Rediscovering What Money Is: Part I

Article by Reuven Brenner, Desautels Faculty of Management

Contracts are the basis of commercial societies and prices are an essential part of these contracts. But prices relative to what?

Assume that there are 1,000 goods and services to be delivered now and in the future, domestically or across borders. In the absence of a standard of reference, there would be 499,500 possible prices for these goods and services because each commodity and service would be priced in relation to every other one. With one common agreed upon "yardstick," there would be 999 prices.

In prisons, where few goods and services are exchanged, the very first thing inmates invent is this 'yardstick', a unit of account. More often than not cigarettes are used to assess the prices of everything else. The prisoners understand that without a relatively stable unit of account, negotiations about prices can become too long and too complex. The inmates choose cigarettes because they are in relatively fixed supply, as each prisoner has the right to only a few packs over designated periods of time.

Read full article: Forbes.com, November 22, 2010