Coined: The Rich Life of Money and How Its History Has Shaped Us

by Kabir Sehgal

  My friend viewed gold as a safe haven. It doesn’t generate income or dividends, but gold has historically maintained its value in volatile economic and political conditions. It doesn’t depreciate over time like a floating currency with a growing supply. It’s rare, precious, and in high demand. After the fall of Lehman Brothers in 2008, the price of gold soared almost 125 percent, to more than $1,800 an ounce in 2010. The CEO of Bullion Management, Nick Barisheff, boldly predicts the future price in the title of his book $10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Haven.5 He points out that after two decades of selling gold, central banks are buying gold to preserve the value of their currencies, balancing the value destruction wrought by printing so much new money. Central banks accounted for 12 percent of aggregate gold demand in 2012, up from the average over the preceding five years of 4 percent. The largest gold producer, China, also imported 209.7 tons of gold in 2010, a yearly increase of 500 percent. China is reportedly trying to exceed the United States’ holdings of gold. It’s not just these global superpowers: Sri Lanka, Ukraine, and Kazakhstan have also increased their gold holdings.6 Market strategists have debated why investors buy gold in such large amounts; maybe it’s an expectation of rising inflation or fear of a market meltdown. Ben Bernanke offered one explanation. While testifying before Congress as chairman of the Federal Reserve in 2011, he said the Fed holds gold because of tradition.7 Whatever the reason, in times of economic turbulence, we trust in gold.

  However, it would take an extreme disaster for a commodity with intrinsic value like gold to eclipse the dollar as the primary circulating currency. Even as people amassed hard money during the global financial crisis, they also hoarded soft money. “I keep a roll of twenties in my underwear drawer, just in case,” said another friend during the crisis.

  During the crisis, there was more money to go around: The Fed took actions to dramatically increase the money supply and stimulate the economy. The amount of cash in circulation increased 45 percent from 2007 to 2013. After the fall of Lehman Brothers, there was a 10 percent increase in the amount of $100 bills being held by the public.8 Presumably, these $100 bills were “hoarded” because they were still seen as a store of value.

  Paradoxically, people lost faith in the banking system but still wanted the money that it created. Maybe my friend hoarded cash because he expected that dollars would always be accepted. US legal tender laws curb Gresham’s law and explicitly state that dollars are acceptable for all debts private and public no matter how much of their value has been lost. My friend could use his underwear money in the United States despite how soiled it was.

  Cash is dirty, low-tech, useful for small transactions, and anonymous. Researchers found three thousand types of bacteria on dollar bills: microbes that can cause acne, pneumonia, and staph infections. Dollar bills they obtained from a Manhattan bank had 1.2 billion markers of DNA, only about 50 percent of which came from humans. The rest were from viruses, fungi, horses, dogs, and possibly even white rhinoceroses. Some bills had small remnants of anthrax. In another study, British researchers examined a batch of their country’s notes and found that 6 percent had amounts of E. coli similar to what is in toilets.9

  It is also difficult for the government to track cash transactions and collect taxes on them. Many people in the $2 trillion “underground economy” who don’t have full-time jobs, from nannies and construction workers to drug dealers and prostitutes, prefer dealing in cash. The Internal Revenue Service reports the US government lost more than $500 billion in uncollected taxes in 2012 due to undisclosed income.10 Then there are investors who prefer keeping at least a portion of their wealth in cash, particularly the dollar, because it’s liquid and a relative safe haven—remember Jasper’s foreign exchange desk, which helped investors diversify their holdings.

  Hoarding gold, and sometimes even cash, is a reminder of money’s role as a store of value. As we have seen, hard money has historically held exchange value in that it can be traded for other necessary items like food and water. In times of monetary uncertainty, when a national currency is under threat or has vanished altogether, people realize the exchange value of hard money by trading and bartering. In the bear case, an informal network of exchange, a barter community, could replace the monetary system. Transactions would be demonetized. Social capital, social debt, gifts, doing favors for each other could become the primary currency. The gift economy, like that found among the Maori or Kwakiutl people, could replace the market. We would resort to new currencies since exchange is likely part of our evolutionary algorithm.

