by David Wolman
The useless coinage picture is no better in the United States. The U.S. Mint has manufactured about half a trillion coins over the past generation, yet the mint itself estimates that 200 billion of them have fallen out of circulation.13 According to one estimate, Americans forfeit $1 billion a year due to the time spent dealing with pennies at cash registers and in wallets, when we could be doing something else, like generating income or thinking up the next Facebook. These small-change realities have compelled countries like Israel, Brazil, Australia, Finland, Argentina, and New Zealand to euthanize 0.01, and sometimes 0.05, currency pieces, while also shrinking the dimensions of their larger-denomination coins to further bring down manufacturing costs. Over the past few decades, Norway, Denmark, and Sweden eliminated all coins of value less than fifty øre (like fifty cents), and last year, Sweden’s fifty øre was the latest to get the axe. It’s an odd thing: killing money to save money. But that’s exactly what’s happening.
Pennies, nickels, and dimes can barely be described as money anymore. Legally they are, sure, but they don’t exactly circulate. A store of value? Practically nil. Medium of exchange? Only if you have a boatload of them, which won’t exactly endear you to whomever you’re transacting with. A unit of account? Technically, but I don’t know anyone who uses the hundredths place in his mental accounting. Marketing types will be quick to tell you that consumers treat $2.99 differently from $3.00, but that’s because of the hypnotic power of the left digit. No one cares about the right one anymore. It’s no wonder then that people so willingly pay the usurious 8.9 percent fee to use one of Coinstar’s 20,000 kiosks to convert unwieldy jarfuls of metal into paper money.14
In the United States, the question of killing at least the penny and nickel surfaces whenever the price of metals spikes. A few years ago, the cost of making a penny peaked at 1.8 cents per cent, and nine cents for a nickel.15 The penny has since come down; nickels are still at about six cents apiece, while each of the new dollar coins costs an impressive thirty-four cents. “The current situation is unprecedented,” the director of the U.S. Mint told Congress in the summer of 2010. “Compared to their face values, never before in our nation’s history has the government spent as much money to mint and issue coins.” Never before has the United States faced such “spiraling” costs to issued coinage—more, in fact, than the coins’ legal tender value. “This problem is needlessly wasting hundreds of millions of dollars.”16
“Absolutely anyone else would get right out of the penny and nickel business,” says Birch. At this point, you’d think the only staunch defenders of the penny and the nickel are the companies that provide the base materials, Coinstar, and politicians with a metallic sense of nostalgia or a coin-enthusiast relative. Yet a USA Today/Gallup Poll from a few years ago found that 55 percent of Americans say the penny is “useful” and shouldn’t be eliminated. Who are these people?
The $1 note has its own powerful supporters, not the least of which are employees of the money factory itself, the Bureau of Engraving and Printing (BEP). In the mid-1990s, BEP employees, under the banner “Save the Greenback,” stymied congressional efforts to phase out the $1 bill. (Paper money is cheaper than coins to produce, but it doesn’t last as long, so it’s actually more expensive in the long run.) Greenback defenders had help from Mississippi Senator Trent Lott and Massachusetts Senator Ted Kennedy, who had in mind the interests of Crane Paper of Dalton, Massachusetts, sole provider of U.S. currency paper, which is made from Mississippi-grown genetically engineered cotton. The group even proposed legislation explicitly prohibiting the elimination of the greenback, but the bill—the legislative one—never passed.
