Reflections on Money
by Kianga Daverington
September 1, 2020
This essay, written by Kianga Daverington of Daverington PLLC , was originally published in January 2020. The piece as been condensed for clarity.
Money is not a physical object like a coin, a bar of gold or a dollar bill. Money is at its core, a technology. It is a human invention designed to solve a specific set of human problems. Consider money, perhaps, in a new way. Think of money as a system for capturing time.
Time is the one thing we each have that is absolutely finite. We are born, we die, and the dash in between is all the time we have.
Think of production. We can usually produce more of some good by adding people to a task (also known as “WORK”). But we are still constrained by time. Whatever we produce is still limited by the amount of humans that can be organized to go into that production. Each of us possesses a limited amount of time available to us individually, so we need to convince or coerce others to add their time to ours if we want to achieve more than we can alone.
Out of this imperative, nations are born.
The most important quality of any particular form of money is how well it preserves the value of time over time. Can you buy the same amount of stuff or more in the future than you can buy today? If yes, congratulations - your money is accumulating time for you and future generations while you relax on the beach. If it takes more and more of a unit of money to buy the same amount of time in the future, well then I’m sorry, but that unit of money is getting weaker and weaker. It’s losing value or said another way – it’s losing purchasing power. The longer you hold it, the less it buys.
In a way, by purchasing goods and services, you are purchasing time. Every product and every service requires time to make and time to deliver - your time and/or someone else’s. The price therefore reflects the collective value of all the time put in. Money is a way we exchange time and move it around from where it is valued less to where it is valued more.
This is where prosperity comes from. It comes out of how well a society, collectively and each person, spends its time. How much time is spent creating and making? How much time is spent consuming? If we make more than we consume, we have something left over called wealth. If we consume more than we make, we are left with debt. You can’t consume what you don’t have, unless someone extends credit. Where does this “credit” come from? Basically –it’s made up.
Too much credit or debt eventually collapses and everyone is mixed up in the collapse.
If we understand that a unit of money represents a unit of time, and we understand time is limited, then a unit in a system of money with unlimited supply cannot have any value. This is the problem we are facing today with the world’s money supply. The supply of money in the world is increasing exponentially as central banks create money by giving loans to national governments, which is where our money comes from.
Our entire world financial system is a powder keg of debt.
National currencies today are known as fiat money, a currency without intrinsic value that has been given its power to be used as money by a government that says it is money by regulation. Wikipedia says, “Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.” Well said, Wiki.
A government’s job of maintaining the value of its national money boils down to a confidence game. On what basis do the people who use that government’s money believe it has value?
What happens to the money and those who hold it when the foundation of that belief begins to crumble?
A Sense of Where You Are
by Devin Michelle Bunten
May 23, 2018
Devin Michelle Bunten is a writer and economist at the Federal Reserve. She will begin teaching Urban Economics and Housing at MIT in the fall of 2018. You can find more of her thoughts and writing on Twitter.
It takes about seven months to build a house in the US today, two months less than a full-term pregnancy. When finished, American houses stick around longer too: the typical home is 40 years old while the typical American is just 38. Houses can grow additions along the way, but a good deal of their character is baked into their DNA as the policies and priorities that shaped their construction also shape their trajectory in later years.
These policies produced a pattern of investment that started with housing and fed through to education, wealth-building, and neighborhood change, with a great deal of benefits for white families and a great number of costs for others. The houses are still here, and the racial disparities aren’t going away.
In 1945, two factors came together to create a legacy of social dysfunction. Pent-up demand for housing created a unique opportunity to reshape the urban environment. The ensuing construction boom followed the priorities of decision-makers at the time, who used a host of new and evolving institutions to create vast segregated ghettos and insulated all-white suburbs. The confluence of these factors meant that decisions taken would be enshrined in the homes and neighborhoods of our cities for generations.
WAY BEHIND ON HOUSING
Demand was high, and supply was behind. By 1945, the economy had lost a decade in the Depression and devoted years to fighting the war. Few houses had been built, and our cities were unprepared for the wave of demand. And it was a tsunami: the number of households doubled from 1940 to 1960. Population growth accounted for nearly two-thirds of this growth, and farm-to-city migration accounted for another 20%. At the same time, the average household size fell from 3.8 people to 3.3 as the share of adults living alone doubled.