  One doesn’t have to look to our ancient past for examples of barter in times of economic hardship. During the recession of 2008 and 2009, small business owner Anne Phyfe Palmer resorted to bartering. She grew up in a middle-class family, and frugality wasn’t foreign to her. In 1996, at the tender age of twenty-six, she opened 8 Limbs Yoga Centers in Seattle. Low on cash, she was flush with another currency: yoga lessons. Though she traded classes for other services like haircuts and massages from the start, in 2004 she stumbled upon BizXchange (BizX.com), an online barter network that operates in cities such as Seattle, Oakland, and even Dubai. The website smooths some of the friction found in bartering. For instance, bartering is subject to taxes, so BizX manages record keeping and account details for its customers.

  At first, she found plenty of people wanting yoga lessons, but she couldn’t find items that she wanted. This illustrates the “double coincidence of wants” issue in bartering: In order for bartering to work, both parties must want exactly what the other is offering. The probability of two parties wanting the same thing is low. Let’s say Anne Phyfe has a plumbing emergency, but the plumber doesn’t want yoga lessons. No deal. Hence, some economic historians say money was invented to facilitate exchange and solve the problem of the double coincidence of wants.

  With more participants in a barter system, there is a higher chance of a double coincidence of wants occurring. The BizX community grew over the years and now boasts 8,000 individual users and 2,000 business users. Eventually Anne Phyfe’s yoga lessons became a hit, garnering $20,000 in trade value, which she exchanged for things like business signage and bulk mailing. There was also the added benefit that each exchange could generate recurring business. It was a win-win solution: more customers with little cash outlay. And BizX benefits to the tune of $10 million in revenue for facilitating $60 million in trades per year.11

  During the global financial crisis in 2008, when business slowed and money was tight, Anne Phyfe put her amassed credit toward a new ceramic tile floor for her kitchen. At the same time as the remodeling, her husband shifted from freelance design to overseeing the construction, so they lost one source of income. The downtown location of Anne Phyfe’s yoga studio revenue declined, too. In sum, their income halved, and they were living on credit. In hard times, she resorted to exchange in a rudimentary form—she bartered.

  During the euro crisis in 2010, which was an economic downturn, debt crisis, and currency panic, some European countries saw the rise of barter communities. In Spain, many bartered because they lacked incomes as unemployment reached 26 percent, and 55 percent among young workers.12 Those who had cash savings tried to preserve it. For example, as Spain’s economy flagged, Sabino Liebana, a Spanish online retailer of computer equipment, tried to preserve his company’s cash flow. He got creative with his office rent, paying not in cash but in kind—with printers and computers. Bartering helped him conserve his cash for other important expenditures.

  “Because of liquidity problems I think [bartering] is something that will be used by more and more firms, especially in the service industry,” Liebana explains.13

  Anne Phyfe initially encountered limited liquidity in the barter economy, but Sabino praised it as an alternative to cash in economic downturns. Liquidity, the ease with which one can buy or sell a good, depends on many factors, from the number of people in the barter network who are able to fulfill the double coincid
ence of wants, to the viability of other types of currency. In Sabino’s case, there was an economic downturn and debt crisis that was calling into question the viability of the euro. When people lose faith in a soft currency and the institutions that back it, they often take matters into their own hands. Not trusting the issuer, they trust themselves. They barter to survive.

  Besides the economic reasons, the creation of barter networks can also be an act of “solidarity through the rough times.”14 Many who barter see the benefits of a “Do it yourself” economic system, instead of one administered by technocrats hundreds of miles away. “I felt liberated, I felt free for the first time… I instinctively reached into my pocket, but there was no need to,” said a man who started a barter network in Greece.15 When national institutions fail, people rely on their communities and neighborhoods. The marketplace becomes local.

