A fellow Doper has asked me to explain how IOU’s can be money. I answered him before, using an economy with only TWO people as example, but that was unacceptable to him.
I’ll post the scenario again, hoping the board’s economists will comment. As a bonus, a “broken window” leads to an economic boom!
Crusoe and Friday are the sole inhabitants of Paradise Island; Crusoe owns all the land, Friday does all the labor. Their words are their bonds and they treat each other quite fairly. Never mind how Crusoe became the sole land-owner. Maybe he won it in a poker game with Friday, or maybe he presented a quitclaim deed from the Emperor of All the Indies (though neither man can read Amharic).
Most of the economy runs on simple barter: Friday gets all the water he needs in return for housecleaning; they have a protocol to share the jackfruit and pomegranates Friday gathers, and so on. But for some trades they use delicious oysters as a money unit. It used to cost Friday fifteen oysters for a big log, but the easy oyster pickings have been picked out and now he gets a big log for just ten oysters. Crusoe often eats the oysters as soon as he gets them, so when Crusoe wanted Friday to do some major repairs on his house, he offered an ‘IOU 75 oysters, signed Crusoe’ and Friday accepted it. For the next few weeks, when Friday shopped at Crusoe’s store he didn’t need to pay oysters; they just scrawled over the debt amount.
To get oysters now, Friday has to take his boat into dangerous water far from shore. The boat is falling apart and some days Friday has to spend all day jury-rigging the crummy boat and can’t even take it out. Friday tells Crusoe “Lend me 1000 oysters for supplies and I’ll build a magnificent new boat. Starting next month we’ll have more oysters than ever. I can pay you back with interest.” But Crusoe doesn’t like to think far ahead and just says, “Do you think I’m a bank? No way.”
One night, drunk on jackfruit whiskey, Crusoe accidentally sets Friday’s boat on fire. Being fair-minded he realizes he must pay Friday the boat’s replacement cost, including labor. He writes Friday a marker for 750 oysters; Friday scrimps and gets his new boat built. The [del]broken window[/del] burnt boat leads directly to a more productive economy!
What do you think? Is there a flaw in this scenario? Do the ‘IOU oysters’ notes qualify as “money”?