Question

During the early part of the last century, a prominent English lord spent a month each winter vacationing on a small island in the Indian Ocean. He paid for his expenses by writing checks on his London bank account. So great was the impression of his lordship on the local inhabitants, that instead of cashing his checks, they held on to them dearly, and transferred them among themselves in settlement of transactions and for the payment of debts – that is, the checks circulated as a "medium of exchange."

(a) What characteristics or qualities would make his lordship's checks a good money to the islanders? How might the islanders benefit by substituting the lord's checks in place of the commodity money that had been used prior to his lordship's annual visits?

(b) Who actually paid for his lordship’s vacation? Carefully explain your reasoning.

Answer 1

(a)

Lordship's cheques are good money to the islanders because of these cheques being easy to handle, freely transferable, acceptable among all the islanders because of trust of lordship, low chances of being stolen.

(b)

Islanders paid for the lordship's vacation. Amount was not withdrawn by the islanders from the lordship's account because of which, lordship's vacation was financed by the islanders. They keep on transferring cheque from one to another and keep on providing supplies required by the lordship against the money(cheque) they never got.