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HOLDING FOLDING

Why we’re so attached to familiar forms of money, why we think coins are bigger than they are, why it’s good to be grumpy if you don’t want to get ripped off and why paying with cash might be better than credit.

AT ONE TIME, money was really worth something. That is to say, its physical form – coinage – was valuable in and of itself. Yet we’ve long known that isn’t really the point. The point is that money represents a store of value. Its worth lies in the fact that we can exchange it for something valuable. But even though we know that, we’re still strongly attached to the forms money takes, and we’re sensitive, and sometimes even distressed, when those forms change.

Anthropologists such as David Graeber have shown that money existed in early human societies living 5,000 years ago.¹ And what’s really interesting is that its existence as a virtual concept – in the forms of debt and credit – long predated its appearance in physical form as coinage. In other words, money was in our minds long before we could hold it in our hands. Contrary to popular belief, earlier societies did not use to rely entirely on bartering – that is to say, the direct and immediate exchange of goods or services: ‘I’ll mend your wall if you give me right now something we agree is equivalent – say, ten eggs.’ Instead, people have always recognised that a form of abstract exchange is necessary: ‘For mending that wall, I’m willing to accept something that can be redeemed at some stage in the future for goods and services we agree are equivalent to the mending of the wall.’

Immediately we can see that this is a complex mental concept, requiring imagination, the ability to inhabit a mind other than our own, the capacity to conceive of a number of futures and – crucially – notions of trust, honour and confidence. We think that contactless payments, chip and pin, and all the rest are signs of twenty-first-century sophistication, but in a sense they are simply a return to money as it started out. Before it became a coin, for example, the Mesopotamian shekel was a unit of weight representing the amount of barley a worker received for his labour in the fields. A shekel was therefore a promise, an IOU. It was only over time that it became a stamped coin.

That said, coinage soon established a firm grip over human imagination; a grip it exerted for many centuries. And although actual currency is less and less important in our monetary transactions these days, when we think of money we still tend to see it as a physical thing.

To this day a British £10 note is printed with the words ‘I promise to pay the bearer on demand the sum of ten pounds’ – a promise which used to mean you could exchange it in a bank for gold to the same value, literally ten gold sovereigns. It was long thought that without that written guarantee there would be no confidence in national currencies.

Indeed the ‘gold standard’, as it came to be known, underpinned even advanced economic systems until well into the twentieth century, with the United States only abandoning it altogether as recently as 1971. But there was a big problem with the gold standard. It was too rigid for complex, dynamic economies – and strict adherence to it led to the miseries of the Great Depression of the 1920s and ’30s.

Even so, coming off gold proved to be a protracted business, and to this day central banks retain large stocks of gold as a bulwark to other confidence measures.

Assuming you were able to succeed in exchanging the money in your bank account for gold, would you know what to do with it? You can’t eat gold after all. And as a metal, it’s not even one of the most useful. Its value lies partly in its relative rarity and the fact that we like the look of it, but largely because we have collectively invested it with a sense of preciousness. Again, it is essentially a psychological thing. If we all decided that gold was dross, it would become so.

We imbue money with its value. The Pacific island of Yap is famous for its huge stone discs – as large as 4 metres in diameter with holes in the middle – which were used as currency back in the 1900s. Mined from limestone on another island hundreds of miles away, the stones were traded for goods. When sold, they remained in the same place, but with a new owner. Economists such as Milton Friedman have used these stone dises as an example of how money can still be seen as valuable if it is declared to be so, despite not being made from a material as useful as metal (fiat money as some economists call it).² And as he points out, it’s the money we’ve grown up with which feels most real to us. Foreign notes can feel like toy money. But in fact these stones did have an intrinsic value to the islanders. They were considered both to be aesthetically beautiful and to have a religious significance. The story goes that when a storm caused one of these vast stones to fall overboard on a boat journey back to the island, it was decided that the money was not lost, even though it now lay at the bottom of the sea. Mentally it was still money.³ They still believed in it, just as we believe in the value of our £10 notes.

