Back When “Boodlers” (Not Central Banks)
Counterfeited Currency…

As Bruce Sterling puts it, “If some joker told you that a one-dollar bill from the Railroad Bank of Lowell, Massachusetts had a woman leaning on a shield, with a locomotive, a cornucopia…then you pretty much had to take his word for it.” And in that particular case the joker was actually telling you the truth.

So the variety of these bills – and the virtually impossibility of spotting a fake – made boodling a breeze.

I hope no one takes offense at this; but Americans were more gullible people back then. They looked upon boodlers with awe, seeing them as ingenious masters of complicated technology. Sterling likens boodlers to the “hackers” of our day.

So these dollars circulated with relative ease…at least until the introduction of the Secret Service. One frightened estimate said that roughly a third of the dollars in circulation were fakes, neither issued by a bank nor backed by any real gold. The first cChief of the Secret Service – William P. Wood – even estimated that a full half of America’s dollars were fakes!

But uniform rules for currency really only made the situation worse. The first greenbacks – so called because only the back of the bill was printed in green ink – were easy for boodlers to copy, and the situation didn’t really change until the Secret Service went into action.

But why are we talking about 19th Century counterfeiting? It’s because we’re now facing one of the biggest boodling epidemics in world history.

The Promise

One of the key attributes leading to the success of fiat currency (paper money) has been the fact that it’s accepted by the government for payment of taxes. So even if no one else will accept your paper bills, at least your own government promises to accept them as payment.

It may seem like a benign attribute. But in reality, this promise is pretty much the basis for the value of paper money. Since everyone has to pay taxes, everyone has at least a degree of interest in accepting their country’s paper money. And if enough parties accept the money, then the currency can function as a store of value.

So the government’s promise to accept the bills for tax payments ultimately amounts to a promise that those dollars are worth at least something.

But doesn’t that mean that a problem would arise if you started counterfeiting the currency or circulating dollars that aren’t backed by anything? I mean, conjuring this money out of thin air must have some kind of devastating effect, right? The promise is effectively broken, right?

Well, yes and no.

It turns out – as we can see in the story above – that this promise is not very easily broken.

The promise can be bent and warped…even torn at a little bit here and there. But the dollars will still be worth something. Instead of the promise simply being whole or broken, there are varying degrees at which the promise can exist.

This is best evidenced by today’s free-floating exchange rates and the fact that a dollar today might not have the same value as a dollar did yesterday. It turns out that this kind of promise from an established and powerful country is, in fact, very elastic.

Indeed, as we can see from the example above, this promise can sustain major blows from counterfeiters or anyone else creating dollars out of nowhere. A full third of the economy’s paper money was counterfeit in the 1860’s, but the system still seemed to work.

So what does this mean for today’s boodlers at the Fed and the Treasury?

It means that their calm is – at least in part – justified.

These systems don’t break down overnight, and we’re not going to wake up tomorrow to a full-on bout of hyperinflation. Rather, the exchange rate of our dollars will continue to reflect the value of that promise in the minds of all those holding dollars (at least when compared to the promises made by other countries.)

So for all the naysayers and chicken little’s that say we’re heading full-speed into a hyperinflationary crash…perhaps they should be looking into the pages of history. Because this isn’t the first time that the American economy has been replete with currency conjured from thin air.