Money Mischief_ Episodes in Monetary History - Milton Friedman [6]
During the German hyperinflation after World War I, currencies of foreign countries served as a substitute currency. After World War II, the Allied occupational authorities exercised sufficiently rigid control over monetary matters, in the course of trying to enforce price and wage controls, that it was difficult to use foreign currency. Nonetheless, the pressure for a substitute currency was so great that cigarettes and cognac emerged as substitute currencies and attained an economic value far in excess of their value purely as goods to be consumed.
I personally experienced a remnant of the use of cigarettes as money in 1950, by which time monetary stability had been restored to Germany and the paper German mark was again the common medium of circulation. Driving from Paris, where I was spending a few months as a consultant to the U.S. agency administering the Marshall Plan, to Frankfurt, the newly established temporary capital of Germany and also the base of U.S. occupation authorities, I had to refill the gasoline tank of the "Quatre Che-vaux" (a small Renault car) that I was driving. As it happened, I had no marks with me, because I was to get an allotment of them when I arrived in Frankfurt. But I did have dollars, French francs, and British pounds. The German frau who filled my tank would accept none of these in payment—that was illegal, she said. "Haben sie keine wäre ["Have you any goods"]?" was her next remark. We settled amicably when I gave her a carton of cigarettes (for which I had paid $1.00 at the Paris PX—remember, this was a long time ago) for gasoline that she valued at $4.00 at the official exchange rate for marks but that I could purchase at a U.S. PX for $1.00. As she viewed it, she got $4.00 worth of cigarettes in return for $4.00 worth of gasoline. As I viewed it, I got $1.00 worth of gasoline in return for $1.00 worth of cigarettes. And both of us were happy. But, as I used to ask my students, what became of the missing $3.00?
I should add that a few years earlier, before Ludwig Erhard's 1948 monetary reform—the first step in the remarkable postwar recovery of Germany—a carton of cigarettes would have been valued as the equivalent of a far larger number of marks than the number that, at the then official exchange rate, could have been purchased for $4.00. As currency, cigarettes were typically traded by the pack, or even the single cigarette, not by the carton—that would have been far too high a denomination for most purchases. Foreigners often expressed surprise that Germans were so addicted to American cigarettes that they would pay a fantastic price for them. The usual reply was: "Those aren't for smoking; they're for trading."
As the example of cigarettes (or cognac) suggests, an amazing variety of items have been used as money at one time or another. The word "pecuniary" comes from the Latin pecus, meaning "cattle," one of the many things that have been used as money. Others include salt, silk, furs, dried fish, tobacco, even feathers and, as we saw in chapter 1, stones. Beads and cowrie and other shells, such as the American Indians' wampum, have been the most widely used forms of primitive money. Metals—gold, silver, copper, iron, tin—have been the most widely used forms among advanced countries before the victory of paper and the bookkeeper's pen (although a temporary use of paper as money occurred in China more than a millennium ago).
What determines the particular item that will be used as money? We have no satisfactory general answer to that simple question. We do know that, however the habit of using one item or another as money arises, the habit takes on a life of its own and, like Topsy, just grows. As Walter Bagehot, a nineteenth-century editor of the English periodical The Economist puts it in his masterpiece, Lombard Street: "Credit is a power which may