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What IS Money?
(May 18, 2008) In the early days of our country, before the expense of the Civil War required the Union to take unto itself the monopoly issuance of legal tender, paper money was a Hydra-headed agglomeration of notes both true and false. Today, our money is standardized and taken for granted, yet who can we believe about its true value?
Stephen Mihm has authored and published through the Harvard University Press, A Nation of Counterfeiters, detailing the early days of US money from the beginning of the 19th Century through the struggles of the Civil War.

Although the US Mint struck gold, silver, and copper coins more or less continually from 1795 onward, our nation early on lacked sufficient precious metals to provide sufficient coinage to support our national economy through this period of unprecedented growth. What a citizen at that time normally encountered in everyday retail commerce was not gold or silver coins, but more often circulating notes issued by private banks of varying degrees of solvency, each promising to pay ‘in specie’ on demand their denominated face value.

This came to be because, under the Constitution, the power to coin money in gold and silver was reserved to the federal government, and the states were forbidden to issue paper money, or ‘bills of credit.’ So in the early 1800s, state-chartered banks took on that role by issuing their own notes, which circulated in lieu of scarce specie coins.

Mihm writes, “though only a few banks issued notes in the 1790s, close to two hundred did by 1815, and by 1830, the number had climbed to 321. Ten years later, the number of banks jumped again, to 711, and after dipping in the early 1840s, skyrocketed upward…By the 1850s, with so many entities commissioning bank notes of their own design (and in denominations, sizes, and colors of their choosing), the money supply became a great confluence of more than ten thousand different kinds of paper that continually changed hands, baffled the uninitiated, and fluctuated in value according to the whims of the market. Thousands of different kinds of gold, silver, and copper coins issued by foreign governments and domestic merchants complicated the mix. …Such a multifarious monetary system was not what the framers of the Constitution had intended.”

One basis of a successful medium of exchange is that it be in a form both standard and recognizable to the ordinary person in an everyday commercial transaction. But what ‘passed’ for money in the early 1800s, in its varied issuers, designs, and denominations (including such oddities as $3, $4, $4.50, $16 notes, etc.), failed that test miserably.

Such a situation was inevitably taken as a opportunity by the dishonest. Counterfeits flooded the countryside, some of domestic origin, some smuggled over borders from Canada, and all adding to the diverse pile of good, bad, and ugly issuances which was the American money supply before the 1860s.

“’We seem about to become liable to be called a nation of counterfeiters!’ predicted Hezekiah Niles in 1818. Niles, whose Weekly Register was the premier financial publication of the day, looked with horror at the proliferation of fraudulent paper. ‘Counterfeiters and false bank notes are so common, that forgery seems to have lost it criminality in the minds of many.’”

Counterfeiting had its masterminds in that era, and Mihm tells well- researched stories of some of the most notorious of them. Steel- plate engravers did the dirty work, proper paper was obtained, notes were printed by the ream, signatures matching those of bank officers were forged, and established countefeit money distribution channels existed all over the country, methodically ‘shoving’ the suspect product onto merchants, vendors, and ordinary citizens alike.

Mihm cites estimates of the amount of bogus paper in circulation in the early US economy as ranging from ten per cent to as much as fifty percent in some regions of the country. Everyday commerce became a puzzling challenge for buyer and seller alike.

A note that had a familiar look and was well made always had a chance to ‘pass,’ and whether it was accepted often came down to an eye-to-eye assessment of the bearer – honest or cunning? One’s suspicion about any given banknote at the time could have many reasons: was the note a phony copy of a good banknote, or was it the lawful issue of a bank which no longer is in business, or if the issuing institution is legitimate and still in business, can it actually redeem its printed promise in cold hard cash? Or was it possibly a legitimate note that had been ‘raised’ – that is, had its denomination changed, say, from $1 to $5 by dissolving the impression on parts of the note, and inking in (‘raising’) the numerals “5” in its corners?

If the problem of blatant copies wasn’t enough, the very legitimacy of the ‘genuine’ issues occupied a shadow world all their own. The term ‘wildcat bank’ referred to an institution, established out on the Western frontier, perhaps chartered by the state and perhaps not, which also issued its own paper money, without benefit of actually having any hard money (specie) in its vaults. The business model was simple: print some convincing looking bills in various denominations, have the bona fide officers of the bank sign them, and blend them into the mix of notes that made up the tools of commerce. A merchant in Kentucky, being tendered such a previously unseen note from, say, far-off Michigan, might accept the note at a discount to its equivalent in gold or silver, if he was confident that it could be ‘passed’ onto someone else in a future transaction.

Legitimate issues of solvent banks circulated, of course. These were notes that actually could be taken back to their issuers and ‘cleared’ for genuine gold or silver coins. Other banks issued notes during their period of initial solvency, yet might later suspend specie payment if more paper was returned to them then they could cover. Nonetheless, their currency lived on, circulating, perhaps at a discount among those in the know, and perhaps at par to the uninformed.

To say the least, the general reputation of the banking profession during these times was less than stellar. Andrew Jackson was elected President in 1836 in large part on his vow to close the Second Bank of the United States (and he did). In the era before deposit insurance and standardized currency, most Americans were more likely to hide their life savings under a fence- post than deposit gold and silver in the trust of a bank.

