Living on credit.

Historically, the acceptance of money as a means of payment wasn’t as universal as it is today. Imagine we’re traveling to Athens — not to the city of the present day but rather in antiquity. We’re carrying some coins in our luggage in order to buy some wine. It quickly becomes clear that the wine merchants who have traveled to the Greek city from Alexandria won’t accept our money because we don’t have any Egyptian coinage.

Although coins had advantages over bartering, they were often impractical in everyday use: difficult to transport, easy to tamper with and easy to steal. Rischbieter gives the example from Athens to explain what long served as a general currency instead. Namely, people extended credit to one another and traded based on trust. Money in the modern sense played only a minor role.

Until the 19th century, trade was often carried out via credit on account and loans. In this regard, the merchants of the Middle Ages traded with one another not out of friendship but as a calculated decision: “It wasn’t that A and B particularly liked each other,” Rischbieter explains. “Instead, it was a sign of agreement that all parties wished to continue to conduct their business in the same way.”

Gold for money

How did money become established as a means of payment? To this day, many people imagine that the Swiss franc is backed by gold — in other words, that you can theoretically exchange it for a piece of the precious metal. In fact, this has never really been the case. The gold standard of the 19th century was primarily a psychological construct. “Almost no country in the world actually had enough gold for a prolonged period of time to cover all the currency in circulation,” says Rischbieter. What the gold standard actually provided were fixed exchange rates between currencies. This gave merchants certainty in planning.

Today, nothing remains of this link, or “peg,” to gold. Instead, our money is based on trust in states and central banks. The actual revolutionary development is the modern tax state. States that reliably collect taxes are considered creditworthy as a result and can therefore take on debt. That’s the basis of the modern economy.

Debt as a bogeyman

Despite this, there are few phrases that trigger as much apprehension as “national debt.” According to Rischbieter, this apprehension is unfounded: “National debt is not a bad thing in itself.” Capitalism operates on the basis of an investment today and a profit tomorrow, she explains. That goes for all participants, whether they’re a company or a state. Railway construction, industrialization, education — none of it could have been financed in the 19th century without debt. “We need debt because it provides the credit to bridge this gap,” Rischbieter explains. Likewise, she says that crises are also resolved through debt.

Credit cycles have been apparent at least since the time of industrialization: Businesses need loans to fund the development of innovations. As soon as borrowing becomes cheap and there’s a promise of a future profit, everyone wants a piece of the pie. Think railroad shares in the 19th century, the dotcom bubble or the hype around cryptocurrencies. Not every stock market bubble results in a financial crisis and countless companies going bust — but some do. The economist Joseph Schumpeter called this process “creative destruction”: Old and inefficient companies or industries collapse, creating space for new and more innovative ventures.

At the same time, the fact that our economy is based on credit creates a structural problem: A capitalist economy needs growth. People who take out loans pay interest. For that reason, there must always be more at the end than at the beginning. In a world with finite planetary resources, this inevitably leads to conflicts over wealth distribution.

A strong currency

It’s not the growth itself but the resulting conflicts over wealth distribution that can be problematic for a country’s economy. This is because a state’s citizens don’t always benefit equally from their currency. For an example, we need look no further than the exchange rate of the Swiss franc. Around the world, the currency is considered a safe haven, partly because Switzerland is politically stable and its institutions are perceived as reliable. Anyone who’s been abroad recently will have noticed that the Swiss franc is very strong and that Swiss people’s money therefore goes further on holiday. According to Rischbieter, however, this isn’t necessarily a cause for celebration: “The flip side is that a strong currency hampers exports. The goods are simply too expensive for our trading partners.” For some Swiss companies, a strong franc is therefore highly detrimental.

“By looking at money and its past, we gain a better understanding of the present and of today’s social and economic structures,” says Rischbieter. At the same time, she says, people can also use money in everyday life without needing to understand it — and therein lies its strength.