Housing supply responded in kind. Over the fifteen years leading up to 1945, the US had built about 300,000 non-farm homes per year. Over the next fifteen, the US added as many homes every three months. The quantity of new housing exceeds all of the homes in California and New York today, combined.
The extent of construction presented an opportunity for policy decisions to be amplified to a monumental scale. If the new houses were a flood in housing demand, they would be channeled through a complex of levees that planners and policymakers began erecting in the 1920s and 30s. Encompassing local zoning laws and federal freeways, place-based mortgage guarantees, and more, this residential irrigation project had myriad objectives.
Illustration by Sophie Feller
A set of legal and social institutions segregated American cities in 1945, even more than today. Together, they determined what form the new housing took, what land it would occupy, and who would occupy it. This was the era of red-lining, of deed restrictions barring Black (and sometimes Chinese and Jewish) ownership or occupancy as a prerequisite for Federal Housing Authority mortgage insurance, of all-white public housing.
It was also an era of corporate segregation initiatives, some versions of which persist to this day. Real estate agents risked being blackballed if they showed homes in all-white neighborhoods to Black families. Similarly, most banks refused to lend to those rare developers seeking to build integrated neighborhoods. One example from Richard Rothstein’s The Color of Law describes a manufacturing union turned down for a loan to build integrated housing near a factory for well-paid Black and white employees.
And then there was the terrorism: firebombings, cross-burnings, and personal assaults on Black families and the sellers or landlords who helped them move into all-white neighborhoods. As a rule, this terrorism was state sponsored; the local police would wink, nod, or participate--sometimes finding grounds to arrest the Black family targeted with violence.
Over the ensuing years, several of these institutions would be dealt setbacks. Explicit racial zoning--Black blocks here, white blocks there--had been declared unconstitutional in the 1910s, deed restrictions fell to the Supreme Court in 1948, and Brown v. Board would technically outlaw segregated schooling a few years later.
Together, these new laws and rulings looked, for a moment, like revolution. White families looking to preserve the status quo would need to develop alternative ways of segregating people of color.
A bit of economic theory can shed light on the motivations of white families and the politicians and business groups who served their interests. What did segregation buy them?
In life, individuals are regularly confronted with bargaining. We bargain over financial matters when taking a job or hiring a worker, buying or renting a home, borrowing and lending; we also bargain over non-financial matters, like the circumstances within a job, within a household, or even in everyday interactions on the street. How these negotiations go, economist and mathematician John Nash proposed, depends critically on each party’s outside option: the value received by walking away. In an employment situation, this is the value you can get by leaving your job and looking for another; on the other end, it’s the value to your employer of hiring their next-choice applicant. If they have a long line of similar applicants then you don’t have much leverage; if you’re a one-of-a-kind with unique expertise then you have a great deal of power. We should not be surprised to find people in the latter situation tend to be better-compensated.
Following this logic, one way to get ahead is to gain power over the other party’s outside option. If a powerful in-group--such as white people--acts together, they can shape the landscape of society so that members of the out-group, no matter where they turn, are faced with an inferior outside option. If you’re the member of an out-group faced with a racist employer bent on underpaying you, well: your second-choice employer is also racist, and also your third-choice, and also your landlord, and anyone you might buy a home from. You enter each situation with an inferior outside option and thus very little of the bargaining power.
Segregation is crucial for upholding these different outside options. As the Supreme Court found in Brown v. Board,
Coupled with similar policies in labor markets, such as the tracking of Black employees into certain occupations, segregation served to systematically grant bargaining power to white people, to the corresponding detriment of Black and other families.
The Great Migration of Black families from the South into northern and western cities in the mid-twentieth century meant the burgeoning Black communities overwhelmed the blocks to which they were segregated. Some families sought to escape these overcrowded conditions by purchasing homes in all-white neighborhoods, which often resulted in white flight: the departure of white families from blocks or center cities as Black families arrived.
