Of Fare Hikes and Fiat Currency

"No one ever lost money speculating on subway tokens." ~ RC Schmidt, NYC subway aphorismist

Despite official rates of inflation that lack a certain honesty, there are always underlying measures that track reality. An informal New Yorker's rule of thumb indicates that the price of a single ride on the subway system tracks that of a slice of pizza in the city, and that when the slice goes over the cost of a single ride on the system, a fare hike is headed the city's way. Sure enough, when April rolls around the cost to ride the system will have increased, albeit at a lower rate than originally planned.

For now, the fare will remain at $2 for a single ride. This increase compares with the original fare for the system when it was privately run from 1904 to 1940 of a nickel. The old IRT was profitable until World War I, when wartime monetary expansion increased the costs of its inputs, chiefly labor and especially coal, while its nickel fare was contractually guaranteed with the city and could not rise to reflect increased costs. It was only Warren G. Harding's return to normalcy after the war, with a sharp contraction and reversal of inflation that allowed the company to continue to operate at a profit and provide expanded service to the city. FDR's depression, combined with competition from a city-run system in the 1930s, drove the IRT and its private competitor BMT into the arms of the city in 1940. The first fare hike after 36 years of private operation and flat-rate fares followed soon thereafter, in 1948.

It is interesting to note that the first fare's cost represented 1/413 of an ounce of gold, set in 1904 at $20.67. The recent $2 fare represents about the same percentage of the 50-day moving average of the price of gold, recently above $800 for the first time. Thus the 40-fold increase in the nominal fare can be laid squarely on the monetary dilution at the hands of the Federal Reserve; it is not coincidental that the first war "to make the world safe for democracy" crippled and eventually killed the private provision of mass transit in New York City, and the aftermath of the second world war gave the city its first fare increase.

In any case, the "more efficient" public ownership of the system commenced, and a scant five years after the first fare increase yet without any need to pay dividends to exploitative capitalist owners, the fare rose again, to 15 cents. This, however, presented a problem, especially in a city filled with as many irritable and rushed people as New York is: how to drop only one coin into a slot to permit entrance through a turnstile into the system? 1953 saw New York create its own sort of fiat currency, the subway token; it bore the inscription "Good For One Fare," a seeming eternal promise.

The 1953 token held out at 15 cents until 1966, when the fare was raised to 20 cents. This first fare increase caught New Yorkers somewhat unawares, but they soon figured out that they could stockpile cheaper tokens to use after the fare hike. The system planners had not counted on this rational response, and so, just as Gary North noticed during the last days of the all-silver dimes and quarters, a shortage appeared. There being only so many dollars to invest in subway tokens, however, the shortage disappeared after the fare hike.

The authorities were ready at their next fare hike, in 1970. They replaced the smaller token with a new, larger token, the first that this writer can recall holding in his grubby little hands. The older, small tokens would no longer work, but the hoarders did not suffer if they turned in their tokens to token booths in time: they could exchange the tokens for their previous cost, and buy new ones. Thus, "going long" subway tokens allowed the New Yorker a free "call option" on subway rides with no downside except lost time and usually a 50% or higher upside.

The inflationary seventies offered two more fare hikes, in 1972 and 1975, and both times token speculators were rewarded. Later fare hikes had different results. The Transit Authority countered with new tokens on several occasions, and in 1989 even tried to limit token purchases to two at a time. The chief reason for avoiding new tokens was the cost in ordering new ones minted, and also the labor in changing over all the turnstiles to accept only the newer tokens. The authority had another bad surprise when the 1986 token turned out to be nearly identical to a much cheaper token used nearby on the Garden State Parkway, and so the offensive against the quick-drop, one-fare token began.

Transit systems designed by bureaucrats with no intention that masses of people will ever use them, like BART and the Metro in Washington, DC, had long used an electronic card reading system that read a fare card at entry and exit. Given the sparse ridership on these systems, the inevitable traffic jam at exit as everyone fished for his fare card was not too bad; New York's system had long abandoned zone-based fares and so required payment only at entry, as New Yorkers were more likely to trample the slow-of-exiting than citizens of less-civilized cities (natural selection, and all that). Since the system runs 24 hours a day, 365.25 days a year, there is no limit to the amount of riding that one fare will buy. Even so, difficulties with token changeovers led to the introduction of the MetroCard in the mid-1990s, which allowed entry to the system with an electronic swipe.

