The End of Money

by David Wolman

  Designing paper money, says Thorkelsdottir, is unlike designing anything else in the world. Banknotes have this strange functionality in that few things are as commonplace, yet many people have strong emotional relationships to physical money. For people who relish travel, or even hold low-grade curiosity about landmasses in other time zones, there is a mysterious allure to the banknotes and coins of other countries. What else could explain why so many corner stores, diners, and bars have pinned wrinkly banknotes from dozens of nations on the wall like postcards or passport stamps? As Thorkelsdottir puts it: “Banknotes tell stories of history, but they also are history.”

  Right about this time in our conversation, I expect Thorkelsdottir to express some wistfulness about the possible end to the króna, about national soul, about an uncle who collects banknotes—something. Instead, she is a portrait of practicality. “I want money to stand for what it is, for the value it represents,” she says. “If we have to take up the euro because of today’s situation, it’s probably for the best. To insist on the króna would be like smacking your head on a stone over and over.”

  Perhaps this lack of sentimentality is a consequence of the country’s recent economic nightmare—a national reckoning about money and a new prevailing ethic to be practical above all things. Or maybe this no-nonsense worldview is something Icelanders have always had, a requirement for survival in such a harsh landscape, and it was only a tiny group of investment bankers who recently turned their backs on this heritage. Whatever the reason, if I was looking for someone to say that killing the national currency is akin to burning the flag or a heartbreaking loss in the World Cup, I wasn’t going to hear it here. “I actually use plastic most of the time,” adds Thorkelsdottir. “Money is just a tool,” she says, “and the credit card is more convenient.”

  As it happens, Icelanders are more addicted to electronic cash and payments than any people on earth, making Iceland something of a frozen paradise for anti-cash mavens. An American expat in Reykjavik told me he once saw a couple of local children selling homemade cookies on the street, much like American kids set up lemonade stands, except that the young Icelanders had debit-card readers on hand. This widespread adoption of a card-based system makes economic sense: analysts have found that using cash in Iceland has a per-transaction cost that is five times higher than using a card. If that sounds abstract, think about it this way: it’s expensive for businesses and governments to ensure that ATMs, cash registers, and banks in every remote fishing village have correct change, whereas all you need for electronic payment is electricity and a phone hookup.8

  As Thorkelsdottir shows me some of her first pencil sketches for the banknotes redesign, I think of my conversation the previous day with an Icelandic economist, who reminded me that it was George Washington who said: “It is not a custom with me to keep money to look at.” Not long from now, Thorkelsdottir’s creations will move from immortalizing the history of this country into their humble place within it.

  But maybe not just yet. Iceland is currently facing the prospect of more inflation, and the country is at least a few years from joining the euro. (Possibly more than a few, with the euro currently stuck in the mud, and countries like Sweden noticeably enjoying the economic benefits of not being on the euro.) Perhaps another round of revaluation is in the forecast. So I ask, 90 percent in jest, whether the recent financial collapse means the Central Bank of Iceland will retain Thorkelsdottir’s services once more, this time to design a 10,000-, or perhaps even a 20,000-króna note?

  “I can’t answer that,” she says.

  “But you’re not retired, right?”

  “Right.”

  IN OCTOBER OF 2008, the króna suffered a near fatal crisis of faith. Because those three private banks’ losses dwarfed the national economy, the central bank couldn’t come to their rescue as lender of last resort. Despite the alchemy of money creation, central banks are still limited to creating money in their national currency. Issuing more króna to try and absorb the banks’ gargantuan debt wouldn’t have worked because those króna couldn’t buy anything. Iceland was forced to approach the International Monetary Fund hat in hand and accept a last-minute loan from Russia to stave off bankruptcy.

  Before the crash, the króna was strong—a source of national pride, and only getting stronger. It was so strong that Icelanders were buying or taking loans in other currencies—often euros, Swiss francs, or Japanese yen—because the interest rates were better. For those with trading savvy, there was money to be made bouncing between currencies or in investment deals involving a series of conversions.