Yet there are at least a few signs that U.S. officialdom is rethinking coins. “What’s a Penny (or a Nickel) Really Worth?” was the title of a 2007 paper published by the Federal Reserve Bank of Chicago. Since medieval times, the traditional fix when minting costs surpassed the face value of the coinage was to “debase the threatened coin, that is, make it of a cheaper material.” Noting that this isn’t possible under current law, the author’s advice to Congress is to either give the Treasury the green light to find some cheaper substance for future pennies, or “discontinue the one-cent denomination and rebase pennies to be worth five cents.”17
Discontinue. That is unusually decisive, if not subversive, language for a Fed official. Why? Because eliminating the penny is an admission of inflation. “You just don’t do that,” a seasoned financial journalist once told me, as if I’d just suggested toppling the government. “What does a formal acknowledgement of the worthlessness of 1¢ say about the worth of $1?” In other words, it doesn’t help the economy to remind people that prices are continually rising, while the purchasing power of their money is continually falling, even though both are true. Acknowledging inflation makes people doubt, and as any priest, rabbi, imam, or shaman will tell you, doubt and faith don’t go well together. Even though research suggests that killing the penny would benefit the economy, how can we be sure? All of a sudden, the seemingly small idea of ending pennies isn’t merely about inconvenient objects or the various uses for zinc. It’s about the whole damn economy.
We’re sensitive about inflation because higher prices are a drag, and because of concerns, rational or otherwise, that it might metastasize into something much worse: hyperinflation. This is when the purchasing power of a currency falls off a cliff, while prices rocket upward so fast that people must race to get money out of their pockets before it devalues further in the next few days or even hours. A lifetime’s savings last week can’t buy a loaf of bread this week.d
The most famous example of hyperinflation hit the Weimar Republic (Germany) in the early 1920s, caused in large part by Germany’s inability to pay World War I reparations owed to its neighbors. At its nadir, the exchange rate was 4,200,000,000,000 marks to 1 U.S. dollar, and the government was printing 100,000,000,000,000-mark banknotes (yes, one-hundred trillion) in a failing attempt to keep up with rising prices. The situation was so traumatic that it helped the insane ideas of Nazism take root and fester.
Forty years since the steep inflation of the 1970s, the prices Americans interact with in daily life have remained remarkably stable relative to incomes. A cold Florida winter might bump up the cost of oranges, and the price of oil rose high enough a few years ago for President George W. Bush to acknowledge the U.S. addiction to oil, but that’s not inflation. In-your-face inflation is when you have to run down supermarket aisles, as people had to do for more than a decade in Brazil, to get ahead of the person whose job every few days was to increase the price of all the items. Younger Americans today have been so lulled by economic stability that the notion of all prices surging upward is alien. A $100 hot dog or a $10,000 sheet of plywood only reads like a typo because of our good fortune.
Still, those images from pathological instances of hyperinflation are plenty searing: banknotes used as wallpaper in Zimbabwe, swept into the gutter in postwar Budapest, or spilling out of wheelbarrows in Germany like so many leaves. One German artist during the Weimar hyperinflation covered a park bench with 100,000-mark notes. He titled the work “Deutsche Bank,” a pun on the German word for bench, which is bank. We can only pray that the same never happens here. Fears about inflation and hyperinflation may not always be rational, but countermeasures against them sure as hell are. In a roundabout way, then, maybe the wise move really is to spend whatever’s necessary to fund small coinage so as to prevent worries about inflation. What’s riskier: producing and circulating annoying coins at a loss, or injuring morale about the economy so much as to undermine faith in more than just the value of those little metal discs?18
The elegant fix to all of this, of course, is to keep the denomination known as the penny—heck, even bring back the half-penny if you’re so inclined—but keep it sequestered in the cheaper and more efficient digital realm. Yet the Federal Reserve, Bank of England, European Central Bank, and most other central banks on the planet are pressing ahead with their c
oin orders. The next big coinage spree in the United States will be the $1 presidential series. By 2016, the Fed should have about $2 billion worth of $1 coins available, even though many merchants and cash handling companies won’t stock them because people don’t use them. Aside from those that end up stashed in collectors’ cases, the rest will gather dust in government vaults until you and I can be convinced of their utility.19 If you’re wondering what in God’s name these money managers are thinking, you’re not alone.
