9 . For 2,000 years on the far away island of Yap in Micronesia, located in the
ID: 1098312 • Letter: 9
Question
9. For 2,000 years on the far away island of Yap in Micronesia, located in the Pacific Ocean, the inhabitants have been using giant stones as money (Note: this is a true story)
a) What are the functions of money? Can these stones fulfill all or partially the functions of money?
b) Because the stones are worthless when broken, the islanders leave the larger ones where they are and simply take note of the fact that ownership has changed. How is this similar to paying by checks?
Historical Note: The history of the island of Yap in the 20th century is as follows: Seized by Japan in 1915, Yap became a U.S. protectorate after World War II and gained independence in 1986, as part of the Federated States of Micronesia. Since then, the U.S. has provided subsidies that account for 70% of public spending on Yap. In 2011, the U.S. contribution came to $15.5 million. A treaty also gives U.S. military dominion over the area. In the March 9, 2013, issue of the Wall Street Journal,
Explanation / Answer
Generally, economists have defined four types of functions of money which are as follows:
(i) Medium of exchange
(ii) Measurement of value;
(iii) Standard of deferred payments
(iv) Store of value.
The stones as explained do perform the functions (i) completely and the rest partially. Since all the inhabitants of Yap use the stones as the currency, it is a medium of exchange, Now, if every commodity is measured in cardinal stones : say 6 stones worth or 4 stones worth, its fine. But say if I want 1.5 units of the commodity, then what? What if I have to pay 5.5 stones? Do I break the stone? Or are there pebbles just as there are cents for dollars. That has to be looked at, i.e the effective measurement of value.
These stones should be accepted both by the creditor and the debitor. But isn't counterfeiting these stones very easy? That makes troubles with iii). Stones can be broken in the long run as said. If the currency itself starts breaking, it will be difficult to ensure value in the long run.
ii) There is practically no difference between this system and cheques in the long run. Both have paper ownership. money calculated wealth and purchasing power which can be as easily done by stones. That means that just like our money, there is no value of the stones on their own, we are assigning it to them. So even the damaged ones if assigned have values. This is unlike gold currencies which had value on its own.
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