merged

life; it came into existence not by conscious imitation but as a response to the immediate needs
and circumstances.”
There was little production in a P.O.W. camp. Therefore economic activities were not as
important in a P.O.W. camp as they were in normal society. Nevertheless, quoting from the
article, “it would be wrong to underestimate the importance of economic activity. Everyone
receives a roughly equal share of essentials; it is by trade that individual preferences are given
expression and comfort increased. All at some time, and most people regularly, make exchanges
of one sort or another”.
Though the prisoners were not dependent on their own production for meeting their needs, they
could enhance their standard of living by trade. The articles traded consisted mainly of the
contents of Red Cross parcels – canned beef, canned milk, cheese, biscuits, butter, jam,
chocolate, sugar, cigarettes, etc. Bread rations were issued by the camp twice a week. Private
parcels of clothing, toiletries, and cigarettes were also received occasionally.
The prisoners quickly realized the potential for gain by trade. For example, a nonsmoker might
barter his ration of cigarettes for a smoker’s chocolate ration. As trade became more common
and better organized, cigarettes were quickly established (not by any authority, but by common
practice) as the medium of exchange (money). And market prices were established (measured in
cigarettes) by demand and supply.
Initially, trades were arrived at by prisoners wandering around calling out offers of trades. This
system was soon replaced by a notice board listing items offered and wanted, and proposed
terms. The public nature of the transactions led to the market prices (in cigarettes) of the various
commodities being known throughout the camp. Eventually, a camp shop was organized where
commodities could be bought and sold for pre-determined prices in cigarettes.
Cigarettes made reasonably good money. They were accepted as the medium of exchange by
smokers and nonsmokers alike. They were relatively homogeneous, fairly durable, and could be
traded in small or large quantities. The use of cigarettes as money facilitated trade and led to
established market prices. They could be spent as money, consumed as a commodity (smoked)
or retained as a store of value and then spent when their value in trade was at its greatest.
Cigarettes also had some disadvantages as money. They were subject to Gresham’s Law (“bad
money drives good money out of circulation”). Low-quality brands were used as money and highquality
brands were smoked. When hand-rolled cigarettes were introduced, they drove machinemade
cigarettes out of circulation. Hand-rolled cigarettes were often debased (rolled with a
substandard quantity of tobacco).
The biggest problem with cigarettes as money was price level instability. Cigarettes are a
commodity with a use (smoking) outside of its use as a medium of exchange. Thus, over time the
supply of cigarettes would decrease (as they were smoked) and the price level would fall. The
decline in the money supply would inhibit trade and force a return to barter. When a large
shipment of cigarettes arrived at the camp, prices would soar. And then the gradual deflation
would begin again as the money supply was smoked.
Not only would the general price level change with changes in the supply of cigarettes and other
commodities, specific prices fluctuated as well, due to changes in supply and demand. When the
supply of oatmeal increased, its price fell. In hot weather the price of cocoa would fall and the
price of soap would rise.
In August, 1944, the supplies of all commodities, including cigarettes, were cut in half. Since the
ratio of cigarettes to other commodities was unchanged, it was anticipated that the price level
would be unaffected. But that was not the case. The demand for cigarettes to smoke was less
elastic than the demand for other commodities (smokers continued to smoke about as much as
before), so the supply of cigarettes decreased more quickly than the supply of other commodities,
and the price level fell. The decrease in the standard of living due to the cut in rations also
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10 - 11 Money, Money Creation, and Inflation