Of course these days if you went into a bank to redeem the promise to pay the bearer the sum of ten pounds, there is nothing they can give you apart from other notes to the same value also bearing promises. More than that, your money in the bank comes in the form of a figure listed on your statement, and you can only have the banknotes as long as lots of other people don’t want to do the same thing at the same time. If that happens – as it did in Britain in 2007 when there was a run on the Northern Rock bank – it quickly becomes evident that banks don’t hold sufficient quantities of cash to pay everyone their money back at once.

In the case of Northern Rock, and the financial crisis that ensued, the Bank of England and the British government had to intervene to prevent the complete collapse of our economic system. How did they do this exactly? Psychology again. The various actions of the Bank and the Treasury somehow ‘restored confidence’. In ways we don’t really understand, we all decided that we would continue to believe in money so that economic life could be maintained.

It’s essentially a confidence trick. As the Bank of England website drily puts it: ‘Public trust in the pound is now maintained by the operation of monetary policy, the objective of which is price stability.’⁴ The Bank is exerting its mind over money.

No wonder that the stuff itself, in its various physical manifestations, fascinates us and exerts a power over the mind. As we’ll see, we even consider money of the same value differently, depending on its form.

THE POUND IN YOUR POCKET

In the 1980s the psychologists Stephen Lea and Paul Webley developed a psychological theory of money that shows we value cash, cheques, gift vouchers and bank account balances differently.⁵ One of the things they discovered was that we are particularly attached to physical forms of money.

A crisp new banknote is very satisfying to have and hold, particularly a rarely seen pink £50 note. To be ‘holding folding’, as the old British expression describes the possession of cash, gives us a visceral pleasure. When a lottery winner finds out they’ve won a few million they often say they can’t really imagine that much money. To make it feel more real, they might be presented with one of those giant cardboard cheques. But just imagine how much more thrilling it would be if the National Lottery handed the money over as stacks of bills in sleek leather brief cases. Far more exciting than an electronic money transfer.

Somewhat in the same way, we all enjoy a pile of coins. When I was little, my grandparents used to save particular pennies and halfpennies and give them to me to stack in satisfying piles. The ones they saved were the bright and shiny coins, which they called ‘new money’. A stack would have been worth less than twenty pence, but given the condition of the coins, we all considered my pennies a little bit special.

Most of us like wads of notes too, of course. But as notes get older and dirtier we actually spend them faster. Research has shown that their ‘dwell time’ – the time a particular note spends in a wallet – is shorter than for newer, cleaner notes.⁶ Ten pounds is ten pounds is ten pounds. But the fact is we regard different notes differently.

At the moment, the Bank of England is replacing paper £5 and £10 notes with stronger material made from polymer, which will last two-and-a-half times as long. Every day 2 million notes are removed from circulation, with high-speed sorting machines identifying those that are too dirty or torn, or have impaired security features. There are good, practical arguments for making this switch, but if history is anything to go by, the new notes are likely to excite comment and divide opinion.

We take the design, as well as the form of our money, very seriously. So seriously, in fact, that a change in design can spark outrage and even death threats. That’s what happened in Britain in 2013, when the Bank of England announced it was removing the picture of the social campaigner Elizabeth Fry from £5 notes and replacing it with an image of Winston Churchill, meaning there would be no women, other than the Queen, left on Sterling notes. Feminist campaigner Caroline Criado-Perez led calls for another notable woman, Jane Austen, to appear on £10 notes – and for her pains was threatened with rape and murder.

No doubt much of the vile abuse heaped on her through social media was simply down to misogyny. Even in this day and age, some men are unhappy that women speak out publicly. But the hatred directed at Criado-Perez was much worse than the harassment received by many other women who’ve campaigned for women’s achievements to be recognised. Why is that? When I met Caroline Criado-Perez at Cheltenham Science Festival, where she was speaking on a panel I was chairing about feminism and bringing up girls today, she told me she wonders whether the reason is that money is seen to emanate from the establishment, and so to have women demanding recognition on that money represents a particular threat to the ‘natural’ order of things.

