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The New Bitcoin

The incredible strength of the shekel is playing havoc with Israel’s economy, while leaving its humble and egalitarian past in the dust

Matti Friedman
December 07, 2021
Original photo: Wikimedia Commons
Original photo: Wikimedia Commons
Original photo: Wikimedia Commons
Original photo: Wikimedia Commons

For people of my disposition, the financial news is a blur in the background: a graph in the newspaper, a ticker with ominous acronyms, a smattering of words like “fiscal,” which have an effect equivalent to two Ambiens and a shot of rum. The economy is kind of like the molten lava at the Earth’s core. It’s there, apparently roiling and occasionally spurting through the surface, but it seems useless to think much about it.

But this is one of the times we probably should: The shekel has risen to historic heights in a dramatic moment for Israelis, our bank accounts, businesses, and travel plans. A consideration of our currency and its checkered biography seems warranted, from its days in the financial doghouse to its present life in the penthouse with coins like the strapping, ruddy-cheeked, oil-fueled Norwegian krone. The rise of the Israeli shekel isn’t a fluke, and it’s more than a business story.

It wasn’t too long ago that a dollar could easily buy four shekels—in fact, there was a time when a dollar could buy 1,630 shekels (more on that below)—but as I write these lines the dollar is struggling, incredibly, to buy a measly three. The dollars in my bank account are worth a fifth less in shekels than they were last March, and the same trend affects my parents’ pensions and what I’ll get from Tablet for writing this column. American currency has always played an important role in the emotional life of Israelis, who used to hoard dollars under floor tiles. Serious business was done in dollars, which were like that stable guy who’d always be there for you. Our own colorful shekel notes, by contrast, were like the high-strung friend you hung out with but wouldn’t trust with your car.

We say that a dollar’s a dollar, but actually currencies are complex creatures not to be taken for granted, and they’re often unintentionally revealing about the place where they’re minted. The sturdy dollar, for example, was once only one of about 10,000 kinds of paper circulating as legal currency in the United States, not including countless fakes; before the Civil War, banks printed their own money, and so did the Mormons, Young’s Hotel in Boston, and a church in Schenectady, New York. In his book about that era, A Nation of Counterfeiters, Stephen Mihm makes the case that at the time America itself was a counterfeit country, unable to impose order or sovereignty. When currency was finally unified and brought under control, it marked a change in the way Americans thought about themselves. The dollar, in other words, says something deep about America. What does the shekel say about us?

In retrospect, we’ve been feeling this change coming for years. When I was renting in Jerusalem as a university student 20 years ago, rental prices were in dollars, like all real estate transactions. The shekel was for buying milk at the grocery store. When I bought an apartment in 2006, the price was in dollars, of course, but the tectonic plates of finance were already shifting: Between the date I signed the contract and the date of payment a few months later the shekel had climbed dramatically, meaning that I saved tens of thousands of shekels when the exchange rate was calculated. It was a rare financial triumph, and of course entirely accidental. The following fall my friend Idit Ben-Or, now a Hebrew University scholar specializing in the human impact of economics, and back then an undergraduate in Beersheba, signed a rental contract in dollars. But then her landlords noticed that the shekel was suddenly worth more rather than less at the end of the year, which meant that when they sat down to calculate the exchange rate, they’d owe Idit money, and not the other way around. They weren’t the only landlords who noticed. By the time she signed her next lease, everyone in Beersheba, and the entire Israeli real estate market, had moved to shekels. It might seem strange that using Israeli currency seemed remarkable to Israelis. But the leap of faith in the shekel, even for Israelis, has been a long time coming.

For anyone familiar with the way Israel’s history is usually told, the annals of our economy can be odd, because these stories are parallel but not identical. The heroes of the economy aren’t iconic generals like Moshe Dayan but forgotten pencil warriors like Michael Bruno, the governor of the Bank of Israel. The dates are also different. Israel became independent in 1948, but the independence of our currency came in 1954. That was when David Ben-Gurion finally abandoned the British Palestine pound and launched the Israeli lira, adorned with images of biblical harps and hammer-wielding Jewish workers. As was true of the state itself, the road ahead for the Jewish coin wouldn’t be smooth: It would have to traverse both a treacherous world and potholes of our own making.

