Like I wrote in the last post, I don't normally post on this blog at all. But I have a story from the spouse of an undergraduate student that I'd like to be able to refer future students to. I don't really have a place to put it online, so I'm putting it here.
Occasionally on this blog I have accepted posts from students explaining how economics relates to specific aspects of their job. I don't encourage that because it's talking shop.
Anyway, I mostly teach principles of macroeconomics. In there, we talk about money. One of the simpler topics, but still a new one to many students, is that money is broader than currency. For example, checks are money, but they aren't currency.
A more nuanced topic is inside vs. outside money. Outside money is currency (printed by the government, or its representatives) and reserves (issued by central banks). Inside money is everything else: checks, savings accounts, CDs, repurchase agreements, and so on.They're called inside and outside because inside money is created by us doing our thing inside the financial system, while outside money comes from outside the financial system. Most students (and many people out in the public) think outside money is a lot more important than it actually is. As I sit here, I'm trying to recall, but I don't think I've used outside money since the weekend, but I've payed bills all week with inside money.
An even subtler topic is that people will create inside money out of anything handy, if there isn't enough inside or outside money around to suit their needs. This is what we do when we write each other IOU's.
The classic textbook example of this is POW's using cigarettes as money in the camps. So I told my undergraduates that story (which was written up in a famous paper about 70 years ago by an economist who ended up as a POW in Germany in World War II). When I was finished, a student raised her hand and said: they still do that in survival school in the Air Force. I was a bit shocked, but she explained that her husband had been through it. He agreed to let me interview him about it, and here's what I got. This is MG's story.
Air Force pilots are required to do survival training: 3 stints, once in their career, for about 20 days in total.
One of those exercises is called SERE: Survival.Evasion.Resistance.Escape. The training is done at a remote location in Washington. A team of about 8 pilots goes through the training together. They are abandoned in the wilderness one morning with 2 MRE's each. They need to survive for a week. They are also allowed to bring a small pack with extra goodies.
MG was told by pilots who had been through the training before to bring cigarettes. MG told them he didn't smoke. The veteran pilots told him it didn't matter: pilots used cigarettes as money during SERE.
So, MG brought 5 packs. Other pilots brought even more. Many of the cigarettes in the group were quickly smoked by the smokers.
That's one thing I tell principles students about what gets used as inside money: it should not be readily consumable. Other features are more obviously related to money: small, light, of fairly certain quality, divisible into small enough units, low rate of depreciation, and so on.
After a while, inflation set in. The price of a bag of skittles eventually rose to 3 cigarettes. Cigarettes were also traded on the spot for (actual) currency, or in exchange for jobs during SERE training.
Cigarettes were even traded for large sums of money to be repaid after training was over. This is very much like how repurchase agreements work in the real world: a firm gives up an asset to another firm for money today, with an agreement to repurchase at a known price on a future date (in the meantime the buyer gets to keep any income generated, plus the price difference). Repurchase agreements are often done in the real world in multi-billion dollar transactions. In the SERE training, the exchange rate hit 1 cigarette handed over immediately for $100 payable in cash when they returned to base. MG saw a transaction like that finalized.