Banknotes are both ubiquitous and somehow sacred. They’re a strong projection of nationhood and economic power. A banknote isn’t just a store of value; it is a symbol. One of the most powerful a country has. The choice of person featured on banknotes matters: kings and queens, independence leaders, military heroes, social reformers, writers and composers. Do governments hope that a reminder of power or influence in the form of a portrait on a note might add to our confidence in its currency? The implication is that this note, just a bit of paper (or soon, polymer) and of no intrinsic value, can be trusted because it is issued by the central bank of a country that produces such monumental figures.

Happily Criado-Perez eventually won her battle, and Jane Austen will feature on the new British £10 note.

HOW NOT JUST GRANNY STRUGGLED TO GET THE POINT

In 1971, Britain’s whole system of currency was overhauled. To aid the country’s accession to the European Economic Community, now the European Union, Britain changed to a decimal system to match the other countries involved.

Under the old system, a penny was one twelfth of a shilling, and there were twenty shillings in a pound. Under the new system, a penny was one tenth of the new 10 pence coin (effectively the replacement for the two-shilling coin) and ten 10 pences added up to a new pound.

Decimalisation was introduced only three months after I was born, so I’ve known nothing else. But for those who had grown up with the ‘old’ money, the change caused considerable confusion, as well as provoking strong reactions. Some saw it as a surrender of British uniqueness to European uniformity; others were suspicious they were in some way being swindled. Most were at the very least uneasy about such a big change to something as foundational as the currency.

The Government was concerned enough to commission a 5-minute public information film explaining the benefits of the new money. It was called, rather patronisingly, ‘Granny Gets the Point’. (They’d never get away with such ageism and sexism now.) My own grandmother could see the logic of the change well enough, but it didn’t stop her from feeling some mistrust. And that was an entirely rational reaction. For a start, for quite some time, whenever she bought something with the new money, she had to mentally calculate what it would have cost in the old money just to be sure she was getting a fair deal. It was like being abroad and having to work out whether two francs for a cup of coffee was a rip off.

It didn’t help that decimalisation coincided with an era of high inflation. Each month, the new pound bought you a little less than it did the month before. Of course, it was nothing like those situations in countries wracked by hyper-inflation – Germany between the wars; Zimbabwe more recently. In these places, in their darkest days, it took barrowfuls of bills to buy a loaf of bread, workers were paid as often as three times a day and 2,000 printing presses worked day and night to print higher denomination notes. Crazy numbers – 5 million marks, 500 million marks, 5 billion marks – reflected a complete collapse in economic confidence. Even so, in the 1970s British people came to see their new pounds and pence as diminished, not just in terms of what they could buy, but in their actual physical size.

Five years after the introduction of decimal coins, there was an experiment in which people were shown a series of circles of different sizes on a piece of paper and asked to guess from memory which best matched a coin of a particular value. It was true that the new decimal coins were generally smaller than the old coins, but even so people significantly overestimated the dimensions of the old coins.⁷ It was as if their minds were telling them that old money bought more so it must have been bigger.

Perception of size is something we learn through experimentation as babies and toddlers. As the developmental psychologist Jean Piaget famously discovered, very young children cannot fathom how a taller, thinner beaker could possibly hold the same amount of liquid as a shorter, fatter one. At that age tall means big. Only as our cognitive abilities improve do we develop a more sophisticated understanding of volume that enables us to estimate how much differently shaped beakers will hold.

As we develop, our perceptual skills gradually improve, only for things to go awry again when money is involved. In a classic study, conducted way back in 1947, children more than old enough to understand Piaget’s liquid conservation tasks were presented with a table laid out with a series of coins and cardboard discs. The discs were identical in size to the coins, but again and again the children judged them to be smaller than the real money.⁸ These were children who knew the value of the coins, and this knowledge seemed to skew their perception of size. More than that, the more the coin was worth, the more their perception became skewed. An abstract concept, the store of value in coins was overtaking their sense of something more concrete – the physical size of the coins compared with the discs.