  But what Icelanders failed to notice was that no one was investing in their currency. This point was driven home for me after my year without cash. I still had about $20 worth of króna burning a hole in my wallet. When I asked at a few currency exchanges on the streets of London or at airports far from Iceland whether they buy Icelandic króna, the tellers looked at me as if I’d asked them to exchange red feathers for U.S. dollars.

  When the bottom fell out of the króna, loans denominated in foreign currencies more than doubled, because twice as much of the domestic currency was suddenly needed to pay back those loans in euros or yen. The banks had built not just a house of cards, but a house of króna. As an Icelandic friend put it: “We were stuck with a currency that is like a sack of rotten potatoes. No one wants it and it’s worth nothing.” It’s important to note that the króna has since recovered much of that lost value. Nevertheless, many experts insist that Iceland and countries like it are no less vulnerable to this kind of currency crisis today than they were in 2007.

  During my week in Reykjavik, newspapers reported that vandals were tossing red paint on the homes and cars of Viking Raiders who hadn’t yet fled to England or the Continent. With their wages still paid in króna, Icelanders were losing their homes, cars, and small businesses, unable to make their now-ballooned loan payments. At the national hospital, hours and wages had been reduced, while administrators cut costs by slowing admissions, blood testing, drug sourcing, and diagnostics. Then again, at least Icelanders will now be eating a little healthier. In 2009, McDonald’s decided to close its three restaurants in Iceland. No one was going to pay 780 króna—more than $6.00—for a Big Mac.9

  IN AUGUST OF 2007, at the apex of Iceland’s dash for financial-sector stardom, an American named Benn Steil flew from New York to Reykjavik to recommend euthanizing the króna. Steil is an economist with the Council on Foreign Relations. That spring, he’d written a provocative article for Foreign Affairs in which he argued that modern economics has “failed to offer anything resembling a coherent and compelling response to currency crises.” Yet a viable strategy is staring us in the face, he says, and it has been around since it was first described by a Nobel Prize–winning economist in the 1960s: killing national currencies. “Governments,” he writes, “must let go of the fatal notion that nationhood requires them to make and control the money used in their territory.” The Icelandic króna and dozens of currencies like it, Steil asserts, should be abolished, and replaced with regional currency blocks.

  Steil delivered his 2007 address to Icelandic bankers, government officials, and academics in a gray-and-purple conference room at Reykjavik’s Hilton Nordica. Presenting alongside him was the former finance minister from El Salvador, who had shepherded his country through the dollarization process. Ditching the króna, Steil asserted, would help insulate the tiny nation from the shock of future currency crises, because the currency’s value couldn’t get tossed around like leaves in a windstorm, and local companies would no longer have to pay exchange fees.

  The speech was received like an insult to Icelandic manhood. The head of Iceland’s Central Bank said: “This is not El Salvador.” Iceland, he said, doesn’t need to climb aboard the euro the way Latin American countries might need to piggyback on the dollar. The Hilton event ended cordially, though a bit awkwardly. Then Steil and his wife, together with the Salvadorian official and his wife, enjoyed
a three-day weekend touring waterfalls and glaciers in the Icelandic countryside. “That part was nice!” Steil admitted. Thirteen months later, the banks collapsed and the króna was pancaked.

  In the age of globalization, what does it mean, really, to be from one country and not another? We have some easy answers, along the lines of language, shared history, cultural references, and geography. I grew up cheering for the Red Sox, not the Hiroshima Carp, so that adds to my American-ness. I had to learn about the Federalist Papers in high school. I pay taxes and vote here. I’ve consumed innumerable gallons of Ben & Jerry’s Ice Cream, watched Happy Days, and listened to both Nirvana and the Beach Boys. When I see coffins draped with the Stars and Stripes, the sight fills me with a kind of reverence that other images of coffins don’t. All of these things, some minor, some major, contribute to my sense of being part of this country.

