answer the 6 questions linked the pdf and then in a separate document Review the two video’s below.
Money & Financial System – Problem Set
Q1: What are the three important functions of money? Define each of them.
Q2: What are the main powers and responsibilities of the Federal Reserve
System?
Q3: Describe the difference between Fiat Money and Commodity money.
Q4: Describe how fractional reserve banking can create money.
Q5. (Read CaseStudy: Mackerel Economics in Federal Prisons ) How well do
pouches of mackerel satisfy the six properties of ideal money listed in your
text section 18-1c Other Desirable Properties of Money.
Mackerel Economics in Federal Prisons
The economist R.A Radford spent several years in prisoner-of-war camps in Italy and Germany
during World War II, and he wrote about his experience. Although economic activity was
sharply limited, many features of a normal economy were found in the prison life he observed.
For example, in the absence of any official currency behind bars, cigarettes came to serve all
three roles of money: medium of exchange, unit of account, and store of value. Cigarettes were
of uniform quality, of limited supply (they came in rations from the International Red Cross),
reasonably durable, and individually could support small transactions or, in packs, larger ones.
Prices measured in cigarettes became fairly uniform and well known throughout a camp of up to
50,000 prisoners of many nationalities.
Now fast-forward half a century to the U.S. federal prison system. Prisoners are not allowed to
hold cash. Whatever money sent by relatives or earned from prison jobs (at 40 cents an hour)
goes into commissary accounts that allow inmates to buy items such as snacks and toiletries. In
the absence of cash, to trade among themselves federal prisoners also came to settle on cigarettes
as their commodity money (despite official prohibitions against trade of any kind among
inmates). Cigarettes served as the informal money until 2004, when smoking was banned in all
federal prisons.
Once the ban took effect, the urge to trade created incentives to come up with some other
commodity money. Prisoners tried other items sold at the commissary including postage stamps,
cans of tuna, and Power Bars, but none of that seemed to catch on. Eventually prisoners settled
on cans of mackerel, a bony, oily fish. So inmates informally use “macks”—as the commodity
money came to be called—to settle gambling debts, to buy services from other inmates (such as
ironing, shoe shining, and cell cleaning), and to buy goods from other inmates (including special
foods prepared with items from the commissary and illicit items such as home-brewed “prison
hooch”). At those federal prisons where the commissary opens only one day a week, some
prisoners fill the void by running mini-commissaries out of their lockers.
After wardens banned cans (because they could be refashioned into makeshift knives), the
commodity money quickly shifted from cans of mackerel to plastic-and-foil pouches of
mackerel. The mack is considered a good stand-in for the dollar because each pouch costs about
$1 at the commissary, yet most prisoners, aside from weightlifters seeking extra protein, would
rather trade macks than eat them.
Wardens try to discourage the mackerel economy by limiting the amount of food prisoners can
stockpile. Those caught using macks as money can lose commissary privileges, can be
reassigned to a less desirable cell, or can even spend time in the “hole.” Still, market forces are
so strong that the mackerel economy survives in many federal prisons.
Sources: R. A. Radford, “The Economic Organization of a P.O.W. Camp,” Economica, 12
(November 1945): 189–201: and Justin Scheck, “Mackerel Economics in Prisons Leads to
Appreciation of the Oily Fillets,” Wall Street Journal, 2 October 2008.
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