Masses of studies followed, confirming that all over the world, adults as well as children overestimate the physical size of money, regardless of the currency. And, as we’ve already heard in Chapter 1, people prompted to think about death are even more prone to this perceptual exaggeration. Not only that, but the size of the effect depends on whether or not the participants in studies are rich or poor. For example, the 1947 researchers tried out their experiment both with children in a settlement house in one of Boston’s slums and with pupils at a school in a well-to-do area. The children living in poverty overestimated the size of the coins more than their wealthier counterparts. Echoing findings I’ll discuss later in Chapter 10, their lack of money, and therefore the precious quality they attributed to it, skewed their perceptions that bit more.

MONOPOLY MONEY, THE ACCORDION EFFECT AND WHY BEING GRUMPY LIKE JEAN-MARIE LE PEN CAN BE USEFUL

In April 1983, Britain began the changeover from the £1 note to the £1 coin. The press was not keen on the idea. ‘The Pound Britain Doesn’t Want’ read a headline in the Daily Mail, dubbing the new gold-coloured pieces ‘toy town coins’.⁹ The economic value of the coin was exactly the same as the note. The problem was that people didn’t see it that way. They viewed and treated the two forms of £1 (which for a limited period were both in circulation) differently, as the economic psychologist Paul Webley discovered.¹⁰

Webley persuaded a group of people to allow him to examine the contents of their wallets every day for a month. He marked every note and coin with one of those invisible detective pens that can only be seen under UV light, before returning every penny to their wallets. This allowed him to track the dwell time that each coin or note spent with its temporary owner before it was passed on to someone else.

At the start of the six-month transition period, during which notes were phased out, people obviously had fewer £1 coins than notes. The new coins were a novelty, and were bright and shiny, and you might think people would be keen – for a while at least – to hang on to them. Indeed, some people in Webley’s experiment did hoard them or put them in piggy banks, but for the most part the coins had shorter dwell times than the notes.

What could Webley conclude from this finding? He had some ideas, but first he wanted further evidence. The problem with his initial experiment was that, with so few coins in circulation, it was hard for Webley’s team to collect enough data. So they tried something else. Members of the university staff were given either a pound coin or a pound note, pre-marked with the special pen, in exchange for completing a questionnaire. When the staff returned the following day for the next part of the experiment, they were asked to reveal the contents of their wallets. Half of the pound notes remained, while most of the pound coins had already been spent.

Paul Webley complains that most economists considered this finding to be of no interest.¹¹ Like him, I think they’re wrong. Even if people were simply disposing of the relatively heavy coins weighing down their pockets, this was presumably having some impact on economic activity at the time. Pounds were being spent more readily because of their change of form.

Of more interest psychologically, the study seemed to show that people considered pounds in coin form as loose change that was more disposable. A pound note by contrast still seemed to represent a more significant sum to be used cautiously. That is surely evidence that the form money takes can change our sense of its value, which if nothing else should make central banks pause whenever they consider replacing one form of currency with another.

In the United States, feelings also ran high when an attempt was made to replace bills with coins. Dollar coins were introduced back in 2007, but the famous greenback dollar bills continued to be produced, and the use of the coins was low. By 2011, with more businesses returning than requesting them, the Federal Reserve Banks found themselves with enough dollar coins to meet the demand for the next 40 years. The Treasury ordered production to cease and now, although ticket machines occasionally spit coins out at you in change, the US is the only G8 leading economic power still using a note of such little value.

