Requiem for the Shekel

Asher Schechter
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Asher Schechter

The State of Israel is only 64 years old, but it has had three different currencies - the lira, which replaced the Eretz Israel lira; then the old shekel; and then in 1985, the new shekel. Now, 26 years after that last change, the Bank of Israel is considering changing the name of the country's currency once again, in 2013, when it issues a new series of banknotes. The new currency will probably be called the Israeli shekel.

"You can't say that a 30-year-old currency is new," says a source at the Bank of Israel. "The intent is to convey stability, something the name 'new shekel' does not do. Issuing new banknotes, a significant change that happens only every 10-15 years, gives us a window of opportunity."

Israel's present and past currencies. Credit: Ayala Tal

This is yet another incarnation of Israelis' tendency to dismantle symbols, says sociologist Prof. Oz Almog of the University of Haifa.

"There are several things that typify Israeli culture, one of which is our tendency to constantly change things," says Almog. "Take children's names: Every generation here has a new series of names, unlike other societies. These are the dynamics of a society in constant flux. It's dynamic, but we don't preserve tradition. There's no stability or respect for tradition. In European societies, or in ancient Hebrew societies, names were traditions handed down from one generation to the next. We don't preserve houses either - we build and dismantle. We do the same to national symbols.

"Of course, this is a reflection of the past economic instability. It also likely reflects the lack of long-term planning. We run on impulses, and that's why the thinking is always short-term. Now our currency has one name, and tomorrow it will be called something else. Just pick a name and stick to it. It's very confusing, and attests to the public sector's non-user-friendly attitude."

Prof. Danny Gutwein, a social historian from the University of Haifa's Jewish history department, sees things differently.

"It's not that we're searching for ourselves; the frequent name changes reflect stages in the Israeli economy," he says. The currency's name is being changed due to power struggles and an attempt to shape awareness by changing symbols, he says.

"Why does the Bank of Israel suddenly want to change the currency's name? The central bank clearly feels that last summer's social protest changed the Israeli economy. Dropping the word 'new' indicates that the current state is stable and permanent, a counter-reaction to attempts to undermine it."

Dr. Friedrich Loewenberg, the hero of Theodor Herzl's 1902 book "Altneuland" (Old New Land), is a young, suicidal Jewish intellectual in early 20th-century Vienna. Like many young people of that period, Loewenberg is poor, depressed and tired of European decadence. A moment before he attempts suicide, he encounters a mysterious Prussian aristocrat named Kingscourt who magnanimously invites him to join him on a trip to a Pacific island.

On the way, the two pass through early 20th-century Palestine: an undeveloped, poor, nearly unpopulated country. After touring the country and finding nothing there, they continue to the island and spend 20 years there, totally isolated from the outside world. On their way back to Europe they pass though the Land of Israel again, and are amazed to discover that the Jews have resettled it and turned it into a social, economic and technological marvel.

Then Finance Minister Yitzhak Moda'i and Shimon Peres. Credit: GPO

In Israel their guide is David Litvak, a poor Jewish boy whom Loewenberg rescued from starvation in Vienna 20 years earlier, and who went on to become a pioneer in Israel. Litvak shows them the new Israel, a model egalitarian society.

One particular detail catches their attention: "What the hell is that?" Kingscourt asks Litvak. "That's our currency," Litvak smiles. "We have introduced our ancient currency, the shekel. It's worth about the same as a French franc."

Tyrian vs. Roman

In the beginning there was the shekel: a unit of measurement used for weighing metals in biblical-era Israel, and later for weighing food, before the invention of coins. Eventually that shekel became the name of a currency used in and around ancient Israel, made from silver or gold, and varying in size and weight depending on the region.

The Tyrian shekel, considered purer than the Roman shekel, was also used for the tax that all Jews paid annually during the Second Temple period in order to pay for sacrifices. It was dubbed "the half shekel." Although it was issued in Israel, it bore Roman images to make it clear that the Jews were not autonomous.

During the Bar Kochba Revolt, the rebels reminted Roman coins with the slogans and symbols of the revolt. One of them was the Bar Kochba shekel.

"The world's debt to the Jews," was the title of a November 10, 1902, speech by Dr. C. George Lorimer, the pastor of New York's Madison Avenue Baptist Church. While officially persecution of the Jews in enlightened countries had ended during the course of the 19th century, the illegal persecution that continued was no better, he said. Prestigious shops turned away Jews at every opportunity, but received Italians, whom Lorimer called less cultured and less suited to high society.