In the brief interval between the independence of the country and the independence of the lira, Israel’s population more than doubled as immigrants poured in from the Islamic world and from the ruins of Europe. Even though most came penniless, they powered an expanding economy that the state tried to manage with a mix of central direction, austerity measures, and private enterprise. Israel never really had the Soviet-style command economy that some imagine in retrospect. And although the Zionist movement always venerated agriculture, the truth is that within a few years of independence people here already knew the way forward was manufacturing, even if factories were less picturesque and less conducive to the writing of beautiful Hebrew songs. Many Israelis didn’t have jobs or a place to live, at least for a while, but things somehow stumbled forward until Yom Kippur, 1973, when Israel’s leadership mishandled a surprise attack by Egypt and Syria and barely eked out a victory that cost the lives of 2,600 Israeli soldiers in three weeks of desperate fighting.

Viewed purely as an economic event, the war consumed the equivalent of three-quarters of that year’s gross national product and forced the country to its knees. A year later the lira was devalued by 43%. Then came the political earthquake of 1977, when Likud politicians came to power for the first time, took problems they’d inherited from Labor, and made them worse. The currency was devalued by nearly another half, then replaced with a new currency, the shekel, which was supposed to help but didn’t. Three years after that the Tel Aviv Stock Exchange crashed.

Then came an Israeli victory never commemorated in statue, ceremony, or song: the Great Stabilization Plan of July 1, 1985.

The newspapers from early July of that year offer a glimpse into an unrecognizable country—a basket case of Argentine proportions. “Devaluation of the shekel reaches thirty percent this week,” reads one headline. This week! An ad for a clothing store reads, “Inflation isn’t in fashion: For four days only, pay the old prices + huge discounts.” Everyone was scrambling to buy dollars: A photo shows a man buying black-market U.S. currency from a guy on Lilienblum Street in Tel Aviv. The buyer is a uniformed policeman. The rate was 1,630 shekels to the dollar. That is, a week before your 100-shekel note could have got you a whole dime, but now it was worth 6 cents.

Enter Prime Minister Shimon Peres, whom Israelis tended to see as a schemer who lacked the salt-of-the-earth authenticity of the sabra or the glamor of the general. It was his finest hour. His plan was to slash government spending and move a country founded by radical socialists toward the risks and potential benefits of the free market. The Reagan administration was in favor, offering billions in aid and dispatching American experts like the young Stanley Fischer of MIT, later a famous economist and eventually the governor of the Bank of Israel. The daily Yediot Ahronot reported that the plan would cut more than $1 billion from the state budget; even in an Israeli newspaper reporting an Israeli budget crisis, the sums were in dollars. When the July 1 papers went to press, Peres and his cabinet were still fighting it out in a session that lasted 24 hours.

The Histadrut, the powerful labor organization that helped found the state and once ran much of the economy, was doing everything it could to fight the plan, perhaps understanding even then that its back was about to be conclusively broken by bourgeois capitalism. Yisrael Keisar, the Histadrut chairman, got up to speak in the Knesset and asked bitterly to have his microphone lowered by one third, “like salaries.” Workers were burning tires in the poorer quarters of Jerusalem. Yair Tzaban of the socialist opposition declared it “a black day for Israeli society, for workers, the Labor Party, and the biography of Prime Minister Shimon Peres.” The defense minister opposed any cuts to the army. The police minister swore the police had no money to spare. The education minister wouldn’t hear of cuts to schools. Ultra-Orthodox lawmakers boycotted the vote because the frantic preparations had violated the Sabbath. But when the dust settled in the Knesset, Peres had won. The proud father, the stubborn political donkeys, the wise men from the West bearing gifts: This was the nativity scene of the new Israeli economy.

The proud father, the stubborn political donkeys, the wise men from the West bearing gifts: This was the nativity scene of the new Israeli economy.

After that the battered shekel, just 5 years old but limping like it was 90, was replaced by the New Israeli Shekel. Import restrictions came down and the local textile industry died. Labor Zionism faded, taking with it the Histadrut and respect for working people. Inequality rose. Steep cuts to the military left officers and technicians out of work, many of whom went on to fertilize Israel’s small tech scene, which became the Next Big Thing. Israel, wrote the economist Paul Rivlin of Tel Aviv University, “has lived in the shadow of the 1980s economic crisis ever since.”

