Ananlysis of pow case | Deflation | Prices

MGT505

T. J. Joseph

MGT505: Economic Analysis for Business Decisions
Term I (Class of Aug.2009-11, Section E)
Reading: “The Economic Organization of a POW Camp” by R.A. Radford Economica, 1945, 189-201 Questions for Discussion 1. What, according to Radford, accounts for the development of an exchange (trade) system in a POW camp? According to Radford, the main reason for the development of an exchange (trade) system in POW camp was because supply was same but the needs of prisoners were different. The Red Cross society supplied the same stuffs including chocolates, sugar, bread, jam, margarine, tinned beef, and cigarettes to everyone. Even the quantity of the supply was same. This led to uniformity among different communities but the needs varied from community to community. This was the basic reason which led to the development of trade system in a POW camp. Prisoners began exchanging goods as per their need. They exchanged goods which they did not need for goods which they wanted in large quantities. Gradually, the economy developed as the exchange system made life of prisoners more comfortable. Can the development of the system be explained by the equality or lack of equality in the distribution of supplies? The development of the exchange system can be explained by the equality in the distribution of supplies. The supplies were the same for everyone but the needs were diverse. The Sikhs did not need tineed beefs while the English did not use coffee. This led to the development of exchange system. Initially the Sikhs exchanged tinned beef for practically anything but later they learned the exchange value. Soon every item gained a value in term of each other . sugar could be exchanged for chocolate and margarine for beef. Thus it can be said that the development of the system was because of equality in the distribution of supplies and difference in the needs of the individuals. Were prisoners generally unhappy with their particular allotment of supplies and thereby motivated to develop an exchange system? Yes, the prisoners were generally unhappy with their allotment of supplies. They were all given the same supplies but the needs varied. This led to the development of exchange system. For example a non smoker friend gave his smoker friend a cigarette and in exchange took some chocolates. This was the initial raw form of

MGT505

T. J. Joseph

exchange. Soon the exchange system developed and trade became organized. Everything had a fixed value. The trade was mainly done in terms of cigarettes. The prisoners’ unhappiness regarding the supplies led to the development of an exchange system. Which force does Radford think was most important in accounting for the evolution of the exchange system? The most important fact for the evolution of accounting system was the difference between the needs and supplies. Supplies were limited and needs were unlimited. This was the driving force which led to such development of the market. The demand varied and people wanted goods according to their needs. In what sense does the "extent of the market" matter in the POW camp exchange system? The POW was basically a closed economy. The source of supplies was only the Red Cross. Though there were other private supplies, they formed a vey small portion of the larger bulk. The economy was self sustaining. They did not have any contact with the other economies. The only contact the prisoners had with the outer economy was through black marketing. This shows that extent of the market mattered a lot in the POW camp. The market was limited to marts and the advertisements . prices were not well known and the trading was mainly local in nature. Very few traders traded across bungalows and made huge profits. It was important that the prisoners should have known the extent of the market. It would have enabled them to strike proper deal among themselves. 2. According to Radford, did cigarettes function well as money in the POW camp? According to Radford, cigarettes as currency did function very well, initially. Cigarettes served as metallic currency and performed all the functions of a normal currency. They were homogenous, reasonably durable and of convenient size for the smallest , or in packets for the largest transactions . They could be clipped or sweated by rolling them between the fingers so that tobacco fell out. They were subject to the working of Gresham’s law which says bad money drives out good money. Even though various brands of cigarettes exited , for currency purpose a ‘cigarette’ was a ‘cigarette’. It was obvious that for trading purposes low quality cigarettes were used. As time progressed, machine made cigarettes were replaced by hand rolled cigarettes from piped tobacco. Piped cigarettes wrer issued in lieu of cigarettes at a rate of 25 cigarettes and one ounce would produce 30 home made cigarettes. Since these cigarettes wrer not standard homogeneity could not b maintained and now the cigartees had to b examined properly before being accepted. However, machine made cigarettes were still universally accepted. The main disadvantage of cigarettes being used as currency was that they had an intrinsic value as they were universally acceptable both for what they would buy

MGT505

T. J. Joseph

and for themselves. As long as the red cross society continued with its supplies of cigarettes, the economy continued smoothly but when the issue was interrupted, styock soon ran out, prices fell, tradin declined as cigarettes could no longer be used as currency as people adopted the barter system. Even though private parcels arrived regularly they could not serve the purpose.it can be said that even though cigarettes proved to be a good alternative for currency initially , later they failed as economy expanded and became unstable.