What can account for such dramatic neighborhood transformation? Uniform neighborhoods, or white, Black, rich, poor, immigrant--reflect the presence of strong complementarities between members of a community. These complementarities take many forms. Perhaps most obviously, in this context, is personal racism on the behalf of white families who refuse to live near Black people. But complementarities can take other forms as well: a desire to live near people with similar appetites for dining and retail, so that you can find many satisfactory shops and restaurants within your budget and serving your particular needs. Immigrant enclaves also reflect complementarities: people who speak your language, celebrate your holy days, cook your food, and are willing to help you make connections are invaluable when starting a new life in a new country.
Illustration by Sophie Feller
With complementarities, neighborhood change looks like a balance beam perched on a fulcrum. Start walking from one end, and the beam remains firmly planted--up until the moment you reach the pivot. Then, the beam swings, all at once, to the other end, and only comes to rest when a new equilibrium, built around the new residents’ needs and their complementarities, is reached. The situation is more complex still: From their perch atop the beam, existing residents of the neighborhood can’t see where the fulcrum is located. And from that vantage, a small change looks as if it may lead their beam over the tipping point.
Instability invites fear. Homeowners’ primary asset is at risk: if the endgame is lower home values, they could end up underwater on a mortgage, or short a retirement fund. Of course, new investment could raise values, as more neighbors are able to support more local amenities. But if homeowners are satisfied, they may prefer pulling up the drawbridge to knocking down the walls. In this context, even a vociferous anti-racist might not welcome an integrated community. Segregation was almost inevitable.
STRATEGIES FOR BUILDING
Back to 1945. The federal government undertook a variety of schemes to support the construction of more housing, as well as efforts to channel it into particular places for particular people. Altogether, the schemes amounted to hundreds of billions of dollars of investment in creating a stable, white middle class.
Most visible then and now were freeways. While some major cities had been investing in systems of parkways for decades--most notably New York and Los Angeles--the Interstate Highway System took shape in the years following the war. Planned to connect major cities with one another for purposes of trade and security, the freeways would also provide new high-speed routes between city centers and nearby rural areas. At the same time, rising incomes meant more and more households were able to afford automobiles. Put together, the farms were not long for this world. Developers followed the tried-and-true method of suburbanizing along new transportation routes, just as their forebears had once built new suburbs along streetcar lines and elevated railways.
Illustration by Sophie Feller
There was demand aplenty, which new freeways drove towards acres of newly accessible land. But one factor remained: risk. In general, neighborhoods need to reach a certain scale to be attractive to potential residents--large enough to support nearby grocers and other amenities. This is easy for incremental investment, as you can piggyback on adjacent neighborhoods. But to get to this minimum efficient scale in a suburb built from scratch meant a large up-front investment, years before costs could be recouped. The risk that homes wouldn’t sell fast enough to repay loans threatened to collapse the whole enterprise. To prevent collapse, the government provided a truss in the form of mortgage guarantees. These guarantees satisfied the banks that lent the money to developers, who built the homes for government-approved customers. With this structure in place, the suburban growth machine was up and running.
The loan guarantees, issued by the Federal Housing Authority, came with restrictions meant to ensure the houses would hold their value. In the event of a delinquent borrower, the lending bank could foreclose and resell the home, and the program would require little government spending.
The FHA thus endorsed restrictive covenants, exclusionary zoning, and other policies aimed at ensuring that the neighborhoods it guaranteed would remain all-white.
Beyond suburban subsidies, the government took part in two other notable housing schemes: tax and loan assistance for multifamily developments, and public housing. Both approaches started strong and then faded fast, quickly diminishing to a small segment of overall public funding for housing. A key multifamily program, known as Section 608, led to the construction of a half-million apartment homes in the 1940s--the majority of new multi-family units for a time. As late as 1978, the New York Times could write that homes built in Queens under Section 608 made up “a considerable portion” of the outer borough’s housing stock.