Rivlin happened to move to Israel from Britain two months before that fateful July 1—which could only have been due to Zionist idealism, because as an economic decision it was lunacy. When he landed at Ben-Gurion Airport the inflation rate was approaching 500%. Distrust of the shekel became ingrained in him to such an extent, he says, that even with his economic training it took him longer than many others to realize when the game eventually changed.

Rivlin identifies a turning point in 2003, after an economic nosedive caused by a combination of Second Intifada terrorism and, 6,000 miles away, by the dot-com crash in New York. Israel had been running a trade deficit since its founding, Rivlin said: For 65 years we were importing more than we were exporting. But now came a cosmic shift. In 2003 Israel moved into the black and has stayed there ever since, which is part of the explanation for the shekel’s strength. Anecdotally, it was in these years that you started meeting Israelis wearing Nike and H&M, and teenagers who liked sushi and focaccia. Cranes proliferated on the Tel Aviv skyline. By 2012 you could see a Ferrari dealership in the city, and homeless people.

Those watching Israel from the outside are condemned to mistake political news for the life of the country. Insiders understand that over the past two decades something deep has come together here in culture and economics, and that modern Israeli society is only tenuously connected to the government. That’s the answer to a perplexing question—namely, how on earth the economy managed to boom through the past two years of political deadlock and infighting, with no national budget. “It’s a reflection of the fact that to some extent our economy isn’t dependent on the government,” Rivlin said. “The politicians can muck it up, and I wouldn’t put it past them, but even having four elections one after the other didn’t do it.” Just in the first half of this year the sum of foreign investments in Israel, mainly in tech, reached $37 billion—close to the sum for all of the previous year, and greater than the sum for the year before that.

That flood of money is another part of what’s fueling the shekel, said Yovav Gavish, Israel’s representative to the World Bank in Washington, D.C. A tech company getting investment in dollars, for example, has to exchange them for shekels in order to pay its Israeli employees, landlord, and supplier of artisanal tabbouleh. Another immediate reason is the rise in U.S. stocks, which means that Israel’s massive pension funds have more dollars in their American stock portfolios, requiring them to protect themselves with hedging mechanisms that involve selling dollars and buying shekels, further driving demand for the Israeli coin. But for the finance-averse, like me, the explanations can be summed up with the observation that the shekel is strong because the Israeli economy is strong. Israel weathered the 2008 crash that battered almost everyone else, and only two years later joined the elite economic club of the Organization for Economic Cooperation and Development in Paris. “All of this created more faith in the shekel and the Israeli economy, two things that can’t be divided from each other, and attracted vast inflow of foreign investments, including in Israeli government bonds,” Gavish said.

But that doesn’t mean that the shekel’s Incredible Hulk moment is necessarily great for Israelis. It’s good if you’re traveling abroad, and in theory it should make imported products cheaper (though in practice the importers tend to pocket the profits and keep prices high). But it’s bad for people who work in tourism, agriculture, and in industries producing goods for export. If the rise continues, it will cost jobs in those factories and farms and make the country even more dependent on the tech scene—which is so overheated and flush with cash that some smell a painful correction coming. Everyone loves the “startup nation,” but only 10% of employees are in tech, and Israel can’t risk having all its eggs in an e-basket that could go the way of WeWork and take the economy with it.

More than a century ago the sociologist Georg Simmel observed that the rise of money made the world seem like an “arithmetic problem,” but there isn’t really a formula that explains definitively why some things are worth a lot and others less. The logic can get circular: The shekel is strong because people believe in the shekel because the shekel is strong. There’s a reason that capitalism is known as a vast confidence game.

“Shekel” is a word that appears in the Torah, from the same Hebrew root as the word “weight,” which suggests solidity. It reappears in the modern world as a membership share in the Zionist movement of the late 1800s, when a Jewish state with its very own currency, inflation, dysfunction, and inequality was nothing but a dream. Anyone with a shekel could vote in Zionist elections dedicated to willing an imaginary state into existence. All currencies have some deep metaphysical link with the state that prints them, but in the case of the shekel the connection seems uniquely apt. If enough people believe enough in something, sometimes that thing materializes in the real world, shaping our lives as it takes on a life of its own. And so the shekel and its country climb up—away from their humble beginnings, away from poverty and from the egalitarianism of the founders, up like the new skyscrapers in Tel Aviv, into the heights of the free market, for better or worse.

Matti Friedman is a Tablet columnist and the author, most recently, of Who by Fire: Leonard Cohen in the Sinai.