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
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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
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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
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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.