The story of public housing and urban renewal is somewhat better known: large segregated developments went up during and after the war, with some explicitly oriented towards displacing low-income and Black families from their neighborhoods en masse. The intention was to renew interest in the city among white middle-class families who might otherwise decamp for the suburbs.
Between the mortgage guarantees, tax deductions, segregated public housing, and freeways, the federal government poured hundreds of billions of dollars into the bank accounts and lifestyles of white American families in the post-war years. White families prospered. Their homes saw steady appreciation, their mortgage payments remained within reach, and their tax bills were not too onerous. This active investment stands in contrast to the treatment of poor and Black urban families.
In Chicago, over 20,000 homes were destroyed in federally-funded urban renewal between 1950 and 1966. The demolition of these homes and their replacement with freeways, parking lots, and structures served the needs of exclusionary white suburbs. And so the metropolitan landscape was upturned and aligned on a tilt, a geography of injustice where wealth, capital, and convenience flowed towards white families and away from others.
THE ESCALATOR OF WHITE WEALTH
Illustration by Sophie Feller
Post-war suburban homes have now seen generations of price appreciation--at least in the growing regions that have avoided the economic declines of the Rust Belt. For those families able to step on, the suburban wealth escalator has ensured a middle class lifestyle, funding children’s educations and parents’ retirements. This process owes to the escalator’s artful combination of growth with stasis. As development extends outward, a new suburb boards the escalator at the bottom. Once aboard, the escalator offers stasis: a fixed neighborhood character protected from development forms that might alter the community. Growth comes from the emergence of new suburbs farther down the line.
To be precise, the bricks and wood of the house don’t increase in value as the city grows. It’s the land underneath; the house is simply aging and cramped. With a parcel full of apartments, in a neighborhood full of such parcels, the land could be unique and scarce while the housing atop remains abundant and ordinary. That we don’t see many new neighborhoods like this is down to the zoning laws of our cities. In most small cities--the Bostons, Washingtons, and San Franciscos--only a few square miles are zoned to allow new apartment buildings. Such cities--let alone their suburbs--mandate that scarce land must feature scarce housing.
GUARDING THE ESCALATOR
Left to a competitive market, an attractive neighborhood will see that scarce land used ever more intensively. Homesteads give way at first to bungalows, then to perhaps townhomes or small apartments. Eventually, larger apartment buildings and even high-rises could follow. Over time, this process usually pushes average incomes down, at least relative to the city. First, developers tend to economize on space: two small apartments can generally rent for more money than a single large unit. All else equal, cash-strapped people feel more pressure to economize on space, and so small apartments will tend to be home to lower-income families. Second, with each passing year, an existing house will be smaller, older, and less-attuned to the demands of the day. Beyond these evolutions, a revolution is always possible: any new family may be the one that pushes the block over the tipping point and towards a new, poorer equilibrium. These changes--and the complementary evolution of the commercial environment--are precisely what post-war housing policy sought to forestall.
Zoning is perhaps the most obvious policy. From the beginning, it was clear to critics and proponents that banning apartments from single-family zones was the economic approximation of the racial zoning outlawed by the Supreme Court in the early 1900s. From the Ohio bench in the famous Euclid case legalizing the practice, a dissenting judge noted that “the result to be accomplished is to classify the population and segregate them.” Professor of urban design Lawrence Vale calls this design-politics, the notion that physical design and social policy are intertwined, and choices about design cannot be neutral. The policymakers writing the first city codes in the 1910s and 1920s understood this well:
The economic inaccessibility of a neighborhood could be overcome if a family were willing and able to take in boarders. Whether renting a room in the classifieds, on a street post, or on Airbnb, the additional income from an extra tenant can cover a mortgage or rent that might otherwise stretch beyond one’s means. In this way, the prohibition on multifamily housing is outmaneuvered: the boarder does not get her own unit but just a room, and thereby two lower-income parties can occupy a home intended for the middle class. Unsurprisingly, our cities are now replete with bans on boarding. From laws precluding short-term tenancy, to limitations on the number of stoves per home, and “you-plus-two” tenancy restrictions common in college and immigrant communities, non-normative tenancy arrangements are met with well-tuned laws intended to preserve the upper-income single-family character of so many neighborhoods.
