Question

During World War II, an Allied soldier named Robert Radford spent several years in a large German prisoner-of-war (POW) camp. At times more than 50,000 prisoners were held in the camp, with some freedom to move about within the compound. Radford later wrote an account of his experiences. He described how an economy developed in the camp, in which prisoners traded food, clothing, and other items. Services such as barbering also were exchanged. Lacking paper money, the prisoners began to use cigarettes (provided monthly by the Red Cross) as money. Prices were quoted, and payments made, using cigarettes.
(a) In Radford’s POW camp, explain how cigarettes fulfilled the three main functions of money
(b) Briefly discuss why a non-smoking prisoner would have been willing to accept cigarettes in exchange for a good or service in Radford’s camp. (2 ma

Answer 1

In the POW camp, no paper money was used. Prisoners thus used cigarettes, which were allocated by the Red Cross in limited quantity.

a) The three basic functions of money are:

Medium of exchange: Cigarettes were used for transactions on a day to day basis. Instead of barter, this is much more convenient. Prisoners were able to buy whatever they want, and pay using cigarettes.

Unit of account: Since cigarettes were a scarce resource, the number of cigarettes a person has indicates his or her wealth. Any other good can be quantified in terms of cigarettes. It thus becomes a standard unit of account.

Store of value: Cigarettes are a durable and long lasting good. Thus, like money, they can be stored and their value doesn't degrade. They can be used as money, whenever needed.

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b) In this POW camp, it doesn't matter much if a person is a smoker or not. If the person has cigarettes, they can be used as money. Thus, even a non-smoker would be interested in accumulating more money, which can be further used for transactions. This is because a non-smoker would need other goods and services, and would have no other way to pay for them.

Thus, for daily transactions, and for store of wealth, both smokers and non-smokers would require the currency "cigarettes".