Lorimer, an admired preacher at the time, was speaking on the occasion of "Shekel Day," a Zionist Movement fund-raising campaign that raised $3,000 in New York and $4,000 in other cities. As part of the campaign, "shekels" were being sold for $0.25.

Coincidentally, that is roughly what the New Israel Shekel is worth today.

The shekel always has been one of the outstanding symbols of the Zionist movement. The number of shekels sold in each country determined the number of delegates it could send to the Zionist Congress. The buyers received a symbolic banknote bearing symbols of the movement and photos of the ancient Hebrew coin.

Still, when Israel was established, the shekel was tossed aside in favor of the lira, a remnant of the British Mandate.

The Palestine lira had been the local currency before statehood, and was equal in value to a British pound sterling. It was divided into 1,000 mils. When the mandate ended, Britain expelled Israel from the sterling bloc.

Instead of reintroducing the shekel, Israel decided to keep the name "lira." The Jewish Agency's Anglo-Palestine Bank - which became Bank Leumi in 1951 - was in charge of printing banknotes. After overcoming the legal problem of printing banknotes for a country that did not yet exist, bills were printed in denominations of a half lira, 1 lira, 5 liras, 10 liras and 50 liras.

"The decision to keep the lira after Israel was established was intended to create the impression of stability," says Gutwein. "That's how Israeli currency began. The British left and there was a desire to create a sense of continuity. Most of the British rules and regulations remained, and the Mandatory atmosphere persisted until the state gradually took its place."

In 1952, when Israel was deep in austerity, the Israeli lira replaced the Eretz-Israel lira. Instead of mils, it was composed of 1,000 prutot.

The Bank of Israel, which was established in 1954 and began administering the monetary system in place of Bank Leumi, distributed its first banknotes in 1955. They bore pictures of Israeli landscapes.

In addition, the Israeli lira was unlinked from the pound sterling, and depreciated sharply as a result. The lira depreciated further in the following years, rendering prutot worthless and driving the central bank to divide the lira into 100 agorot instead.

In the 1950s, immigration doubled Israel's population, and large investments were made in agriculture and construction and in such infrastructure projects as the National Water Carrier and the Ashdod Port. These developments, coupled with the depreciation of the lira, reparation payments from Germany and American assistance, drove annual economic growth to more than 10 percent. Inflation was low, employment was full and exports increased.

The comeback

In the mid-1960s, Israel entered its second recession. Emigration skyrocketed, leading to the expression, "Would the last to leave please turn out the lights." The recession ended when immigration renewed and the Six-Day War sparked military development. By then, more people were asking why the Hebrew state had a currency bearing a foreign name, sparking the initiative to rename it.

In June 1969, the Knesset legislated that the national currency would be called the shekel, but the government ignored the mandate until 1977, when Bank of Israel Governor Arnon Gafni recommended that it be implemented.

In 1980 the shekel finally made its big comeback, after 2,000 years, assuming its role as the new currency of the State of Israel. In order to strengthen its link to the biblical shekel, and in turn the Jewish people's historical link to Israel, the reverse side of the coin was engraved with pictures of archaeological finds. Its value was set at 10 liras. The lira, which was the currency of Israeli economy's "lost decade." Inflation soared to more than 100 percent annually by the late 1970s, there was no economic growth, government expenditures increased steadily, the deficit skyrocketed and the demand for dollars soared.

In order to finance its growing debts, the government issued bonds and printed money, fueling inflation and increasing the debt and tax burden. The result was a profound economic and social crisis. The Israeli welfare state had become bankrupt.

"There was a feeling that people had stopped believing in the lira," says Dr. Avi Simhon, economic adviser to Finance Minister Yuval Steinitz and a member of the Trajtenberg Committee. "That's why the policymakers wanted to try to restore confidence in Israeli currency. A package of coffee suddenly cost 1,500 lira. A car cost millions. So they invented the shekel, and also dropped a zero.

"Of course that had no effect, because the important thing is not what the currency is called but rather monetary policy, which didn't change. It was an attempt by policymakers to convey a change in policy, but it was not accompanied by a single genuine commitment, and therefore it had no effect. Instead of printing liras, we simply printed shekels.

"We then entered a period of high inflation. The treasury considered inflation of only 10 percent a month an achievement. Of course the shekel lost value, and that same package of coffee cost 10,000 shekels.

"They understood these numbers were not feasible. You can't walk out of the grocery store with a bill totaling hundreds of thousands of shekels, because people lose perspective and don't know what's cheap and what's expensive. A cup of coffee cost 20,000 shekels in regular restaurants and 30,000 shekels in expensive restaurants, and the currency's value declined every day. People stopped talking in shekels and started talking in dollars, and one dollar was worth 1,500 shekels. And then they said 'All right, now we're dividing everything by 1,000,' and invented the new shekel."