  Greenbacks do too, whether I like it or not. The coins and banknotes of a place are one of the few remaining touch-points of national identity left in our increasingly digital world. The monuments, symbols, and famous people splashed on them help reinforce this sense of nationhood. But as representations of the currency, they do more than that, because the currency is both the fabric of the economy and the stitching of the state. Even Marco Polo saw this in China, as the currency pulled a vast kingdom together under one umbrella of economic organization.

  In recent times, though, having a national currency, at least for smaller countries, is looking more and more anachronistic. At the minimum it should be up for debate. Steil told me that when he lived in Europe in the 1990s, the old saying was that to be a country you needed an airline, a stock exchange, and a currency. By the twenty-first century, that was hardly the case: airlines had merged or gone bankrupt, stock exchanges had consolidated, and the euro had become the dominant currency of the continent. In the years ahead, more and more small countries may decide to quit their currencies and adopt that of a more powerful neighbor (the Australian dollar in parts of Oceania, for instance), band together with nearby countries to form a currency block (e.g., the East African Monetary Union), or jump aboard an international powerhouse like the U.S. dollar or the euro.

  All kinds of factors could sway this decision: runaway inflation, fear of currency crises, too little infrastructure to manage the cash supply, an unexpected rash of counterfeits, hope of greater competitiveness in global trade, and the wish to put an end to potentially dangerous speculation about the currency’s worth next week or next year. Steil points to relatively strong economic growth and stability in countries like Ecuador, El Salvador, and Panama, which have all officially adopted the U.S. dollar. Even where the local currency still reigns as far as officialdom is concerned, “spontaneous dollarization” is widespread. More than half of the bank deposits in Latin America are denominated in U.S. dollars.

  Steil’s thesis hinges on the fact that most monies in the world are unattractive to people who live outside the countries where those currencies circulate. Notaphilists may keep Icelandic króna in their collections, and my dad still has the Samoan, Cuban, and Egyptian banknotes I once gave him, but investors won’t hold these currencies as a store of wealth, says Steil—“something that will buy in the future what it did in the past.” The same goes for the Argentine peso, and doubly so for currencies of absolute-shambles countries. Know any friends who are denominating their kids’ college savings accounts in Somali shillings? Exactly. At the same time, while all countries conduct trade to grow their economies, smaller ones eat extra costs for perpetually converting from the local currency into something else. There’s also the fact that countries generally need U.S. dollars to repay their creditors.

  Dumping the national currency would also protect people from harmful manipulation of the currency’s value by corrupt or incompetent public officials. As Nobel Prize–winning economist Milton Friedman once put it, in the “socialized industry” of providing the people with a transactions medium, “governments are inefficient, produce a poor product and charge a high rent for it.”10 More recently, Harvard financial historian Niall Ferguson has written that “from the very origins of coinage, rulers sought to establish and exploit monopolies over currencies. This, more than anything else, helps to explain the many inflations and other monetary disruptions in history.” Which begs the question: would a handful of regional currencies, or even a single global currency, help to prevent such disruptions, and by extension improve prosperity?

  As for citizens in the United States and Europe, when other countries adopt the dollar or the euro, we profit from seigniorage—or the government does, anyway. By putting more money into circulation—inside or outside our borders—the Fed pockets the interest generated from this process, so it’s really no skin off our backs, provided those countries understand that the United States will never make monetary or economic policy decisions because of conditions in some other country that happens to use our currency.

  This idea of pulling the plug on small-country currencies was making all kinds of sense to me, right up until the insanity in Greece began to unfold only a few months after my visit to Iceland. Greece’s crushing debt was partly the fault of government officials who cooked the country’s books so that the nation could meet the standards of economic stability necessary to join the euro a decade ago.11 The International Monetary Fund, a kind of global credit union, had to intervene, as did other European countries, to the tune of a $145 billion loan to prop up Greece and prevent the common currency from coming unhinged.12 Ireland was the next one to fall, and, at press time, Italy is looking shaky. In a matter of months, the euro transmuted from a shining success of international cooperation and integration into a beast with renegade appendages.