EXITING THE UNDERGROUND, Birch and I spot the Gherkin in all its eggy rocket-ship glory. Now we are in the thick of it, The City, as in the City of London. This cluster of broad classical buildings is the economic center of the former empire that built a colossal financial system out of stocks, bonds, and credit. The Royal Exchange is on our right, and the limestone fortress itself, the Bank of England, on our left. “This is the enemy,” says Birch, turning into the entrance of the Bank Museum.
Fiat money wasn’t invented here, but the Bank of England gave the world one of the first globally recognized currencies, the pound sterling, and showed how effectively states, particularly cash-strapped states at war, could raise funds by having a private bank issue government-backed currency in the form of paper. As such, the Old Lady of Threadneedle Street, as the Bank is affectionately known, is in many ways the die cast from which modern central banks are struck. Although banknotes aren’t manufactured at central banks, this is the point of conception, where the miracle of cash’s life begins.20
Inside the dark foyer, the first thing we see is a public service notice: a large pink poster announcing the withdrawal from circulation of all £20 notes with a portrait of classical music composer Sir Edward Elgar. After June 2010, only the new £20 notes, featuring Adam Smith, will be considered legal tender in the UK. Reissues, as we’ll learn more about soon, usually happen because of counterfeiting. If you still happen to have any £20s with Elgar on them, tough luck. iPhone in hand, Birch inspects the poster and shakes his head. “New versions of expensive paper,” he says. “Is this really what we need?”
Unlike most countries, which periodically demonetize certain coins or banknotes, all notes and coins ever issued in the United States are legal tender. This policy is supposed to reinforce the aura of U.S. economic stability. It’s also why redesigns of greenbacks preserve those “legacy features,” as the Federal Reserve calls them, that people associate with U.S. paper money: pukey light-green color, founding fathers, a jumble of fonts.21 Although you technically could, you probably don’t want to spend super-rare coins or bills inherited from your great grandmother, because their collector’s value is a hundred times greater than their face value.
The museum is quiet and mostly empty today, which seems to happen at money museums on days when there are no school field trips scheduled, and when numismatists (coin geeks) and notaphilists (banknote nerds) are stuck at their day jobs. One kid-friendly display in the main hall is a hot-air balloon basket, inside of which is an explanation about how central banks target inflation rates to keep economic growth on track. The idea is that adding or removing money from the economy is like adding or reducing the amount of hot air in a balloon, thereby keeping the flight on track. (To where, the exhibit doesn’t say.) Birch looks up from his phone, which he has been tapping at for much of the day. “I already know about inflation. It’s their fault,” he says, bobbing his head toward the ceiling to indicate the bank’s higher-ups.
To Americans, Birch may seem like a prototypical libertarian who wants to shutter his country’s central bank and let the chips fall where they may. He is suspicious of government-issued currency because governments—notorious deficit spenders—have a dismal track record as guardians of money’s worth. He’s also enthusiastic about a future full of all sorts of different currencies, which we’ll get to later. But Birch takes umbrage with the monetary system deployed by governments for reasons that are more technological than ideological. “I don’t hate money. I hate cash!” A major reason for that hatred is the question of who foots the bill.
A typical burst of anti-cash restiveness on Birch’s blog goes like this: “The cost of cash isn’t only the cost of the notes and coins, the ATMs and armored cars, the night safes and counting machines. It’s the lack of efficiency in the economy that goes with it. And economies that are stuck with cash are the worst off.” And then he’s off, serving up a rapid-fire summary of research results unearthed, conference highlights shared, media articles skimmed, and factoids gathered about the annual cost of cash-handling in Indonesia (more than $800 million); counterfeit bills in Canada; thieves tunneling their way into a bank vault in Argentina (he called it “the Shawshank Redistribution”); and reports from Europe that most banknotes in the euro zone are used for hoarding, not spending. “The purpose of cash is no longer to support commerce,” he concludes.22
Birch wasn’t always so obsessed with money’s forms, friction, and future—not until he had to digitize it. His background is in computers, where he got his start helping to link up networks in the days before the Internet. His specialty was making networks secure, which led to a corporate job traveling the world to help with secure systems at NATO, satellite communications in Southeast Asia, and reliable data communications for California’s Bay Area Rapid Transit. He was one of the founders of a consultancy in the 1980s.