But the Dollar Coin Alliance, backed by car wash companies, vending machine firms and snack food sellers, is still campaigning for dollar bills to be replaced by coins.¹² Not surprisingly, mining and metals companies support the change too. The Alliance argues that a single coin can last 35 years, 17 times as long as a dollar bill; that coins are 100 per cent recyclable; and that when people complain about the weight of coins in their pockets, they should bear in mind that four quarters weigh three times as much as a single dollar coin. Taking all of this into account, they say, the US government could save $150 million a year if coins replaced bills.¹³

The Federal Reserve Board argues these savings are exaggerated; that the growth of debit and credit card use renders coins less relevant today than in the 1980s, when many other countries made the transition; that their notes can now last six years due to their superior production; and that coins cost more to produce and are easier to forge.¹⁴

So it seems there are strong economic and practical arguments on both sides, but that’s not what interests me. Rather I’m struck by the strength of feeling the debate generates, which is passionate and heartfelt. It’s not just a case of finding the most sensible and sustainable course of action. There are emotional attachments to consider, particularly with regard to the much-loved dollar bill. And for the moment that attachment seems to be winning out. In a Reuters poll, the complete replacement of bills with coins was not at all popular, with three-quarters of people saying they preferred their greenbacks.¹⁵

The world’s largest-ever currency changeover, in 2002, saw 12 countries in the EU give up their individual currencies and replace them with the euro. As the change took place the European Central Bank used the slogan ‘the EURO. OUR money’, stressing pan-European solidarity, and after the introduction of the new currency the majority of people polled in the affected countries did say they felt more European as a result.¹⁶

Not everyone was happy of course. On the steps of the Paris Opera House, the leader of the French far-right National Front Party, Jean-Marie Le Pen, called for a contemporary Joan of Arc to drive out the Eurocrats. ‘Long live the franc, long live France, long live the French!’ he cried. ¹⁷

As a result of the currency change, 9 billion notes and 107 billion coins were withdrawn. The European Central Bank introduced 15 billion new notes and 51 billion new coins.¹⁸

Public information campaigns across Europe suggested simple conversion strategies to help people adjust to the new currency. Kits containing one of each of the new coins were bought by 150 million members of the public, to familiarise themselves with the coinage before it could be spent. Products were labelled with dual prices at the start of the three-year transition period. And, in a sign of the times, diskettes were handed out to householders containing information on the changeover.¹⁹

After that, it all happened remarkably quickly. Within two weeks of 1 January 2002, euros made up 95 per cent of the currency in circulation. In that first week of the New Year, withdrawals from ATMs were far higher than usual. But curiously robberies from security vans dropped right down. So thieves apart, most Europeans quickly got used to having euros in their pockets. Yet by the end of the first month, only 28 per cent of people said they thought in euros.²⁰

Despite the extensive publicity campaigns to familiarise everyone in the Eurozone with their new currency, people still needed to do mental conversions between the old and new money.

Ireland’s reaction to the euro changeover was among the most positive. 77 per cent of people said they were very or quite happy with the idea compared with a European average of 53 per cent.²¹ Some Irish people did remark that it was a pity to lose the attractive designs on the Irish banknotes, but during in-depth interviews with psychologists, others liked the new notes. One said it was like being ‘a child at Christmas’, another that it was like having Monopoly money.

This reaction partly stemmed from the fact that of all the countries joining the single currency only Ireland had a previous currency with a unit value higher than a euro. An Irish pound was worth 1.28 euros. So people marvelled at these new high numbers on their salary slips. For a fleeting moment, they felt richer. Until, that is, they went shopping, where everything looked more expensive. Some people suspected that shopkeepers were taking the opportunity to rip them off, although in fact there was little evidence to back up this suspicion. The real problem was one most of us are familiar with if we travel overseas: it’s just difficult to calculate whether prices in an unfamiliar currency are fair.

One technique that Irish people used was to learn a few reference prices along the spectrum and then guess prices in between. Another strategy – you may have used it yourself – is to learn the price of one thing, let’s say a pizza, and then apply it to anything else you purchase. So, while it may be hard to calculate quickly whether the scarf you want to buy is good value just by converting x currency to y currency, you find you can compute the sums if you think to yourself, how many pizzas would that scarf set me back?

