America's History of Dubious Credit Stephen Mihm, author of A Nation of Counterfeiters, argues that Wall Street's problems — stemming from debt and money that was handed out too freely — are not new problems in the United States. Historically, he says, the economy was built on shady promises, shell games and trickery.

America's History of Dubious Credit

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Right now, today's trouble on Wall Street and their illustrious - or maybe I should say dubious - pedigree. Professor Stephen Mihm writes in a new book due out this week that the country's reliance on shaky credit goes all the way back to its founding.

Stephen Mihm is an assistant professor of history at the University of Georgia and author of "A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States." He joins us from the studios of Georgia Public Radio in Atlanta. Nice to have you on the program today.

Professor STEPHEN MIHM (Author, "A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States"; History, University of Georgia): Thanks for having me in.

CONAN: So playing fast and loose with credit, this recent example on Wall Street, not unique.

Prof. MIHM: No, no. Not at all. I would say probably from the country's founding all the way to the present, there have been episodes, frequent episodes in which capitalists in this country have extended credit far too loosely and sometimes fraudulently with some unpredictable consequences of the sort that you're seeing now.

CONAN: Booms and busts.

Prof. MIHM: Booms, busts, panics - really, panics that actually put the current one in perspective, panics that are, as one of your guests said more recently today, are like an old-fashioned bank run, I mean, things that we haven't seen for some time were actually much more frequent occurrence in the United States for the most of its history, in fact.

CONAN: Oh, I guess, the only experience most of us have with something like that is the scene from "It's a Wonderful Life," where Jimmy Stewart has to save the savings and loan.

Prof. MIHM: Exactly. Exactly. Exactly. But, you know, in the early 19th century, bank runs and suspensions of payment - when banks literally had no more money to give out or rather didn't have gold and silver coin to redeem the notes that they did have outstanding - were happening pretty much, you know, on every 10, 20 years this would have take place and just sweep and absolutely devastate the economic landscape of the United States.

CONAN: And it's interesting, part of the situation on Wall Street today is exactly what you're talking about in an odd way. It's psychological. It's about confidence - people three weeks ago had confidence in these loans and now they don't.

Prof. MIHM: Right. And it's sort of - it exposes, you know - once in a while this happens and it exposes the fact that underlying our entire economic system is essentially a kind of confidence game that as long as prices keep going up, as long as people continue to have faith that prices keep going up, we can continue engaging in this kind of financial alchemy that's been the norm the past few years. But then, oftentimes there's a moment and it can be a very kind of random moment when that all starts to fall apart. And things that previously seem genuine start to seem fraudulent, counterfeit, you name it, but otherwise worthless, and the panic sets in.

CONAN: In an op-ed you wrote for the New York Times last week, you quote John Adams, the former president, wrote in 1809 that every dollar of a bank bill that's issued beyond the quantity of silver or gold in the vaults represents nothing and is therefore a cheat on somebody.

Prof. MIHM: Yes. Yes. A man who would have been in good company with bears and not bulls today, I think you could safely say. But this is a strain of thought and a kind of, perhaps, even a Calvinist one that's kind of stayed with us all this time, and you can see it starting to rear its ugly head again today, where people are pointing out. But what is really backing these collateralized debt obligations? Well, as it turns out, confidence, and confidence is suddenly in short supply. And so things that look like a sure bet suddenly start to look a lot less like a sure bet.

CONAN: And bubbles, I guess, again, what we're familiar with was the Internet bubble of a few years ago. But bubbles...

Prof. MIHM: Right.

CONAN: ...and real estate bubbles in particular, are nothing new.

Prof. MIHM: Nothing new either. And in fact, you know, when you look at, for example, at 1819, 1837, 1857, these are three massive financial panics that resulted in no small part because of essentially real estate or land speculation in which easy credit was extended, people got themselves way over their heads, and then the entire edifice came crashing down.

So it's interesting how in many ways this is recurrent, but we're also a kind of nation of amnesiacs and that we sometimes forget just how central this has been to, and maybe even integral to our advancement economically as a country -easy credit.

CONAN: You ended the op-ed with a wonderful quote from Frederick Marryat. I guess people would remember him mostly as a nautical writer, but he...

Prof. MIHM: Absolutely.

CONAN: ...visited the United States in the wake of the panic of 1837. As he surveyed the wreckage of broken banks and worthless paper, he came to a surprising conclusion. If all the profits of the years of healthy credit were added up, he wrote, and the balance sheets struck between that and the loss at the explosion, the advantage gained by the credit system would still be found to be great.

The advancement of America depends wholly upon it. It is by credit alone that she has made such rapid strides and it is by credit alone that she can continue to flourish.

Prof. MIHM: Yes. It's kind of a beautiful quote because it captures the kind of paradoxical quality of credit in this country. Without it, we'd be nowhere. Without it, we wouldn't even be a nation. We essentially purchased our independence from the British by issuing paper money that we never redeemed, and that's been the case ever since in terms of our economic growth. And so I think we have to put things in perspective. Today, when you see the credit edifice come crashing down - that it does and has had very positive consequences for economic growth, and in time will once again, but that time may be a little ways off.

