America’s First Initial Fiat Offering (IFO)
Wall Street traditionalists have been quick to cast aspersions on cryptocurrency. Jack Bogle said to “avoid Bitcoin like the plague” and Warren Buffet says “bitcoin is a ‘gambling device’ with ‘a lot of frauds connected with it’.”
The famous economist Dr. Nouriel Roubini said “The promise to cure the world’s ills through “decentralization” was just a ruse to separate retail investors from their hard-earned real money.”
While I don’t subscribe to the techno-libertarian dream of abolishing the Fed and replacing it with Bitcoin (Bitcoin’s transactions times would have us all waiting for coffee in lines that wrap around the block.) Wall Street’s attitude that crypto is not “real money” because it’s not state-sanctioned fiat is equally objectionable. One only has to look at the history of fiat in the U.S. to see why.
Perhaps it’s high time for a refresher course on the history of the almighty dollar.
The Great American IFO or Initial Fiat Offering
Over the past 100 years, the U.S. dollar has soared. In large part, this was due to Europe decimating itself in two World Wars. Regardless, the first half of the 20th century saw the U.S. turn from a debtor nation to a creditor nation and it was under these belligerent conditions, as well as others, that put the U.S. dollar on top.
But was there ever a time when the U.S. dollar was weak, volatile, and called a fraud like crypto is today?
The answer, unsurprisingly, is yes. It is a story that takes us all the way back to 1862.
Funding the Civil War (1861–1865)
The Civil War is America’s deadliest conflict and it cost a staggering $6.6 billion (in 1860’s dollars). President Lincoln postulated that “The result of this war is a question of resources. That side will win in the end where the money holds out longest.”
Unfortunately for him then-Secretary of the Treasury, Salmon P. Chase, vastly underestimated the amount of money required for the conflict and was desperate to find more. Governments primarily rely on three methods for funding wars:
1) Borrowing from the public
2) Taxes
3) Printing money
Lincoln and Chase decided to walk boldly through door # 3, even though they and all of Congress hated the idea. The reason they hated it was because Article 1 Section 10 of the Constitution mandated “No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts.” In other words, printing fiat was unconstitutional and was ruled as such by Supreme Court Justice Salman P. Chase (yes the same one) in the first of the Legal Tender Cases Hepburn vs. Griswold.
There is no enumerated power in the Constitution that authorizes Congress to print fiat currency or ‘emit bills of credit’ as it was known back then. This power must be found elsewhere, and so it was in the so-called ‘elasticity clause’ found in Article I Section 8, also known as the “necessary and proper clause” which gives Congress “The Power To …make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”
In other words, the Supreme Court had to cajole the original intent of the Constitution in order to wrestle out of it an interpretation that could satisfy the Federal government’s strong desire to have its hands on the levers of the money printing machine. You can read it for yourself if you want to see how badly a Supreme Court Justice can mangle the Constitution. Look no further than Chief Justice Horace Gray Jr’s majority opinion in Juilliard vs. Greenman (1884), the last of the aforementioned Legal Tender Cases.
Back in 1861, this was Lincoln’s response to all this:
“I will violate the Constitution if necessary to save the Union; and I suspect, Chase, that our Constitution is going to have a rough time of it before we get done with this row. Now what I want to know is whether — the Constitution aside — this project of issuing notes is a good one?”
“It is not only a good one,” Chase conceded, “but the only one open to us raising any money.” — Lincoln’s War: The Untold Story of America’s Greatest President as Commander in Chief
So, on February 25, 1862, Congress waived its magic wand passing the first Legal Tender Act, and with the first issuance of $150 million the Greenback was born. This was the United States equivalent of an IFO (Initial Fiat Offering) and it was done in the full knowledge that it violated the Constitution.
The Greenback’s value was tied to the success of the Union, as such, it fluctuated wildly in relation to how well they were doing in the war. If the Union won a battle, the price shot up, if they lost, it plummeted. Volatility is certainly not unique to cryptocurrency.
The chart below shows how the Greenback struggled to maintain parity with gold. Looking at 1865, the year the Union declared victory, we see the price shot up 100%.
Over the next 13 years the Greenback slowly climbed until, in 1879, it reached parity with gold. It was at that time, following the Specie Resumption Act, that lawmakers put the Greenback onto the gold standard where it remained until 1971.
California and Oregon rejected the Greenback
California and Oregon, flush with gold coinage from the Gold Rush didn’t like the notion of bank notes or fiat currency. Merchants in San Francisco set up an embargo against the Greenback in 1862: “They agreed that they were ‘not to receive or pay out legal-tender notes at any but the market value, gold being adhered to as the standard.’ ”
Wall Street should be kinder to cryptocurrency
As we can see, fiat currency in the U.S. was, much like crypto, not an immediately accepted, stable, ubiquitously used medium of exchange or store of value at its inception.
Armed with this understanding of our nation’s own topsy turvy relationship with money creation; one that was passionately contested at the time, perhaps Wall Street will be inclined to take a more sympathetic view on the fledgling cryptocurrencies of today. After all, if just 150 years after the Civil War which nearly ripped the United States in two, its dollar is the strongest reserve currency on earth, where might we see cryptocurrency develop if given the time?
Our present moment may not be as desperate as it was in 1862, but fiat currency has been anything but a sure bet on global economic stability. I think it would be wise to allow technologists and crypto libertarians the ability to continue their work on digital currencies, if not as a hedge against our current financial system, then at least by way of offering innovative solutions that can work within it.