  Bartering can be an informal exchange without written contracts, and thus difficult to track, so metrics of its use during the eurozone crisis are limited. But some regional numbers exist. During the crisis, in Catalonia, Spain, several dozen barter communities emerged.16 There’s also a small but growing market: One Spanish online barter network grew quickly and facilitated bartered trades with a value of nearly 10 million euros. In 2012, the International Reciprocal Trade Association, a global barter exchange, helped more than 400,000 member companies make $12 billion in revenues by trading excess business capacity.17

  For a broad study of bartering during and after economic troubles, consider Russia after the fall of the Soviet Union. Russians had to adjust to free markets and a new price system. But they couldn’t always afford a given good, so they bartered. In free markets, the prices of goods adjust according to supply and demand. But the Russian government prohibited many companies from dropping prices if it meant selling goods at below production costs—even though those costs were too high in the first place. The effects of bartering were felt throughout the Russian economy as businesses took in less cash, and in turn didn’t have enough to pay workers and vendors. It was a bear case, and there wasn’t a viable alternative.

  Bartering was a vestige of the old Soviet economic system. For example, in 1991 researchers examined the business practices of a successful Soviet furniture retailer. All the store’s wall units had sold quickly because of their high barter value. There was a significant demand for wall units because every apartment required one. Customers considered furniture as proto-money that could be exchanged for other necessary items. Even the managers of the furniture retailer engaged in bartering.18 Researcher David Woodruff of the Massachusetts Institute of Technology estimates that bartering made up 50 to 70 percent of business transactions in Russia in 1998.19 In Bulgaria, once a satellite state of the Soviet Union, bartering became prevalent as the nation endured an economic crisis. “You can buy almost anything with potatoes,” observed the mayor of a Bulgarian village in 1996.20

  Indeed, the bear case may result in an increase in hoarding and bartering. But it could generate a rise in sharing, which seems counterintuitive. During the 2008 crisis, the US government rescued the banks because it needs them. Government allows the banking system to create money, and the banking system allows governments to borrow massively. This partnership has historically led to unchecked spending, inflation, and the destruction of the currency’s value—telltale signs of the Faustian bargain of soft money. Social scientist Mary Mellor says that in the current system money has been partly privatized, administered by a cartel of banks and government, not just in the United States but in most countries. Because banking officials decide who should receive loans, money is not being appropriated like a public resource. Banks distribute money to certain individuals and enterprises through loans, which have interest rates. In other words, the banks make money from the dissemination of money. However, Mellor argues that money should be seen as a public resource, a commons—like water and air.21 During the crisis, it was the public’s money, tax revenue, after all, that was used to save failing institutions. The interdependence of governments and banks, laid bare during the 2008 financial crisis, has eroded people’s faith in financial and governmental institutions. A Gallup poll found that since the 2008 financial crisis, only about 25 percent of Americans have a “great deal” or “quite a lot of” confidence in the banks, down from 53 percent in 2004. This was still a better showing than “big business,” which received 22 percent, and Congress at a dismal 10 percent.22

  Even now, after the financial crisis, the public isn’t demanding an immediate reform of the monetary system as we know it, unscrambling the eggs of government and banks. It’s hard to imagine government officials and bankers relinquishing control of the monetary system, let alone playing a diminished role. But let’s say there were an impetus for reform and the bear case realized: After a series of terrible economic crises, an enraged public demands reform of the monetary system. What would such a system look like?

  Mellor envisions restoring money as a public utility. The financial and monetary systems could be combined, removed from the auspices of central banks and put under the aegis of elected representatives, or even the people themselves. For example, in Porto Alegre, Brazil, tens of thousands of citizens are involved in a participatory budgeting process, and the World Bank has credited the system for improving the standard of living for the community: The number of households with sewer connections jumped from 75 percent to 98 percent in a decade.23 Mellor proposes that the government could issue money to local communities, cooperatives, or directly to citizens—instead of it flowing first through the banking system. To prevent elected politicians from abusing their monetary authority, another entity staffed with a group of elected officials would determine whether to enlarge or contract the overall money supply. This reformed system, Mellor argues, would likely reduce the amount of money, leverage, and power in the financial system. The electorate would gain power and the ability to prioritize spending for better or worse. Mellor’s ideas may seem counterintuitive for the bear case: Sharing money more democratically is the opposite of hoarding. Yet perhaps a future crisis will generate a rise in neosocialist communities that would try an experiment like this.

