Brain Teaser

Here’s a fun puzzle I found at Cafe Hayek, via The Stalwart:

An American tourist goes to a remote island for a vacation. The natives live by a barter system-they have no money. When the tourist tries to pay for his lodging with a check, the owner laughs at first, but then decides that the design on the check is quite attractive and agrees to accept the check in return for lodging. This happens again when the tourist pays for food and some native artwork. The checks are never cashed. They begin to circulate on the island as money, replacing the barter system that had existed before.
If the checks are never cashed, who pays for the vacation of the tourist? Or is it free?

What do you think? My thoughts after the jump….


As Milton Friedman said, “there’s no such thing as a free lunch.” Well, the same goes for island vacations. The neat part of this is that it causes you to rethink how you naturally think about money.
Isn’t it funny how these stupid, backward, gullible natives trade around pretty paper as if it has real value?
Ooh, look! Pretty paper!!
BWHAHAHAHAHA
(Long Silence)
Hey, why is everyone looking at me like that?
Um, we also barter non-cashable checks every day. Ours also have really pretty designs, complete with dead presidents. That’s right: A paper dollar is nothing more than a “check” drawn against the central bank. A dollar is never “cashed” as you can no longer get any gold for it. It’s accepted because…it’s accepted.
In the scenario above, the tourist is acting like a Federal Reserve with Bermuda shorts. It’s really the same thing.
So who’s the gullible native now?
There’s a close real world relative to this. The Micronesian island of Yap is famous for its stone currency:

Yap is notable for its stone money, known as Fé (see photograph at left): large donut-shaped, carved disks of (usually) calcite, up to 4 m (12 ft) in diameter (most are much smaller). The islanders know who owns which piece, but do not necessarily move them when ownership changes; their size and weight (the largest ones require twenty adult men to carry) make them very difficult to steal. There are five major types: Mmbul, Gaw, Ray, Yar, and Reng, this last being only 0.3 m (1 ft) in diameter. Their value is based on both size and history, many of them having been brought from other islands, as far as New Guinea, but most coming in ancient times from Palau. Approximately 6,800 of them are scattered around the island. As no more disks are being produced, this ceremonial money supply is fixed (Washington Post, 1984). The United States dollar is the currency used for exchange in Yap.

Some of the stones are deep in the water, but as long as the islanders recognize them as money, the system works. When the Germans took hold of the islands, they tried to force the Yaps to work. Only when they put check marks on their stones, did the islanders respond. As the chores were completed, the Germans removed the marks. In other words, taxes can work the same way.
When we talk about monetary “standards,” be it gold or silver or cigarettes in a prison, all of them are really misnamed. There’s no such thing as a gold standard. There’s only a human standard. Any standard is only as strong as people’s commitment to it.
Now if you excuse me, I have to eBay some Beanie Babies. It’s amazing how much people will pay for this crap.

Posted by on July 24th, 2006 at 12:56 pm


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