hard cash. A bank issuing a note vowed to pay the stated amount in “real” money (gold or silver coin) if someone presented it for redemption at the bank’s counter — a promise that many banks failed to keep in times of panic. These slips of paper became the nation’s de facto money supply, as well as the building blocks of the country’s credit system....

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