While the Irish, along with other people in the Eurozone, struggled a bit to adapt, the new coins and notes became a little more familiar every day. However the old currency still holds a nostalgic draw for some Eurozone citizens. In 2014 sales of gold and silver reproductions of the old Italian lira coins and commemorative books on the currency amounted to more than 25 million euros.²²

In countries that hadn’t adopted the euro, where of course there were no public information campaigns, dealing with the currency has not been as easy. The Swedes didn’t have to use the euro on a daily basis, but the fact that many of their close European neighbours had joined the single currency meant some familiarity with the new money was important. How then would they cope with it?

The first experiment carried out by a group of researchers as part of a study in 2002 was a simple one. They asked people in the Swedish city of Gothenburg to look at a list of prices of magazines, bus fares and monthly rent expressed either in the local Swedish crown or in the euro. Then people were asked to rate each price on a five-point scale ranging from very cheap to very expensive. Now the cost of living in Sweden does tend to be higher than in most European countries. But it was not that which led the Swedish respondents given the amounts expressed in euros to say that prices were cheaper. No, they thought euro prices were lower for one simple reason: the numbers on euro notes were smaller than the numbers on Swedish crowns.²³ People were being fooled by the fact that a two-euro bus ticket sounds cheaper than a five-crown bus ticket, just because two is a smaller number than five. People were just guessing, rather than bothering to do the calculations, but would they take sums more seriously if they were asked to ponder the possibility of actually moving to a country? Or would they still be mesmerised by the numbers on the notes?

Next time round, the Gothenburg residents were asked to consider the following scenario. They had been offered a good job in another EU country known to have friendly people and a pleasant climate. It was surely an attractive prospect. But of course, before moving, people would want to consider the cost of living.

The prices of various items including a cinema ticket, a haircut, a piece of cheese, a vacuum cleaner and a queen-sized bed (yes, a rather random selection of objects) were given to the participants in various made-up currencies. Did they think these items were more expensive in these currencies than the prices they were used to in Sweden or not? With a bit of effort to calculate exchange rates, people could have worked it out for real. But instead they tended to assume that if the price was expressed in a high-number currency – something like the old Italian lira – then the item was more expensive in that country than at home.

This effect has been dubbed the ‘euro illusion’.²⁴ (It’s a variant on the broader ‘money illusion’, a phenomenon first noticed by the economist Irving Fisher back in 1928.) What happens is that we can’t help but focus on the actual numbers printed on banknotes and this skews our attention away from real values. So why do we fall into this trap?

For a start, as we’ve found, thinking this way is easier than doing complex calculations. But there’s also the issue of what’s known as psychological salience. This can take various forms. It might be that something stands out from the crowd, such as a single red tulip in a sea of white flowers, in which case our attention is drawn to the exceptional thing. But in another case – one angry face in a crowd of happy people – the salient thing is not that the angry face is the exception (we don’t tend to notice one happy face in a crowd of angry people) it’s that our minds are attuned to notice anger in particular. We do that because anger can spell danger for us. In the case of money, what is particularly salient is the big number. We’ve been taught since childhood to equate big numbers with more money. So – using the old Italian lira as an example again – when I visited Rome in the mid-1990s and a glass of prosecco was advertised as costing 10,000 lira, my immediate response was, ‘What?!’ The number in front of me dominated my thoughts. And only later, perhaps after I’d decided not to bother, did I work out that 10,000 lira was less than £3, which was reasonable enough for a glass of fizzy wine at a café in a sunny piazza.

Back among the Eurozone countries, there was another difficulty for some people. In Austria, Portugal and Italy, half of those people questioned in polls said the change was still causing them problems a year later.²⁵ And what they were struggling with was what’s known as the accordion effect – that two prices in euros were harder to compare than two prices in their old currencies, because in the new currency the numbers were much closer together.

