Preamble: Welcome to the Story of Money Podcast week here at We’re five episodes in – and so it felt like a good time to remind everyone to go and check it out. In particular, we’re desperate for your ratings and reviews. Thanks to everyone who’s given us feedback – it’ll help us improve things going forward. In this series of posts, I’m doing some selective highlights.

Cigarettes as currency

Robert A Radford was an economist that spent much of the Second World War in a German prisoner of war camp. After the war ended and he was rescued, he went to work for the newly-established International Monetary Fund (IMF), where he wrote about his economic experiences during the war.

Specifically, he wrote about the monetary dynamics within the prisoner of war camp. And in particular, how the cigarette became the main form of currency.

The background: the prisoners in the camp would receive food parcel rations from the Red Cross, comprising “tinned milk, jam, butter, biscuits, bully, chocolate, sugar, etc. and cigarettes”.

Then, in Radford’s own words:

Very soon after capture people realised that it was both undesirable and unnecessary, in view of the limited size and the equality of supplies, to give away or to accept gifts of cigarettes or food. ‘Goodwill’ developed into trading as a more equitable means of maximising individual satisfaction.

Starting with simple direct barter, such as a non-smoker giving a smoker friend his cigarette issue in exchange for a chocolate ration, more complex exchanges soon became an accepted custom. Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes: the market was not yet perfect. Within a week or two, as the volume of trade grew, rough scales of exchange values came into existence. Sikhs, who had at first exchanged tinned meat for practically any other foodstuff, began to insist on jam and margarine. It was realised that a tin of jam was worth ½ lb. of margarine plus something else; that a cigarette issue was worth several chocolate issues, and a tin of diced carrots was worth practically nothing.

By the end of a month, when we reached our permanent camp, there was a lively trade in all commodities and their relative values were well-known, and expressed not in terms of one another – one didn’t quote bully in terms of sugar – but in terms of cigarettes. The cigarette became the standard of value.

That is: within a very short space of time, a fully-fledged barter economy had emerged, which then transitioned into a monetary economy where the medium of exchange was a cigarette.

The rise of credit

The economy soon expanded and began to engage in foreign trade: for example, where coffee rations would trade “over the wire” and be “sold for phenomenal prices at the black market cafes in Munich”.

The mini-economy was also susceptible to demand and supply shocks. The influx of new prisoners would cause prices to spike, while deliveries of Red Cross parcels would cause prices to fall. A futures market developed, as did the extension of credit:

Credit entered into many, perhaps into most, transactions, in one form or another. … many buyers asked for credit, whether the commodity was sold spot or future. Naturally prices varied according to the terms of sale. A treacle ration might be advertised for four cigarettes now or five next week. And in the future market “bread now” was a vastly different thing from “bread Thursday.”

There was also currency debasement: cigarettes would be rolled between the fingers to sweat out some of the tobacco. Eventually, operating in accordance with Gresham’s law, the fatter cigarettes were kept for smoking, and the cigarettes that were used as currency became thin.

It’s a really fascinating example of monetary economics taking place on a small scale. And it demonstrates some of the shortcomings in a non-fiat currency in a way that you might not find all that intuitive.

For the end of this story: check out episode 3.

#cliffhanger #sortof

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at Also, check out the RA podcast on iTunes: The Story of Money.