Stories about money: Case studies from economics books.

The Economic Organization of a P.O.W. Camp:

In the article entitled “The Economic Organization of a P.O.W. Camp”, R.A. Radford describes his experiences as a prisoner of war during World War II. As a prisoner of war, he saw first hand how market structure from the outside had influenced the P.O.W. camp. In the beginning of the camp, prisoners would barter amongst themselves. Then the camp’s economic system moved towards an Exchange and Mart board, and finally into a market that was comprised of many middlemen. Cigarettes became the main source of currency inside the camp. As a result, paper currency had no value although it was tried inside the camp for a short time, but soon lost out to cigarettes. P.O.W.’s were given a certain ration of cigarettes a week. The prisoners could either smoke the cigarettes or use them as currency, but it all was left up to the prisoner as how they used the cigarettes. Plus, cigarettes were used because they could be given value and were available to P.O.W.’s. Finally, the cigarettes moved easily through the market, so it made them an ideal source of currency. The market prices depended upon the increase and decreases in supply as well as what was happening in the outside world.

When goods were first passed out to the prisoners, prices were low because quantity demanded was not high because people still had their own rations. The events that happened outside the camp had their effects on the market. Each week prisoners were given rations of cigarettes, food, and toiletries. Another example about outside sources that affect the market is Alan Greenspan. The middlemen held all the power inside the camp. However, many prisoners did not smoke, so they wanted to trade their cigarettes for something else like food. People who did not like jam or chocolate would trade to get something they liked better. Items that were harder to come by were given a high price in cigarettes. This system is exactly like an economic market, where people buy and sell goods at an agreed price. Thus within the POW camp the cigarettes became the store of value, the unit of account and medium of exchange, just like money in real world.

The story of Fei and paper money:

The island of Yap is located in the Pacific Ocean between Guam and Palua and is now a rather popular tourist destination. It is known for it’s incredible beauty and the amazing amount of marine life, especially manta rays, which are found off its coast. On the island of Yap, a small island in the Pacific, the traditional medium of exchange was the fei. Fei were stone wheels that were up to 12 feet in diameter that functioned as the money that we have today. They were used for transactions and exchanges, however due to their bulk and weight, it was difficult to take the fei to the market. Eventually, the people on the island paid little attention to having physical possesion of the stones, and focused more on the claims to the fei as money. In that way, people began to use the claims to the fei as the medium of exchange, and not the actual fei itself (very similar to the gold standard used before the civil war in the US). This is kind of like money backed by fei. A story to attest to this is that of an owner of a particular fei who lost it at sea during a storm, because the loss wasn’t considered to be his fault, people still honored his claim to the fei even though the actual wheel lay at the bottom of the ocean.

~ by moonaai on September 9, 2009.