Barter System Prisoner of War

Barter System

Prisoner of War Economics

What are the functions of money, and why are cigarettes both a good and bad form of money?

Cigarettes are a good form of currency because of their instrinsic value. The cigarette, due to its intrinsic value would never become completely worthless. The paper dollar, with enough inflation becomes almost worthless because it has no value outside of the economic construc. However, cigarettes as a highly addictive good, would always carry value even in time of inflation.

Cigarettes are a bad form of money because they are a multifunctional form of currency. Unlike paper or metal forms of currency, cigarettes are not just a unit of exchange value. People with tobacco addictions were severely handicapped in the barter system. They became the poor people. Further, cigarette money is heavily governed by the law of supply and demand. In times of high supply, the cigarette had less value as a currency than in times of low supply and high demand. When the Red Cross delivered large shipments of cigarettes and there was a large supply, the price of other goods went up to accommodate for the decreased value of the cigarette. However, when the rations stopped, the price of goods went down and people were willing to sell their bread for fewer cigarettes, because each cigarette had a high value. However, the danger of using such a commodity as a monetary unit is that other goods being bought and sold with cigarette money were also subject to the law of supply and demand. When bread rations were low, the value of bread was high and so it would sell for a higher number of cigarettes than when bread was in abundance. Further, when rations were in drought, it decreased both the amount of goods to be bought and sold and it decreased the amount of cigarette currency to be used to buy products. Thus, they would both achieve a high value at the same time. This is usually not the case in modern paper money economies. When the iPhone or the ' Tickle Me Elmo' were in short supply, the price skyrocketed, but the amount of dollars in the system did not also become obscure. Conversely, in times of economic depression when there is not enough money circulating, people tend to spend less of it, and products become overabundant (at least in the short run).

2. What is the main advantage of our current currency over a barter system?

According to Pamela Brown, in "Constitution or Competition: Alternative Forms of Money Reform," the calculation of exchange in a monetary system is much slower than the calculation of exchange in a monetary system, thus a monetary system is more efficient than a barter system. Everyone wants money, so it eliminates the middle trade. For example, if I want a new pair of shoes I go to the shoe store and pay for them. However, in a barter system, the shoe seller may only want steak, for his bbq he is throwing, so I will first have to trade my assets, lets say they are apples for steak and then take that steak to the shoe seller. This system can be terribly inefficient. Additionally, hard currency has a long shelf life, unlike apples and its worth is immediately known. Further, any economic system that involves taxation, is advanced by a monetary system because it is much easier to tax one form of currency, money, that to calculate the amount of apples one owes in taxes.

3. What is meant by the term "arbitrage"?

Arbitrage is a term used in economics that means taking advantage of differences in price of a single item. The author references a padre who would purchase items sold for lesser amounts within one group of POWs and then re-sell it for a greater profit within another group of POWs. For example, buying coffee from the British at a small number of cigarettes and then selling it to the Russian prisoners for a much larger number of cigarettes. Generally, arbitrage should involve zero risk, because the two transactions should occur simultaneously, but this was not an option in the POW camps. According to Aswath Damodoran in Corporate Finance Theory and Practice, this form of arbitrage is classified as near arbitrage. Pure arbitrage requires that you invest no money, take no risk and walk away with sure profits. Unless the transactions can be completed simultaneously, such as with securities transfers, there is always risk. Damodoran defines near arbitrage taking advantage of as assets that have identical cash flows trading at different prices. The example that the author gives of Sam, the trader, might even be closer to speculative arbitrage if he took advantage of mispriced items by purchasing the items selling at below value and selling those going at a rate above their value.

4. What is the function of an entrepreneur in an economy?

The Federal Reserve Bank of Dallas describes the important roll that entrepreneurs play in a free market economy; they create competition and encourage economic growth. The author describes Sam as an entrepreneur. His mart encouraged trade within the camp, and it helped to regulate prices through competition. Once can imagine a situation where two prisoners engaged in an exchange of butter for cigarettes, and the buyer may say to the seller that his price is too high because he can just go to Sam's mart and get the butter for fewer cigarettes. By creating standards, it becomes easier for each buyer to gauge what he can purchase for his ration of cigarettes and to thus budget himself so that he can continue to engage in trade between ration deliveries. Further, Sam would advance goods to his patrons. This encouraged continued trade because people could get what they needed, engage in a series of trades in the community and make the profit necessary to clear his credit with Sam.