Zoning prescribes an unchanging building typology, and tenancy laws an unchanging use of these buildings. Still, a third prong was necessary: policies to create an unchanging class of families, even as simple building aging tends to make older neighborhoods a natural fit for low-income homebuyers. Preserving the status of a neighborhood is clearly possible. The hillside end of Beverly Hills, for example, has stayed at the top of the income tables for generations. The trick is coordination: ensure each new family trusts the neighborhood will stay wealthy, and wealthy families will continue to move in. The economists Songhoon Lee and Jeff Lin have showed that beachfronts and other geographic features can help neighborhoods hold their wealth for decades. Another such device might be high local taxes or fees. When households must contribute thousands of dollars toward the maintenance of parks, schools, or other amenities, only those who can afford such expenditures will move in.
Such measures function along economic lines, highly but not perfectly correlated with the racial lines that formed the basis of fears about neighborhood change in the 1950s and arguably still do today. To preserve racial segregation, white families and their governments employed a variety of tactics. The federal programs of segregated public housing and deed restrictions were early examples, and before Brown v. Board, the siting of explicitly Black and white schools had a major role in segregating neighborhoods. By 1972, Richard Nixon’s only criteria for a Supreme Court nominee was to be “against busing and against forced housing integration”. Municipal fragmentation--the establishment of a large number of small suburbs--also played a role. Unlike neighborhoods within larger cities, independent municipalities refused cross-district busing and thereby attracted white families who wanted segregated schools.
Another way to keep rich neighborhoods white was to keep Black families poor. One means to this end was the disruption and destruction of Black communities for the freeways and other projects. Zoning also played a role here: neighborhoods that were partly or largely Black were chosen as sites for multifamily and commercial zoning, or even industrial zoning; correspondingly, Black families there missed out on mortgage guarantees and other monetary investments. Similarly, exploitative systems like the contract lending detailed in Ta-Nehisi Coates’s The Case for Reparations transferred tens of thousands of dollars from Black to white families. And then, the siting of freeways also meant that Black children were particularly exposed to exhaust from vehicles and thus suffer at much higher rates from asthma, lead poisoning, and associated maladies that hamper health, schooling, and life outcomes.
Finally, a great number of individuals in neighborhoods across the country participated in individual acts of racism intended to make people of color feel unwelcome in white neighborhoods. These acts ranged from terrorism and homicide to discriminatory rental practices and persistent microaggressions, and continue to this day. These acts kept neighborhoods as far from the tipping point as possible. By refusing Black tenants, Fred Trump and his son ensured that white tenants continued to move in and pay top dollar.
Under the model of tipping, neighborhoods have two possible end states: all white, or all Black. The escalator of white wealth necessitated preventing as many neighborhoods as possible from undergoing the transition to all-Black, but the continuing great migration ensured a growing number of Black families in northern and western cities.
This exploitation is made tangible in the prices paid by different families, as explicated in historian Beryl Satter’s book Family Properties. As neighborhoods in cities like Chicago tipped from white to Black, it was possible to document the evolving prices of individual homes when sold between white families, to white speculators, and then on to Black families. The policies of segregation were extremely successful at enabling exploitation: homes would be bought by Black families for 40-50% more than the value they could fetch from a white family. This gap--perhaps $70,000 or more for a house, in today’s dollars--reflects the scarcity of options available to Black families, and the easy outside option for white families of moving to a new suburb.
WE CAN DO BETTER
A well-built home, zoned restrictively, can last for generations. It comes as no surprise that the crises induced by the policies that built that home endure alongside it. The Fair Housing Act, Brown v. Board, and other civil rights legislation have collectively dulled elements of the post-war white supremacist housing framework. And in many ways, our cities have changed dramatically over this period: central neighborhoods are once again rich, and some cities have re-attained population levels not seen since 1950. Many of the determinants of 1950s housing outcomes, however, remain fixed: a dramatic racial wealth gap, a set of neighborhoods with few white residents ill-served by public services, and housing policies oriented around neighborhood stasis and house price growth. The typical white family in America today holds assets worth $171,000, compared to just $17,600 for the typical Black family. In 2016, in Washington DC, there were eight census tracts, collectively home to 30,000 residents, that had not a single white resident. And the greater portion of our cities see little to no new housing construction, even as coastal urban areas see house prices break records monthly.