  Already some communities have taken matters into their own hands and introduced alternative currencies, like BerkShares in the Berkshires region of Massachusetts; Equal Dollars in Philadelphia; and WIR in Switzerland. It’s not illegal to create alternative currencies in the United States, but there are two stipulations: (1) New currencies can’t resemble dollars, to minimize confusion and counterfeiting; and (2) one must pay taxes just as if one were transacting in dollars.

  One of the best-known alternative currencies is Ithaca HOURS, which were created by community organizer Paul Glover in Ithaca, New York, during the 1991 recession. He wanted to lessen the impact of the declining national economy on his community and promote local commerce. Glover explains:

  In 1991, a lot of people in Ithaca who had talent and time were not being used by the formal economy, and [Ithaca HOURS]… created a network that welcomed their skill. People were either unemployed, underemployed or malemployed. They had skills and passions they wanted to convert into livelihood, and while the classified ads and major employers didn’t care about their special skills and passions, the Ithaca HOURS network celebrated them.24

  HOURS are exchanged like dollars for goods and services, such as groceries and doctor’s appointments, and are accepted only within twenty miles of Ithaca. HOURS are printed on paper notes that feature community members. The fronts of some notes read “ITHACA HOURS are backed by real capital: our skills, our time, our tools, forests, fields, and rivers.” The backs of some notes read “ITHACA HOURS stimulate local business by recycling our wealth locally, and they help fund new job creation.”25 HOURS come in six denominations. One HOUR is equivalent to ten dollars, a half HOUR is worth five dollars. More than $130,000 worth of HOURS are in circulation, and more than five hundred businesses accept the currency. Most noteworthy, loans made in HO
URS are made with no interest charge. Debtors don’t have to borrow even more in order to cover interest rate payments. In contrast, banks create money by issuing loans that carry interest rates. Debtors who borrow in dollars often must take out even more loans to cover the interest rate charges.

  Alternative currencies circulated widely in antebellum America when state banks issued notes during the “wildcat” banking era. Some eight thousand currencies circulated, and the US government oversaw a paltry 4 percent of the money supply.26 The public grew wary of bankers and their dubious banknotes, and as we saw earlier, eventually the greenback was adopted. Another period of wildcat banking, in which subprime loans were issued to those who could ill afford them, led to the 2008 financial crisis. This time the public was irate not just with banks but later with the government for bailing them out.

  Unlike the mid-nineteenth century, alternative currencies now may be part of the solution. In his book The End of Money and the Future of Civilization, noted economist and community activist Thomas Greco carefully considers alternative currencies. He readily admits that these currencies often start with much fanfare but eventually lose their novelty and ultimately decline in terms of usage. It’s difficult to predict what currency will catch on in the bear case, but he outlines the properties of a successful alternative currency system. Most important is that any vendor in the marketplace can issue currency, putting monetary power in the hands of its users.

  To some degree, this is already happening. Loyalty programs like frequent-flier miles are corporate-issued currencies. In 2005, the Economist determined there were more unspent miles than dollars in circulation.27 Starbucks customers earn Starbucks Star points by paying for items with the Starbucks card or mobile application. In the United States, there are already seven million active cards that are used for 30 percent of Starbucks’ daily transactions.28 These loyalty currencies are issued by nonfinancial institutions. Advertising executive Paul Kemp-Robertson believes that corporations can leverage their trusted brands into creating more dominant currencies, especially at a time when so few people trust banks.29 Right now these currencies have limited use and liquidity. But what if they were more flexible and fungible? You could use Starbucks Star points to pay for a plane ticket to Tokyo and a taxi ride to Koishikawa Botanical Gardens. Starbucks points could be exchanged with Amazon points, just like dollars are swapped for euros. There are already websites where you can convert one corporate currency into another.