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Just Like Yap Money

by Elaine Schwartz    •    Feb 25, 2012    •    323 Views

To a Yap islander, in 1903, a 12-foot limestone wheel had considerable value. Described by NPR’s Planet Money, the wheels, as small as a foot in diameter and as large as twelve, composed the islanders’ monetary system. With smaller transactions, you just inserted a pole through the wheel’s center hole and took it to whomever you owed money.

With larger wheels, you did not even need to move them. In a 1991 paper, Nobel Laureate Milton Friedman tells us that when one valuable massive wheel was lost at sea, its owners could still use it. The islanders “…universally conceded…that the mere accident of its loss overboard…ought not to affect its marketable value…The purchasing power of that stone remains, therefore, as valid as if it were leaning visibly against the side of the owner’s house…”

Fast forward to 2012. Increasingly, transactions have become cashless. A phone swipe can pay for a cup of coffee. We can pay bills online. We’ve got credit and debit cards and PayPal. Currently at Slate.com, one journalist is investigating a cashless life. And, in one 2004 study, researchers concluded that although consumers benefit more than merchants, “the shift to a cashless society will improve economic welfare.”

Sounds like the Yap’s big wheels.

The Economic Lesson

To be called money, a commodity needs 3 characteristics:

  • It should be a medium of exchange. (People willingly use the commodity for exchange.)
  • It should be a store of value. (In the future, it still will have relatively comparable purchasing power.)
  • It should be a measure of value. (When someone says one dollar, you know what that means.)

Today, in the U.S., the basic money supply includes cash, currency, travelers checks and demand deposits (checks). Thinking of ATM payments and a phone swiper at Starbucks, the traditional examples of the money supply are not quite working anymore.

An Economic Question: How has the increased use of credit and debit cards since the 1950s affected our purchasing habits?

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