Think about it: the difference between one and two euros doesn’t seem that big. But 20,000 lira seems a lot bigger than 10,000 lira. To revert to my example above (and this time imagine I’m Roman born and bred), the cost of a glass of prosecco expressed in euros not only seems cheaper than it was in lira, but having two glasses doesn’t seem so extravagant because doubling such a small number seems pretty trifling.

Something along these lines may have happened in another country that joined the single currency in 2002. Every September, the National Collection for Mentally Handicapped Persons would go door-to-door in the Netherlands asking for donations. In a study conducted in three villages in the September after the adoption of the euro, giving rose by 11 per cent.²⁶ Income levels remained the same, and it’s unlikely that compassion had suddenly increased, so the probable explanation was the new currency.

It seems people simply weren’t prepared to put in the cognitive effort to calculate the exact amount in euros, which would equate to the amount they used to give in Dutch guilders. Instead they roughly estimated the sum, and fortunately for the charity this meant they rounded it up a bit. Incidentally, the next year donations to the charity rose again, but this time by 5 per cent. Perhaps people were getting better at their calculations.

Anyway, the picture is clear. The change to the euro messed up people’s ability to exert mind over money. Unhitched from the familiar moorings of their old currency, they were, temporarily at least, at sea with their new currency, rather in the way we all are when we use foreign money. In the great scheme of things it probably didn’t matter all that much. People were not so muddled as to go on wild spending sprees or demand massive pay hikes. The impacts were at the margins and in time people adapted. But even so, any change in the physical manifestation of money causes some psychological disruption.

I close this section by positing a possible strategy for coping with currency change. Be warned it involves being grumpy, so it might not appeal to all.

The basis for my idea is this: psychologists have demonstrated that when people are happy – immediately after they’ve watched a video of penguins slip-sliding on the ice, for example – they are better at generating creative answers, but they are less good at mental arithmetic or tasks needing thorough processing.²⁷ Recalling this research left me wondering whether those who were strongly opposed to the introduction of the euro (Jean-Marie Le Pen, for instance) might have had an advantage over jubilant federalists who welcomed monetary union.

The reason is obvious when you think about it. Jean and his Eurosceptic friends would have experienced a dampening of mood every time they saw a price label expressed in their new and unwanted currency. But there was an upside. Their grumpiness could allow them to make more precise calculations about prices.

Of course you may have noticed that there is a problem with the application of this stratagem. When do you need to be able to do currency conversions most often? Probably when you’re on holiday. So to avoid getting ripped off abroad you might need to go to places you loathe to ensure that you’re miserable. Perhaps this isn’t going to work . . .

CASH OR CARD?

So far we’ve been considering how our minds deal with changes to coins, banknotes or types of currency. But money has changed in a more fundamental way in recent years, away from physical forms of any kind.

In your wallet it is likely you’re carrying coins and banknotes, credit cards and debit cards, electronic travel cards and vouchers, as well as points on loyalty cards. But if I asked you how much money you have on you right now you’d probably only include the amount you had in cash.

We treat cash, cards and vouchers separately, so we don’t tend to calculate their combined spending power. In some instances that is logical. Try going into a pub and buying a round with a combination of a supermarket loyalty card and some book tokens and you’d get short shrift. Yet increasingly we pay for drinks – or even a drink – with debit or credit cards.

It’s convenient, but is it money-wise? Perhaps not. Only a couple of decades ago, the limit on your spending in a bar in one evening was the cash you had with you. Even if the bar staff had accepted it, you wouldn’t have got out your cheque book to pay for ‘one for the road’. These days the boundary between everyday money and all the money you have (in your current account at least) is increasingly blurred.

I know some people who feel that for a small purchase such as a sandwich you should always use cash. Debit cards are for bigger purchases and credit cards for luxuries and holidays. It’s a way of exerting self-control over money. It doesn’t seem right to borrow from a bank to buy a cheese-and-pickle sandwich with a credit card, if you can avoid it.