CONAN: Yeah. But the growth over the past 20 years would not be offset by the losses that we see on the market today.

Prof. MIHM: Well, let's hope.

(Soundbite of laughter)

Prof. MIHM: Let's hope that - hope that. Let's hope that the balance sheet remains as positive as Marryat had described it back in the 1830s. So, we'll see.

CONAN: Here's an e-mail question from Travis in Honolulu about, I guess, more recent history. How does this summer's credit problems in the U.S. subprime market compared to the Asian financial crisis of the late 1990s? Both seemed to come after a period of strong economic growth where lenders freely gave to just about anyone. We've seen this many times in the past in this and other countries. Maybe this is part of the typical economic cycle.

Prof. MIHM: Yes. Yes. And in fact an economist named Hyman Minski(ph) even described this very tendency that the credit tends to reach a certain peak and then almost inevitably, there is this kind of reckoning that takes place. And you saw it back then in 1998, although you're seeing it again today. There are other elements obviously in play that are not historical. We didn't have quantitative hedge funds, obviously, operating in the 19th century, but that's clearly at the root of the problem in '98 and then today as well. That's definitely playing a role.

But that misses maybe a larger point in that these are variables that merely trigger what is going to be perhaps inevitable in some way once credit gets extended a little too exuberantly, a little too enthusiastically to too many people. The fall can come in many forms, it just seems to be coming and being triggered the catalyst today from, you know, unforeseen consequences of a lot of the hedge funds operations - among other financial instruments that have developed recently.

CONAN: What happens? Don't - after each panic, each crumble, each depression -regulators seem to tried to find ways to say, all right, that was bad, let's make that impossible for the next time.

Prof. MIHM: Right. Right. Exactly. And they do. And they do a really good job of that. Never, never underestimate the ingenuity of American financiers to come up with new and more elaborate ways to create something out of nothing -to create credit and essentially wealth, oftentimes from thin air. And, you know, in the 19th century you had paper money - some genuine, some counterfeit.

Today, you know, we have collateralized debt obligations, mezzanine tranches, black box transactions, and all these other curious arcane financial mechanisms. And once they are put under the regulatory thumb, it is almost impossible to anticipate but almost certain to happen that down the line, a few years, there will be new forms of financial sleight of hand that will probably break us once again in 10 or 20 years with a new credit scale.

CONAN: And probably legal.

Prof. MIHM: Yes, absolutely. That's the beauty or the horror of it, depending on your perspective. As soon as something is regulated, these new things usually are emerging in a kind of zone of legality, even if they are oftentimes extremely unwise and in retrospect just really bad ideas, but they do emerge nonetheless.

CONAN: One of...

Prof. MIHM: It's a guarantee.

CONAN: One of the fascinating things about your article in the Times was this idea of counterfeit money - not - before the federal government started issuing greenbacks, basically, before the civil war, banks issued notes of their own and of course counterfeiters were quick to make copies of them. But each business had this pamphlet that came out every week or every month that listed all the bank notes being issued by everybody, which were real and which weren't. But sometimes the ones that weren't real were just as good, if not better, than the ones that were real.

Prof. MIHM: Absolutely. There's this, you know, if you can imagine a financial transaction, you're going into a store at this time, you hand over a bank note from one of these banks and you both look at it and, you know, maybe it's counterfeit. But because it's a counterfeit on a good bank or the equivalent of a good mortgage today, you might accept it and pass it along knowing it's counterfeit and you would turn away a genuine note of a bad bank.

So, there's this just kind of collapse of commercial and business ethics that takes place once things get out of hand like this. And the counterfeit detectors, as they were called, were perhaps the best symbol of that kind of collapse. Much the way, I think, you could probably find analogous things today in the financial world.

CONAN: And again, all back to - well, in the case of accepting bank notes that you thought might be, you know - that's a wink and a nudge and I'll pass it along, I'll take my fee and let the next guy worry about it.

Prof. MIHM: Right, right. And you can see that certainly today in lenders who knowingly made bad loans but were able to sell those loans quickly and pass them on kind of like a hot potato onto someone else who would then bundle them up, and they were essentially relieved of any risk or hazard that might be otherwise be associated. So it's this kind of sleight of hand that's sort of, you know...

CONAN: The details change, the big picture doesn't.

Prof. MIHM: No, the big picture does not and the details do. But there are continuities in our history that I think are worthy of contemplation, particularly at a time like this.

CONAN: Stephen Mihm, thanks very much for your time today.

Prof. MIHM: Thank you.

CONAN: Stephen Mihm, an assistant professor of history at the University of Georgia. His book, "A Nation of Counterfeiters, Capitalists, Conmen and the Making of the United States," is due out this week and he joined us from the studios of Georgia Public Radio.

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