  The financial press was soon reporting high-level discussions in Athens and elsewhere about quitting the monetary union.13 The spreading crisis was a bitter validation of the opinion espoused by the likes of Paul Krugman that the euro is a premature experiment gone horribly wrong.14 Economies in a fix can’t be fixed, Krugman and many others argue, without decisive government action. The wealthy countries of the monetary union had to bail out the broke ones, while the countries most hurt by the crisis, now without their own central banks, lack any ability to jiggle the handle of their economies by issuing money, shifting interest rates, absorbing toxic assets, devaluing out of trouble—something. For Iceland, having a sovereign currency was suddenly seen as an advantage. It didn’t help the people whose house loans are denominated in euros, but the weaker króna meant the country could be more competitive with its (now cheaper) exports.

  At the moment, the euro looks like a suit that is five sizes too small, and Steil’s Foreign Affairs piece calling for currency unions seems distinctly out of sync with the times. Maybe the króna and other tiny-country currencies have a future after all. But other leading currency experts assert that this is a short view of the euro situation, and that after this period of turmoil it’ll bounce back stronger than ever.

  As Steil and his sympathizers see it, countries with their own currencies invariably walk in monetary step with their major trading partners: Mexico’s currency generally tracks to the U.S. dollar, Sweden’s krona closely follows the value of the euro, and so forth, and this is the case no matter how autonomous those countries’ central banks may think they are, and no matter how patriotic the artwork adorning their banknotes may be. As Olafur Isleifsson, a professor of business at Reykjavik University, told me: “We didn’t have monetary independence before. The central bank moves were all forced moves, like in chess. Monetary independence is a phantom.” I kept hearing this basic idea whenever I spoke with people about ending small sovereign currencies in favor of regional ones, but the debt fiascos in Europe show that this is anything but a definitive forecast of what lies ahead.

  For economists, this dispute cuts to the core of the most macro question there is: what monetary system offers the best route to a more prosperous future for the most people? Starkly different answers to that ques
tion reveal how divided scholars are about what it takes to keep economies healthy, and even about the utility of sovereign currencies. As if the stability of the whole show wasn’t tenuous enough already.

  Nevertheless, the fact remains that more countries, especially biggies like Turkey, want to adopt the euro. (Poland and the Czech Republic, also in line, slowed down their efforts to join in light of the debt crises, but analysts say these countries will eventually join as well.)15 Leaders in these countries and elsewhere are convinced that the advantages of getting hitched outweigh those of going it alone. Icelanders who are now worrying that the safe harbor of the euro may not be as safe as they once thought may end up favoring a currency union with some of their solvent Scandinavian neighbors.16

  A third way to buttress the value of a national currency is to tether its value to that of another one that is more stable. This strategy has worked for a number of countries, and some experts argue that the availability of this tool can make the idea of regional currencies look like a moot point. Why terminate the central bank’s ability to manipulate the money supply in an emergency if you don’t actually have to? Steil says this approach is still precarious and can end up robbing people of their money: “Which would you prefer. One: I give you $100. Two: I give you a hundred pesos, with a promise to redeem them for $100 if you ask? Option two is a currency board or ‘hard peg,’ which is what Argentina did until 2002.” That was when the Argentine government reneged on its promise to redeem pesos for greenbacks. So much for your 100 bucks.

  Steil is hardly the first person to have thought about regional currencies, or to challenge the government imperative to issue money, but he’s one of the most vocal. The concept of optimal currency areas was coined by economist Robert Mundell in the early 1960s, and since then there have been a handful of campaigns to bring the idea into practice—a few of which are slowly moving forward, in Africa and the Middle East most notably.