New Yorkers did not take kindly to the MetroCard at first, and its use lagged. An incentive was required to get them to discard their tokens, and like all plastic and insubstantial currency issuers, the MTA had an idea in July 1997: a free lunch. Or in this case, a free transfer between subway and bus, eliminating the "two-fare zone" from the city, and allowing each commuter to shell out only one fare on his commute. In addition, for the only time in the system's history, purchase of a MetroCard entailed a discount on fare, with 11 purchased for the price of ten. Never before had there been a fare decrease (and, of course, never since!). Finally, the system changed mass transit from a variable expense to a fixed one by introducing a fixed-price unlimited fare card, $70 for 30 days of unlimited usage. With the incentives of free transfers and unlimited ride cards, MetroCard use increased while token use gradually dropped, and tokens were abandoned in April, 2003, their memory only preserved in the names given to locations where station agents sell MetroCards, token booths.

The history of the token encapsulates in miniature many of the issues that have plagued the whole country in the last 95 years since the introduction of the Federal Reserve, and especially since the Federal Government outlawed private ownership of gold in 1933. First, with apologies to Nietzsche, one nation may try to lie to its citizens with fiat currency, but the grimace that is the price in gold always shows the truth: the fare to ride the subway in New York has increased not at all in gold terms in 100 years, but the dollar in the pocket has shrunk in value. Second, citizens will prefer a coin standard with some sort of precious metal (brass in the case of tokens) over an arbitrarily-valued piece of paper or plastic, and only the promise of a free lunch (interest on demand deposits with no penalty for early withdrawal, free transfers where none existed before) will encourage them to exchange coins for paper. Third, the government will always adorn its "tokens" with slogans in which it does not really believe, like "Liberty," "In God We Trust," and "Good For One Fare"; the latter would be an example of fraud and expose the seller to a lawsuit if it were a private concern that sold a token good for one ride, and failed to honor its commitment. (This is only another example of the limit of consumer redress of grievances in an America dominated by public concerns.) Fourth, the coins and tokens of the government agency will be gradually devalued in terms of intrinsic metallic worth, as the token went from solid brass to a brass/steel mixture, to a pathetic, shrunken coin of baser metal than brass; just the same way, I recall discovering a 1956 silver dime from its sweet ring when dropped, a delightful sound that today's clad coins deny to children of all ages. And given the transition in the denarius from silver to base metal over 1700 years ago, this is an ancient practice. Fifth, the free ride in the fiat money will lead to a boom; the subways have been increasingly packed, although this is as much due to innovative pricing strategies that brought more riders into the system.

New York will undergo a new set of fare hikes in March, 2008. The Port Authority, which operates New York's "other subway," the PATH train, will increase fares by 8.3%, but will for the first time offer an unlimited-ride monthly card. The cost of a single subway ride will remain at $2, but those buying rides in bulk will receive only 15% in bonus rides, as opposed to 20% now, a 4.35% increase. However, the strange nature of the peculiar fiat currency that is the fare card affords the denizens of Gotham a unique opportunity: they can "print" as much of it as they desire, at the current values, only needing to worry about expiration of cards, a particular hazard with PATH fares, but not the new SmartLink card. So one method to beat the increase is to buy as many rides as you expect to use over the next year, and hope that inflation does not exceed the amount of the fare increase. Another possibility suggests itself in this credit card rebate offer, whereby every $150 in transit purchases until March 31st will earn a $10 rebate, a 6.7% discount; combine that with a decent cashback card from the same company offering 3% cash back on purchases, and it will be possible to pay as much as 18% less than other New York subway riders in April for the same ride. And you'll be taking part in a tradition that goes back 42 years to the first token fare hike, and sadly shows no signs of stopping.

February 6, 2008