We have an interlocking network of housing crises afflicting our cities. In coastal metropolises with growing industries--tech, finance, entertainment, health care, education, and more--we see a mass shortage of houses, induced by restrictive zoning regulations and, perhaps, by high construction costs. Homes in the most expensive districts (think Palo Alto, Santa Monica, or Greenwich Village) fetch many times more than the cost of construction, reflecting the scarcity of homes and the tremendous job and wage growth.
Even in cheaper areas, we see local housing shortages, the second housing crisis. The north side of Chicago, for instance, features blocks with restrictive zoning and high-income residents amidst a city that would seem to have plenty of homes. There are blocks where the typical home is worth over a million dollars, in a city where the average home is a quarter of that. In San Francisco, the shortage is everywhere and all housing is expensive. In Chicago, the shortage is local, and reflects racial and economic fractures.
These localized shortages are prone to spilling over into adjacent neighborhoods. Unable to move into the desired block, people look to nearby communities that are still more affordable. This third housing crisis is gentrification, the dramatic increase in income as a neighborhood, long disinvested, tips back to being a high-income, highly educated, mostly white community. When a neighborhood gentrifies, it changes out from under the residents who lived there, as well as those who might have wanted to. Central, transit-oriented neighborhoods in cities throughout the country once offered affordable housing and public transit nearby many jobs. As these neighborhoods gentrify, these characteristics slip out of reach of many potential residents, who must make do with longer commutes and less affordable housing in parts of the city with worse transit access.
Illustration by Sophie Feller
Dramatic gentrification can only occur because of structural disinvestment, the fourth housing crisis. Generations of disinvestment in Black families and neighborhoods have created a situation where simple improvements to infrastructure--transit, bike lanes, and streetscapes--can justifiably be viewed with alarm by lower-income residents, as they’re liable to invite gentrification. Absent a push to invest fully and fairly in neighborhoods and families throughout our cities, this fourth crisis will persist.
These crises were made by policy and private action, and the same means could serve better ends. Tokyo has invested in housing growth and stable prices, efficient and equitable transit, and a growing population far and beyond any American city. In exchange, its middle-class neighborhoods are more susceptible to changing character than most of places in the US. But as we’ve seen with first white flight and now gentrification, American neighborhoods can change as well--and cataclysmically so.
Would more gradual change be feasible in American cities? In terms of the built form, probably yes: allowing apartments in single-family neighborhoods would not turn anywhere into Manhattan overnight, or ever. But the cataclysmic nature of American neighborhood change is likely to last as long as the polarization of American society along racial lines.
There must be a better way. The wealth gap was engineered, in no small part, through the housing market. In midcentury Chicago, Black families overpaid by the modern equivalent of $70,000 or more--30-40% of today’s wealth gap. A better housing policy may not make individual actors less racist, but it could make the consequences of any individual’s racism less extreme. Better transit connectivity could mitigate the harms of gentrification, as displaced families would have more alternatives for accessible and affordable housing. More apartments in single-family neighborhoods far from freeways would improve the health of children growing up in the shadows of overpasses, suffering from asthma and related afflictions. Swapping out the housing wealth escalator--with its reliance on continued sprawl on and ever-more-expensive housing--for a housing policy oriented around sustainable affordability could make society better off and leave room in the budget for social programs aimed at easing the burdens of retirement and education, two of the biggest budget items that housing wealth helps cover today.
With the panoply of problems in US housing markets today, we stand at a point of crisis not seen since the flood of demand in 1945. Seventy years on, we have the information we need to channel the renewed demand for urban housing towards fairer ends. But a lack of information did not construct the earthworks that made the suburbs fertile ground for white families to grow wealthy, and information will not tear those levees down. Moving forward requires white families to recognize this history and the source of their gains, and to join the work of dismantling the barriers to a shared society.