Belief: The Engine That Runs Economies
The Yap are an island people who use limestone crafted currencies called fei. These are no ordinary, coin-purse sized rocks. Fei for large purchases can be taller than an NBA point-guard and wider than former U.S. president William Howard Taft (known for getting stuck in a bathtub due to his immense girth). To counteract the difficulty of transporting these fei between owners, the Yap devised a rather illogical scheme: they leave the fei in one place, and collectively acknowledge the new owner. We may be poised to search for the reasoning behind using these large, difficult to move limestones and, even more questionably, the act of redesignating rocks. However, we should inspect our own notion of money before jumping to conclusions about the Yap.
Whenever we play the famed board game Monopoly, we treat the currency with the face of Rich Uncle Pennybags as worth something, if only for a few hours. The participants of the game all agree that the paper money will be traded. Our palms sweat and hearts race whenever we near the Boardwalk space loaded with an enemy’s hotels, and our potential loss of our dear money looms. If we were to continue trying to use Monopoly money in the real world at Starbucks or for deposits in our Citibank accounts after the game was packed away, we would get many baffled stares and questions. Yet, this is exactly how we treat the imaginary currency we call U.S. dollars. We all agree it is worth something in the real world, as we do with Monopoly money during the game. The Yap agree that their fei are worth something. After a closer look, the mechanics of Monopoly, the U.S. currency system, and the Yap transactions may not differ ideologically after all. They all depend on the consensus that what we are trading has value.
Milton Friedman tells of an interesting story of the Yap in his essay “The Island of Stone Money.” The Germans, who were in possession of the island, wanted the Yap to build them roads so they painted black crosses on all of the fei and claimed them for Germany. The Yap, used to respecting claims of ownership, conceded and built the roads. This strikes us as odd, since the fei were not changed in intrinsic value, only in the sense that the Yap now viewed them as being worthless. If someone were to come up to us, take a dollar out of our hand, put a sticker of their face on it, then give it back to us, we would not regard it as theirs. We would, in most cases, remove the sticker and wonder why some lunatic just did that. Our belief over the value of that dollar would not be changed. However, our own history reveals an instance of our government acting in a way reminiscent of the Yap response to the Germans. In 1932, France asked the U.S. to change its dollar holdings to gold. The Federal Reserve allocated the specified amount into cabinets, labelling that the contents belonged to France. Just as the Germans did not physically gain anything by putting crosses on the fei, the French did not receive anything tangible through the cabinets and labels. Yet, the simple idea that a transaction had taken place was enough to convince everyone. The U.S. markets were sent into a panic, viewing the dollar as having grown weaker and the Franc stronger.
These actions, by our own country and by people in far removed places like Yap, highlight that all forms of money must be backed by the belief that the currency is worth something. If no one on Yap truly believed that the fei could be exchanged without moving it, a lot of energy would be spent rolling the baby-elephant sized rocks around the island. Since everyone is in consensus that goods and services can be bought by the mere acknowledgement that the fei has been given away, the economic way of life can continue to function. For a native example, if we were to somehow get a fei from Yap to America, roll it into Walmart and try to purchase a shopping cart full of groceries with it, we would be leaving empty handed (aside from our mysteriously obtained fei). Because we do not regard fei as having any monetary worth here, it could never be used to buy items. Dollars, on the other hand, have been agreed upon for decades as having purchasing power here. In and of themselves, they are just pieces of linen with no intrinsic worth, aside from kindling.
NPR’s broadcast detailing Brazil’s decades-long battle with inflation is a prime example of this notion. The creation and success of the URV, also known as the real, proves the ability for worthless materials to be assigned a value by a human collective. Nothing seemed to be solving the problem of inflation in Brazil, so four college professors decided to invent a new currency that they believed would solve the problem. Cruzeiros, the standard currency in Brazil, began being translated into URV values. The newspaper would print the reported exchange rate of cruzeiros to reals each day, and businesses would have to accept this new rate. The URV wasn’t even a physical object at this point; cruzeiros were still in use. However, the entire country began regarding this invented currency as based in reality, and these new values caused inflation to decrease. The economy of Brazil was turned around simply because of what people believed. The URV was not a pot of gold at the end of the rainbow that solved all of Brazil’s problems. Their savior was the idea that what they held in their hands had new worth, although nothing physically changed.
It is eye opening to realize that monetary systems throughout the world are based off of mere ideas and beliefs, rather than material objects that have true value. The dead act of bartering made sense: if you needed milk and your neighbor needed eggs, you would give him a chicken and he would give you a cow. Two physical objects with differing purposes changed hands, each benefitting the new owners in some way. Now, that system is long gone. Paper and linen currencies are the new norm throughout the world. If you need milk now, you bring a thin green rectangle with Abraham Lincoln’s face on it to the store. You receive milk, and the seller receives a small amount of purchasing power. With credit and debit cards, you receive milk, and the seller gets electronic information that states he is now slightly wealthier. The Yap receive something large, like a plot of land, and trade in an idea: that a rock now belongs to their trading partner. Admittedly, dollars do have value in our modern world, but certainly not in the way we think. If our wallet catches fire and we lose thousands of dollars in cash, worthwhile beliefs were just set ablaze, not anything physically valuable. If our dog chews all of our Monopoly money while we are taking a bathroom break, the only thing lost is our belief that we had in-game wealth. The beliefs that turned into ash or chewed up paper are that the money had value, and that it could be exchanged for what we desire.
Glass, Ira and Channa Joffe-Walt. “The Invention of Money | This American Life.” This American Life. WBEZ, 7 Jan. 2011. Web. 04 Sept. 2015
Friedman, Milton. “The Island of Stone Money.” Diss. Hoover Institution, Stanford University, 1991.