Given such widespread suspicion of banks, people came to judge a paper note on strictly practical terms. If a counterfeiter turned out a passable copy of a note from a well-regarded and solvent bank, was that not more useful than the genuine issue of most banks? Did not the counterfeiter, with his basically bogus product, stand equally with the banker whose product was no more likely to be redeemed in specie than the bogus note? Weren’t the counterfeiter and the banker both simply producing passable imitations of money, one doing so legally, and the other illegally? Mihm quotes the memoirs of a detective of the time as saying, “It was a popular remark among men of business at this time that they preferred a good counterfeit on a solid bank to any genuine bill upon a shyster institution.”

Although reading Mihm’s book brings to light a broad monetary history of the US, offering an informed and very readable synopsis of the history of paper money from colonial times up through FDR’s era, its primary focus is on monetary shenanigans from the 1830s though the Civil War era. A Nation of Counterfeiters most entertainingly brings to life a sundry and colorful cast of characters from our nation’s monetary past.

For instance, Waterman Ormsby figures large in the history of bank note engraving – though he barely escaped conviction for counterfeiting in 1838, he went on to form the Continental Bank Note Company and win a government contract in 1863 to print US Legal Tender notes, before the formation of the Bureau of Engraving and Printing put an end to having federal currency produced by private contractors.

Or the story that Mihm relates that one day in 1829, a James Brown, shopkeeper of a general store in Boston, Ohio, was struck full on by a bolt of lightning – “The force of the blast ripped his black suit into tatters, threw his body off the porch and onto the ground, and as one eyewitness recalled, tore his boots off his feet, hurling them over the roof of a neighboring sawmill.” Miraculously, he survived his ‘lightning scrape’ and went on, with his brother Dan, to become kings of the infamous Cayuhoga Ohio counterfeiting center in the 1830s.

Consider also the self-styled “Colonel” William Patrick Wood, described in his time as ‘short, ugly, and slovenly,’ and whose first federal appointment was superintendent of the Old Capital Prison in 1861. Along with providing involuntary housing for spies, deserters, runaway slaves, ‘suspicious characters’ and ‘tough citizens generally,’ he also took an expansive view of his official duties, including going on missions behind enemy lines, and distributing counterfeit Confederate money to Union prisoners in the South. Later, he bulled his way into the leadership of the fledgling Secret Service, and more or less singlehandedly put an end to counterfeiting of federal paper money in the course of a few years.

Mihm’s book has a prologue entitled “Confidence and the Currency,” which begins “Few of us question the slips of green paper that come and go in our wallets, purses, and pockets.” But readers of a report in the May 2008 edition of Harper’s Magazine may find themselves intently questioning the true state of our dollar today.

Kevin Phillips, author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, has published a report entitled “Numbers Racket, Why the Economy is Worse than We Know.” In it, he challenges the credibility of our government’s reported economic numbers, chiefly regarding inflation and unemployment, verifying the worst fears that we have heard from the hardcore hard-money hard-cases who have long scoffed at the statistics put out by TPTB and the MSM (to the uninitiated, those are popular acronyms for The Powers That Be and Main Stream Media).

Of course, we all know that the government disseminates questionable economic numbers, from the laughable CPI mis-measure of the inflation rate, to unemployment figures that don’t seem to quite figure who is unemployed and who is, well, maybe just someone who likes to stay home a lot.

Phillips tells us how we got to this precarious point of perennial prevarication, giving us a concise history of modern government statistical manipulation, starting during JFK’s presidency, and seemingly practiced by every administration since. He shows how fudging, hedonics-izing, and, in the case of the 2006 decision by the Fed to discontinue publishing the M-3 money supply figures, simply eliminating important statistical measures of our economy and national financial condition, have long served Washington’s interests in minimizing the perception of inflation and generally putting a rosy spin on the state of our economic nation.

Phillips covers the usual suspects: the substitution of “owner equivalent rent” in place of housing costs in compiling the Consumer Price Index, the abandonment of Gross National Product measurement in favor of Gross Domestic Product to minimalize the perceived impact of foreign debts, the imputation of phantom income boosters that now comprise a full 15% of our stated GDP, and the ‘dumbing down’ of unemployment figures to make them virtually useless in measuring willing and able potential employees, among a host of other distortions to ‘official’ figures.

The most blatant government misstatements are the CPI and PPI figures released every few weeks. They are so obviously out of line with our common experience of inflation that they have the credibility of Soviet-era economic statements that were promulgated by the Kremlin back in the Cold War days.

He quotes John Williams, the California economic analyst and statistician who tracks the ‘shadow’ (read: true) numbers reflecting our economy, as saying, “If you were to peel back changes that were made in the CPI going back to the Carter years, you’d see that the CPI would now be 3.5 to 4 percent higher-“ meaning that, Phillips states, “because of lost CPI increases, Social Security checks would be 70% greater than they currently are.”

Phillips concludes that “After forty years of manipulation, more than a few measurements of the U.S. economy have been distorted beyond recognition,” and in such chicanery he sees real dangers to our present economy. When economic numbers lose their basis in truth, and lead to bad assumptions about the state of our state, it's only natural that bad national policy decisions follow.

Is it any wonder that our poor dollar, its existence dependant on the full faith and credit of the federal government, suffers from that government's self-imposed ignorance, and threatens to slide right off the cliff.


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