3. What is the significance of the fact that a halving of Red Cross parcels changed prices? In august 1944, the supplies of parcels and cigarettes were both halved by the red cross. As both parcels and cigarettes were halved, change in prices were not anticipated.However, since the elasticity of demand for cigarettes was much less compared to that of food, food prices fell a little.Due to halving of supply, there was a change in the prices structure.Certain goods which were valueless such as german margarine and jam , acquired new value. The demand for certain popular goodds such as chocolates and sugar fell and that for bread rose as the supply of bread was reduced. The main significance of the fact that halving of red cross parcels change prices is to show that any change in supply conditions affected both the general price level and the price structure. Changing of supply by red cross showed how susceptible the economy was and it depended solely on the supply of the red cross. A change in supply changed the entire market scenario, goods which were valueless like tinned carrots gained value and some all time popular goods like chocolates and sugar became unpopular and their prices fell drastically. 4. Why did the British officers attempt to regulate prices in the POW camp? As the economy was facing deflation, to avoid such deflationary effects, a paper currency was organized by restaurants and shops. The paper currency was called Bully Marks (BM) and it was at par with cigarettes. Along with this scheme a determined at a pllaned economy was price fixing. The British officers were anxious to control food sales for fear of some people selling too much to the detriment of their health. The British officers attempt to regulate the prices in the POW camp because the deflationary waves and their effects on prices were inconvenient to all and would be dangerous to the restaurants which had to carry stocks. Unless the BMk was converted into cigarettes at about par it had little chance of gaining confidence and of succeeding as a currency. While BMks prices of food were fixed for all time, cigarette prices of food and BMks varied. The shops were in a position to enforce price control both inside and outside its walls. A standard price was fixed for food left for sale in shop and prices outside were roughly in conformity with this scale, which was recommended as a ‘guide’ to

MGT505

T. J. Joseph

sellers but fluctuated a good deal around it . the exchange and mart notice boards came under the control of the shop. The advertisements which exceeded 5% from the recommended sales were crossed out by the authority. Thus, the British officers attempted to regulate prices in order to gain stability and uniformity in the market.

5. In what sense did traders take advantage of pricing discrepancies? . The economy was unorganized and did not have any uniformity. Prices were fixed by the traders according to the needs of the prisoners. As there was no uniformity in the prices of different goods, the traders benefited a lot from price discrepancies. The unity of the market and the prevalence of a single prize varied directly with the general of organization and comfort in the camp. The camp was unorganized and chaotic, no one knew where anyone else was living and this lead to greater prize discrepancies and hence greater benefit to traders who traded across bungalows and communities. The prize of a tin of salmon varied by two cigarettes in between one end of a hut and the other. The traders exchanged goods where they got it a low prize and sold them where the prizes were higher. The people who first visited the highly organized French trading center, with its stable and known prizes, found coffee extract relatively cheap among the tea drinking English – commanding a fancy prize in biscuits or cigarettes and they made small fortunes that way. The traders also made substantial sums by black marketing. Even in the shops run by senior British officers the prizes were not homogeneous. The prices of food were standard but the prices of clothing were less homogeneous. This again gave a chance to traders to earn. The public and semi permanent records of transactions lead to cigarette prizes being well known and thus tending to equality throughout the camp. However, arbitrage was practiced which is the practice of taking advantage of a prize differential between two or more markets, striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prizes. This was the common way by which the traders took advantage of prize discrepancies.

6. Recall the priest who traded the cigarettes for cheese, and cheese for cigarettes, so that he ended up with more cigarettes than he had initially. Did someone else in the camp lose by the priest’s activities? How was the priest able to end up better off than when he began? What did his activities do to the price of cheese in the different bungalows? The priest started with a tin of cheese and five cigarettes and return to his bed with a complete parcel in addition to his original cheese and cigarette. No one in the camp lose by the priest activities because the priest traded across bungalows and communities. The market was not perfect and prizes varied from place to place. The priest took advantage of these discrepancies. No one lost anything because prisoners

MGT505

T. J. Joseph

were not aware of the prizes outside their bungalows. The priest was able to enter better off than when he started because he wandered across bungalows in search of lower prizes. He stroked the best deal. He sold his cheese were he could more number of cigarette where he got more goods for less number of cigarettes. This way he returned with a complete package along with cheese and five cigarettes. 7. In your view, did the POW exchange system produce a just distribution of goods? Would you have favored regulation of the exchange system? What sort? POW exchange system was a raw market system. Nothing was organized. It was driven only by the needs of individuals. The POW system did not produce a just distribution of goods. Initially every one received the same amount of goods from the red cross but according to the needs, they started exchanging goods. They exchanged the goods which they did not need for the ones they required in larger quantity like Sikhs exchanged tinned beef for practically anything. The exchange system soon became a bit organized and instead of exchanging goods simply, each good gained an exchange value like a tin of jam was worth ½ lb of margarine plus something else. Similarly a cigarette issue was worth several chocolates and a tin of diced carrots was worth nothing. Soon, the markets became a bit more organized and instead of trading commodities in term of one another, they were quoted in terms of cigarettes. The cigarettes because the standard of value. The exchange system in POW did not produce a just distribution of goods. The source of basic supply was Red Cross but apart from that personal parcels were also received. Sometimes, the news of wars or the increase and decrease in the number of prisoners changed the entire market scenario. Some prisoners sold so much that their health suffered. They themselves did not consume anything but sold the entire ration. With the increase in instability of the market, the exchange system started losing its efficiency. The exchange system needed some regulation. If it was not regulated, few people who had excess reserves of a particular good would run out of business. A regulation was required to ensure that the exchange system was efficient and ensure that the distribution of goods was just and adequate. It would have been apt if apart from the introduction of pricing policy, there would have been up to which trade would be allowed. the British officers should have tried to regulate the prices as well and the permissible level of trades. For example, a prisoner should not be allowed to sell all his supplies , there should be a limit to the maximum level of exchange.

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