This might sound rather quaint and fastidious, but recent research suggests it’s a sound mental strategy. Researchers in the United States monitored the food shopping of 1,000 households for 6 months.²⁸ Controlling for all sorts of factors, the researchers found that when people were paying by credit or debit card, they tended to make more impulsive purchases of unhealthy foods like cakes or chocolate. It seems our propensity to indulge in guilty pleasures increases when we don’t have to hand over ‘real’ money. So going ‘contactless’ might expand our waistlines as well as slimming down our bank accounts.

Of course it is not in the least surprising that we tend to use a card when the price is higher. It means we don’t have to carry around large sums in cash, and – in the case of a credit card – allows us to spend money we don’t actually have yet. But there’s more to it than that.

When we use a card we are not only more likely to decide to go ahead with a purchase, but our thinking changes. We are less likely to remember the amount we paid,²⁹ and more likely to add a bigger tip. And as this next experiment shows, we are even prepared to spend more on the same goods.

At 1pm on Sunday 19 April 1999, the Boston Celtics began their last basketball game of the season against the Miami Heat. The match was crucial. If the Celtics were to take the division title, they needed a win. Celtics games always sold out well in advance, but MBA students at the world-famous Massachusetts Institute of Technology (MIT) in Boston were offered the chance to get their hands on a pair of tickets just the week before the game by taking part in a psychology experiment.

Psychologists who set up such experiments are notorious for their use of subterfuge, but in this instance the tickets were genuine and one lucky participant really would get to see the game with a friend. Not for free, mind. This was not a giveaway exercise. The winner would have to pay the face value of the tickets. And here’s where there was a bit of economy with the truth – the students didn’t know that. They were told they had to bid against others in a silent auction and believed that they could pay more than the standard ticket price if they chose to.

What the researchers wanted to know was the price students were prepared to pay for these precious tickets; and in particular, whether the form of payment would make any difference.

All the students were given a sheet of paper on which to write their best offer, but half of them were told they would need to pay in cash – and would be allowed to visit an ATM if necessary – while the other half were told they could pay with a credit card. How much would they offer for the tickets?

The difference was striking. Those paying cash bid an average of $28, but the card payers were prepared to offer more than double that amount: $60.³⁰

Now I say this result was striking, but even so I doubt it surprises you that much. I suspect the behaviour of the MIT students mirrors your own attitudes. It certainly does mine. Paying with cash always feels that much more real somehow; and parting with it, that much more painful. Paying with a card delays the pain and makes the transaction easier. Some would say too easy. With the increase in the availability of instant credit, personal debt in the UK, for example, more than tripled between 1990 and 2013.³¹ There is a lesson to learn from this. Whenever you are tempted to buy something on a credit card, imagine getting the same amount out of a cash machine and spending that instead.

Perhaps the card-paying MIT students could afford $60 for the basketball tickets – and thought that was a fair price. If so, okay. But I suspect they overbid, determined to win the tickets, whatever the cost, and not worrying about how they would pay for them.

One final thought on the cash or credit question. The MIT experiment took place in 1999, when students with credit cards were a relatively new phenomenon. Indeed for us all, cash-free payment is a fairly recent thing, certainly for the majority of purchases. Now, one of the reasons why personal debt has risen is that personal finance markets have mushroomed and there are many more ways of acquiring credit. But another is surely that we are still in something of a mental transition period from cash to cashless. And during that transition our grip on ‘virtual’ money is not as tight as it should be. Maybe it should come as no surprise that we tend to spend it more loosely than we do ‘real’ money.

Perhaps children growing up now, children who will almost never see their parents pay in cash, will not make the sometimes dangerous distinction between cash and cashless – respecting the first and being cavalier with the second. Indeed cash may soon disappear altogether. For people of the near future, ‘real’ money will only be numbers on a screen. And maybe they’ll soon find virtual transactions involving lots of digital noughts as daunting as we do handing over a stack of notes.