The new shekel's value was set at 1,000 old shekels. The raging inflation had become hyperinflation, soaring to more than 500 percent a year. National debt shot up to more than 80 percent of GDP.

On top of the inflation crisis came the bank stock crisis, when shares in the four biggest banks imploded. This led to a run on foreign currency and the nationalization of the major banks. At the time, the state budget totaled hundreds of trillions of old shekels, and a hamburger cost 4,000 shekels. Public servants' purchasing power dropped to its lowest level since 1967, while the national debt hit $21 billion. Israelis received raises every three months, which compensated them for 80 to 90 percent of the inflation.

Finance Minister Yitzhak Moda'i noted in his diary at the end of 1984, "The situation is bad, worse than I had thought."

Columnist William Safire wrote, "Needed now is some modern Joshua to break the bad news and rally the people to overcome it. Not with a craven and unjust 'this is the terrible price of American aid,' but with the grit of the generation that bled to create the region's sole democracy and instilled new pride in Judaism," he stated in an essay titled "Passing the Shekel," published in the New York Times on December 27, 1984.

The old shekel lost value daily: In 1980 it was worth $0.16; by the end of 1985 it was worth less than $0.001. The hunger for dollars was so great that in December 1983, Israelis purchased $1.2 billion in two weeks. Confidence in the Israeli economy was at an all-time nadir.

New start

The New Israel Shekel first came into circulation in September 1985, and officially replaced the old shekel in January 1986. It was a central foundation of the economic stabilization plan launched by Prime Minister Shimon Peres, Finance Minister Yitzhak Moda'i and Bank of Israel Governor Michael Bruno. That plan called for cutting government expenditures, reducing the generous subsidies on goods and services, increasing taxes and freezing public sector salaries.

"We will no longer pay our grocery bills with thousand-shekel banknotes," wrote Moda'i in his memoirs, which were published a few years later.

The stabilization plan was a dizzying success. Inflation quickly dropped to two digits, and then to one digit. Emanuel Sharon, the Finance Ministry's director general under Moda'i and one of the architects of the new shekel, says the Bank of Israel's lack of confidence in the plan is evidenced by the size of the shekel, which made many Israelis complain that the little "cockroach" was so small that it was easily lost in wallets and pockets.

"The dollar was worth 1,500 shekels at the time, and the idea was to drop three zeros and create a new shekel, but the new shekel is a very small coin. When it was minted, the Bank of Israel didn't believe the inflation would stabilize, and assumed the shekel would be worth an agora, the smallest coin at the time. That's why they made it so small," he says now.

Milton Friedman, the godfather of neo-liberal economics, came to Israel in the late 1970s in order to help the Israeli government.

"The new shekel was an unequivocal declaration that Israel was taking up Milton Friedman's policy," says Gutwein. "Until then, steps to liberalize the economy were sporadic, but the 'new shekel' granted legitimacy to the new policy. A new currency, a new policy. After all, they didn't have to call it a new shekel, they could just as well have called it an Israeli shekel. The word 'new' was designed to give legitimacy to the new order.

"The transition to a neo-liberal economy, heralded by the new shekel, was a dramatic change in the balance of powers," Gutwein continues. "Between 1979 and 1985 the entire Labor Party-built order was erased with amazing speed. That wasn't due to the currency's restless youthfulness, but due to the instability of power centers in Israeli society and the battle over the change.

"The year 1985 saw the beginning of the privatization that changed the balance of powers, built a moneyed elite and created the Israeli bourgeoisie, which was born of the marketplace and works hard in order to maintain it. That is the antithesis to domination by the state and the Histadrut labor federation, as was the case beforehand," says Gutwein.

"The privatization revolution profoundly changed the centers of power and the economic and political sources of legitimacy. Between 1968 and 1977, Israel built a welfare state and increased equality, and changing the currency symbolically reflected the profound change in the economic system. The construction of new centers of power didn't include only the bourgeoisie and the wealthy families, but the sectoralization of the economy as well. The privatization policy reshaped Israel."

This was one of the more significant changes, says Avi Simhon.

"As opposed to the previous change, this time they really went for a very fundamental change in the Israeli economy," he says. "The year 1985 was a crucial one, when we switched from a Mapai-style economy [referring to the predecessor party of Labor] - even though it hadn't been in power for eight years by then, its style remained - to an economy that could be called free, even though it isn't completely free. This involved a dramatic change in monetary policy.

