delanceyplace.com 8/26/13 - money, for some, is twelve-foot wide stones

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In today's selection -- from Money: The Unauthorized Biography by Felix Martin. What is money? Is it a hard asset like gold? Or is it instead "tradeable debt" -- IOUs that can be used by the noteholders to pay for other goods and services? Even today the debate rages, with crucial policy implications -- including the current debate between austerity and stimulus. In the early 1900s, an unexpected discovery was made on the tiny and remote Pacific island of Yap [or Wa'ab] that eventually came to the attention of a young John Maynard Keynes, the most influential economist of the twentieth century. For the inhabitants of Yap, money came in the form of stone wheels as large as twelve feet in diameter, lending support to the idea that money is at bottom an IOU:

"In 1903, [a brilliant and eccentric young American adventurer, William Henry Furness III] made a two-month visit to Yap, and published a broad survey of its physical and social make-up a few years later. He was immediately impressed by how much more remote and untouched it was than Borneo. Yet despite being a tiny island with only a few thousand inhabitants -- 'whose whole length and breadth is but a day's walk', as Furness described it -- Yap turned out to have a remarkably complex society. There was a caste system, with a tribe of slaves, and special clubhouses lived in by fishing and fighting fraternities. ... But undoubtedly the most striking thing that Furness discovered on Yap was its monetary system.

"The economy of Yap, such as it was, could hardly be called developed. The market extended to a bare three products -- fish, coconuts, and Yap's one and only luxury, sea cucumber. There was no other exchangeable commodity to speak of; no agriculture; few arts and crafts; the only domesticated animals were pigs and, since the German [explorers] had arrived, a few cats; and there had been little contact or trade with outsiders. It was as simple and as isolated an economy as one could hope to find. Given these antediluvian conditions, Furness expected to find nothing more advanced than simple barter. Indeed, as he observed, 'in a land where food and drink and ready-made clothes grow on trees and may be had for the gathering' it seemed possible that even barter itself would be an unnecessary sophistication.'

"The very opposite turned out to be true. Yap had a highly developed system of money. It was impossible for Furness not to notice it the moment that he set foot on the island, because its coinage was extremely unusual. It consisted of fei -- 'large, solid, thick stone wheels ranging in diameter from a foot to twelve feet, having in the centre a hole varying in size with the diameter of the stone, wherein a pole may be inserted sufficiently large and strong to bear the weight and facilitate transportation'. This stone money was originally quarried on Babelthuap, an island some 300 miles away in Palau, and had mostly been brought to Yap, so it was said, long ago. The value of the coins depended principally on their size, but also on the fineness of the grain and the whiteness of the limestone.

"At first, Furness believed that this bizarre form of currency might have been chosen because, rather than in spite of, its extraordinary unwieldiness: 'when it takes four strong men to steal the price of a pig, burglary cannot but prove a somewhat disheartening occupation', he ventured. 'As may be supposed, thefts of fei are almost unknown.' But as time went on, he observed that physical transportation of fei from one house to another was in fact rare. Numerous transactions took place -- but the debts incurred were typically just offset against each other, with any outstanding balance carried forward in expectation of some future exchange. Even when open balances were felt to require settlement, it was not usual for fei to be physically exchanged. 'The noteworthy feature of this stone currency,' wrote Furness, 'is that it is not necessary for its owner to reduce it to possession. After concluding a bargain which involves the price of a fei too large to be conveniently moved, its new owner is quite content to accept the bare acknowledgement of ownership and without so much as a mark to indicate the exchange, the coin remains undisturbed on the former owner's premises.

"When Furness expressed amazement at this aspect of the Yap monetary system, his guide told him an even more surprising story:

[T]here was in the village near by a family whose wealth was unquestioned -- acknowledged by everyone -- and yet no one, not even the family itself, had ever laid eye or hand on this wealth; it consisted of an enormous fei, whereof the size is known only by tradition; for the past two or three generations it had been and was at that time lying at the bottom of the sea!

"This fei, it transpired, had been shipwrecked during a storm while in transit from Babelthuap many years ago. Nevertheless:

[I]t was universally conceded ... that the mere accident of its loss overboard was too trifling to mention, and that a few hundred feet of water off shore 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, and represents wealth as potentially as the hoarded inactive gold of a miser in the Middle Ages, or as our silver dollars stacked in the Treasury in Washington, which we never see or touch, but trade with on the strength of a printed certificate that they are there.

"When it was published in 1910, it seemed unlikely that Furness' eccentric travelogue would ever reach the notice of the economics profession. But eventually a copy happened to find its way to the editors of the Royal Economic Society's Economic Journal, who assigned the book to a young Cambridge economist, recently seconded to the British Treasury on war duty: a certain John Maynard Keynes. The man who over the next twenty years was to revolutionise the world's understanding of money and finance was astonished. Furness' book, he wrote, 'has brought us into contact with a people whose ideas on currency are probably more truly philosophical than those of any other country. Modern practice in regard to gold reserves has a good deal to learn from the more logical practices of the island of Yap."