Secure computer networks and financial transactions have many points in common, and Birch began to build a reputation as an expert in payment technologies and electronic money systems, with clients including the likes of VISA, American Express, MasterCard, Barclay’s, and the European Commission. It was in this role that he started to obsess over the costs, hassles, and hazards of different forms of money, and with the machinations of how value zips around the world. It didn’t take him long to learn that the most lumbering and expensive form of money, by far, is cash. It’s tough to see why, though, without first understanding who it benefits.
“This note-issuing business is the most profitable nationalized industry in British history,” he says. We are now in the museum’s banknote gallery, looking over original sketches for banknote art and more recent examples of “today’s technologically sophisticated notes,” which apparently are not too sophisticated, considering the imminent replacement of the Elgar £20. “So here’s a fifty-pound note,” he says, tapping the display case. “Now where is that fifty pounds, really? This is just a piece of paper, so it’s not here. Where is it? On a computer, yes, but where is that value?” he asks. “No one ever thinks about this, but the answer is that the bank has bought government securities with it. That cash is really a stealth tax.”
Come again? Birch is griping about the weirdest and most technical aspect of national currencies. Everyone wants to make a profit, and the institutions that manufacture and issue the money are no different. The key is something called seigniorage. The opaqueness of the term itself bespeaks the “secret incantation” of central banks and “transactions so powerful and frightening they seem[ed] to lie beyond common understanding,” as William Greider put it in Secrets of the Temple: How the Federal Reserve Runs the Country.23 All it is, though, is profit pocketed by central banks and their governments, earned for providing us with currency with which to go about our business.
Because the cost of making a coin or banknote is (usually) less than the face value of the object itself, the supplier of the money gets to keep the difference. The new state quarters series issued by the U.S. Mint, for example, has already earned the Federal Reserve an estimated $4.6 billion in seigniorage.24 In total, the Fed will have earned about $70 billion in 2010 and 2011 by way of providing you, me, and the rest of the greenback-using world with physical money.25 (The Fed also earns seigniorage when it issues electronic money, but that’s a more convoluted form of earning over time, compared with straight-shot profit, which is like any business that sells its product for more than it costs to produce. Then again, having a legal monopoly makes this very much unlike other businesses.)
Conspiracy theorists in the United States tend to obsess over seigniorage and the Federal Reserve’s semi-private nature, claiming that the Fed is a malevolent secret society—think Knights Templar meets the Council on Foreign Relations. These evildoers, say the theorists, use their power and wealth to manipulate world governments to their benefit. The more boring fate of seigniorage is that the Fed transfers this profit to the Treasury at year’s end. Nevertheless, Birch’s notion of the stealth tax isn’t wrong. Currency issued by the central bank is an interest-free loan from the people to the bank. It depends on your politics, though, whether this profit constitutes the government ripping off the people, or the government of the people earning revenue to spend on its citizens.
Whether we really need national currency in physical form is an offshoot of that broader debate. The thing you must remember about money, says Birch, is that it’s not one thing. “Economists will tell you about all these different functions of money—unit of account, method of deferred payment, store of value and all that.” Looking at money in this way, he says, illuminates the disadvantages and waste from using cash. “Think about how people and society have already replaced cash with electronic money in so many ways.” It would be absurd, for example, for anyone today with adequate savings to hide all his wealth at home or make big-ticket purchases using cash. Say what you will about the deficiencies of banks and credit card companies—and there is plenty to say—but the comparative safety and relative security their products afford is precisely why they have become so enormously profitable. Storing value and transacting in cash, in contrast, is a risky and friction-filled proposition.