"The most important thing they did in 1985 is that they took the power to print money away from the Finance Ministry. Until 1985 the Bank of Israel governor was somewhat like the president, a VIP with a car and a driver, but almost powerless. If the finance minister needed a billion liras or a billion shekels, he would call the governor and say, 'I want a billion shekels by tomorrow morning, brought to my office,' and the governor had no say.

"What happened in 1985 was a revolution, and since then the Bank of Israel has decided how much money to print, and has been responsible for monetary policy. They took the ability to print money away from the politicians and gave it to someone more serious," says Simhon.

"After we had become accustomed to years of inflation and devaluation, the experts didn't give it much of a chance," he continues. "We were used to inflation of 15 percent a month. In July 1985, inflation was 30 percent. Prices rose 30 percent in a single month. Then you suddenly switch to a new currency, and expect people to believe? But amazingly, this time it worked.

"At the new shekel's nadir, in 2002, it hit NIS 5 per dollar. But since then, it has only strengthened. The past 10 years were unprecedented. Since the state was created, Israeli currency has [generally] lost value relative to foreign currencies - except in the past 10 years. Over the past decade, Israel's currency has become stronger."

In August 1997, The Economist wrote, "Not too many years ago, when their currency was a laughing stock and their spare cash immediately went into dollars, Israelis used to long for real money. Now they have it. The shekel, under an exchange-rate policy introduced in 1991, is rock hard - so hard, in fact, that it is giving the government fits."

The economy went through recessions, inflation (but not hyper-inflation) and impressive growth, and through it all, the shekel gradually strengthened. Even rent, which until recently was quoted in dollars - a last vestige of Israelis' lack of confidence in the shekel - has finally switched over to shekels.


Now, inflation is within the price-stability range. The shekel is not weakening in relation to either the dollar or the euro, and there does not appear to be any urgent reason to change the currency's name - except for the official reason, that it is somewhat embarrassing to call a 30-year-old currency "new."

But Gutwein says more significant factors play a role in the decision.

"This is something far more profound than economics. Whether it's due to the social protest or economic concentration, the Bank of Israel realizes the economy is facing a change and is taking a symbolic step designed to preserve the existing order. All previous name changes were connected to economic crossroads and accompanied new chapters in the Israeli economy. This time the intention is stabilizing what we have, by dropping the word 'new' and replacing it with 'Israeli.' You use 'new' when you want to say 'I'm new and that's legitimate,' and you use 'Israeli' when you want to say that things are going well."

Gutwein, incidentally, is not at all impressed by the shekel's success.

"By what measures has it succeeded? Inequality in Israel has increased tremendously. The shekel's stability, which everyone brags about, conceals the tremendous weakening of Israeli society. When the shekel was most stable, our society was severely split," he says.

"The shekel is the symbol of the policy, and it helped cover up the profound weakening of Israeli society, such as the erosion of the middle class. The shekel created the illusion of a stable society, but that was true only for a very small circle of people who profited from the new order. Since 1985 the new shekel's success has functioned inversely to the social outcome of the policy for which the new shekel was used."

Simhon does not agree with Gutwein.

"The shekel is a big success. It has held its ground all these years, and in the past decade it has only become stronger - not because of speculative manipulations, but because the Israeli economy has proven itself to be stable and responsibly administered. In 2011 foreign entities held NIS 100 billion in shekel-linked bonds, which is evidence of the financial system's great confidence in the Israeli currency."

The new shekel's 27th birthday will probably be its last. Next year, it will probably join the so-called "27 Club," the group of rock stars including Jim Morrison, Kurt Cobain and Amy Winehouse who died at that young age.

In the relatively short time that it has been with us, we've managed to get used to it. We even gave it a special sign on the keyboard. We almost forgot for a moment that like everything else in Israel, our currency's identity is temporary.

"There's no question that there's a constant search on here," says sociologist Oz Almog. "The language isn't stable, the institutions aren't stable. Look how often we've changed the election system. It's definitely a reflection of a search for direction and the tendency to improvise. We even build for the short term, our pavement is made from cement tiles that wear out and have to be replaced every few years. Everything is temporary here. Everything is accompanied by a sense of transiency, and this feeling is reinforced by temporary symbols. We're young, we haven't been here for hundreds of years, we're a young nation that is consolidating itself."

Avi Simhon is not impressed by the self-searching.

"Why change? We finally have a strong currency, why play around with it? Things are stable now, so why change the name? It seems absurd to me. We might as well go back to calling them zuzim [a Jewish currency used in Roman Palestine]."