Digital currencies are repeating the problems of 19th-century paper money

History provides a foreboding 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 as yet do not have full public faith. What is worse, today’s currencies are being created by institutions whose primary incentive is profit, rather than public stewardship.

Skepticism of new currencies dates to colonial America when merchants, government officials, laborers and farmers alike preferred to use coins or credit instead of paper money, which seemed more ephemeral. Out of necessity, Congress and the states financed the Revolutionary War using paper currency to pay for soldiers’ salaries, food, munitions and other weapons. But many merchants refused to accept it for goods.

In one instance in New York, two cartmen working for the Continental Army were refused tea when they offered to pay a shopkeeper with paper continental dollars. In response, the cartmen threatened to rally a mob and to “blow [his] brains out.” Congress ordered that individuals who refused the currency would be “an enemy of his country.” Warranted or not, this distrust contributed to currency inflation. By 1790, the redeemable value of the outstanding war currency debt was 100 times less than its total face value.

After the war, Congress lacked enough silver coinage to redeem all the paper currency it had issued to pay for the war. When soldiers’ pay depreciated to next to nothing, it plunged people into deep poverty. Veterans’ claims to a military pension in lieu of pay took decades to satisfy. Bankruptcies among veterans and other debtors were common partly because creditors refused to accept certain paper money for debts.

Public trust was an issue. Paper money markets in the 1770s and ’80s were volatile. Yet, despite the risks, public and private institutions quickly moved ahead with a paper money system without regulation to mitigate inflation, speculation or fraud. Banks issued it. Trade was conducted with it. Wages were paid in it. Although paper money usage increased nationwide over the coming decades, bank failures and counterfeiting added to people’s hesitation to accept any bank’s paper notes. Communities often trusted currency issued by banks near where they lived and worked more than currencies issued by less-familiar banks.

Banks proliferated across the country in the early decades of the 19th century. Paper money presented a lucrative opportunity to get rich while financing continental dominance over Indigenous peoples and European colonies west of the Mississippi River. Eventually, thousands of banks were issuing their own bank notes purportedly backed by gold and silver held in their vaults. Many banks even printed the value of their capital assets on their bank notes to garner public trust.

Self-assured promises of performance also undermined public trust in money systems. Beginning in the 1790s and extending through the 1850s, proponents of bank notes argued for their merits: easier exchange than coinage, a reliable money supply and promises of new wealth in the form of land and industrial capital. Bank notes did spur new economic activity. But these arguments ignored the main sources of growing American wealth: enslaved labor, the dispossession of Indigenous land and property and technological innovation created far more wealth.

Absent regulation, depreciation revealed stark realities of worthless pay and evaporated savings. People would entrust their deposits to banks, the nation’s paper money issuers, and be burned. Hoping to avoid financial ruin, workers relied on newspaper reports and hearsay assessments about the actual liquidity and management of banks whose money circulated.

Even those most up-to-date suffered, though, when the real value of their wages, paid in bank notes, ended up being worth far less than face value because a bank failed or because creditors refused to assume the risk of acquiring more currency. This was especially true during the economic panics of 1819, 1837 and 1857.

Despite persistent national frustration with paper money and without a viable alternative, the federal government was again forced to issue paper currency to help finance the U.S. Army during the Civil War. In 1862, Congress had authorized the Treasury Department to issue paper currency that came to be known as “greenbacks,” as well as government bonds, to finance the war.

Those currencies were effectively unpaid government debts. The Confederacy also issued its own paper currency, which depreciated significantly more than greenbacks. Some Confederates even preferred the more trusted Union greenbacks. In 1879, the Treasury Department successfully resumed redeeming government bonds and “greenbacks” that had been issued to finance the war using gold and silver.

Sustainable and enforceable federal regulation of paper money’s emission, exchange and value was delayed until after the Civil War. In addition to the Treasury Department’s successful redemption program, Congress passed the National Banking Act of 1875. This law required any bank that issued paper currency to alter its designs to resemble all other banks’ currencies.

Yet despite these material assurances for people holding currency, the politicization of money and its regulation continued to limit the public’s ability to trust paper money implicitly. Farmers, who were a large portion of William Jennings Bryan’s electoral coalition during his 1896 presidential bid, were divided on whether Congress should authorize large emissions of paper money or silver coinage.

Successful regulation of paper money was seen by some as proof of its great promise and by others as a measure only necessary during wartime. The chronically indebted universally trusted silver coinage and wanted it, but critics questioned their underlying economic logic. Bryan’s eventual failure to win the presidency gave way to further federal consolidation and stabilization of the country’s monetary system, helping to end over a century of monetary instability and disunion.

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 have invested in digital currencies find themselves squarely in a moment as risk-ridden as in the early days of the United States, with some even suffering catastrophic financial losses like in the 1780s.

Promises of performance have gone unfulfilled, further undermining trust. And although digital currencies have not been politicized to a similar extent as paper money was in the 19th century, risks to the U.S. economy and financial institutions grow steadily as more and more people interact with digital currencies. Just as with paper currency in the 1780s, 1850s and on the eve of 1879, the trustworthiness and viability of controversial money systems can evaporate or solidify depending on the rollout of regulatory monetary policy.

There is not yet a comprehensive legal or enforcement apparatus to protect those who transact with digital currencies from losses, should a company go bankrupt or experience a rush on its deposits. Like with early American paper money, digital currencies promise to benefit our lives daily in the same way as cash or credit cards. As an asset, the promise of untold profits can itself be profitable when consumer trust is high. Yet “decentralized” is still another word for stateless, which presents problems when corporate earnings and statements meant to calm investors replace the full faith and credit of the United States.

The history of paper money shows that regulation and enforcement must match investors’ level of trust in digital currencies. Otherwise, discrepancies have and will always increase the chance of economic catastrophe, especially for those most vulnerable in the marketplace. While the answer to the challenges of the 21st century won’t match those of the 19th, the history of inventing money in America foreshadows a grim and prolonged period of monetary instability at a moment in national and global affairs when we cannot afford to misstep.