The Monetary Economics of Thurston Howell III
Gilligan's Island is now out on DVD, reawakening the unanswered questions of childhood: Why does the Skipper let Gilligan help with anything when he knows he'll just screw it up? Why did the movie star take a day cruise in an evening gown? Why did two of the richest people in the world board a dinky boat with the hoi polloi instead of leasing a private yacht? And why do any of the other stranded castaways treat the millionaire's government money as valuable while stuck on an island where no such government can enforce its value?
Because it's just a dumb TV show.
But that last question stuck with me. Would fiat dollars be treated as valuable without the government around to enforce its fiat? My impression in childhood was that money belonged to the government, was inextricably bound to the government, and we, the citizens of the government, were just using the money "on loan" so to speak. This impression came not only from the look of the money itself, but from American history, as children's cartoons had communicated it to me. (One Scooby Doo episode ends with the hidden "treasure" turning out to be a case full of hoarded and now worthless Confederate dollars.)
A Brief Monetary History of Gilligan's Island
In early episodes, we see Mr. Howell hiring various services from other castaways. We eventually learn he's been writing checks on a mainland (and therefore inaccessible) bank. This works while the group considers their condition temporary, but the checks are quickly devalued and eliminated when the castaways begin to prepare for the possibility of an indefinite stay on the island.
In episode 9, "The Big Gold Strike," Gilligan and Mr. Howell find a gold mine on the island, which Howell convinces Gilligan to keep secret from the others. By the time everyone learns about the mine, Howell has already taken the lion's share of the most easily accessible gold. He'd like to hoard it for himself, but the other castaways begin charging him for their goods and services. Soon everyone has a small fortune in gold, which they all try to smuggle aboard a tiny escape raft. Their collected wealth, of course, ends up at the bottom of the lagoon.
In later episodes, monetary exchange takes place in US paper currency. Was it impossible to recover the gold from the lagoon? Perhaps the writers found it more convenient to deal in the money the television viewers themselves were most familiar with. We might dismiss this as economic naïveté on the part of the writers, but recent history provides evidence that fiat paper can, in fact, outlive its government. Not only that, but postfiat money — dead government currency — can outcompete American greenbacks!
After the invasion of Iraq, there was no more central bank printing dinars and no more Iraqi government to put the fiat behind its fiat currency. The American military started handing out US$20 bills and expected the dinar to fade from existence. Instead, to the chagrin of the occupation force, the dinar's value doubled against the dollar in two weeks. Statues of Saddam Hussein were being toppled, but his face was still on the currency that was preferred — and gaining in popularity. Some saw this as patriotism: a silent protest by the occupied population against the invading force. But we need only look further north, to the Kurd-controlled areas, to find a more economic explanation.
After the first Gulf War, Iraq changed its currency from the so-called Swiss dinar to the more recent Saddam dinar. When a government changes its fiat currency, it announces a transition period during which the old bills can be brought in and exchanged for the new. After the window closes, the old notes are declared worthless.
To no one's surprise, the rebel Kurds did not visit the Iraqi government to make such an exchange. They just kept using the old money. It was familiar, hard to counterfeit, and in its postfiat status, it was no longer inflationary: that is to say, the relatively fixed supply of notes made the currency a better store of value than the new Saddam dinars being printed (and printed and printed) further south.
The Swiss dinar may have been the first successful postfiat money.
For a brief period after the invasion — the time it took the Occupation Authority to reestablish an Iraqi central bank and start printing new dinars — the old Saddam dinars joined the older Swiss dinars in their postfiat status. And lo and behold, Saddam's dead dinars rose in value compared to the inflationary dollars of the occupation force.
But how can this be? A money backed only by the force of the state is backed by literally nothing in the absence of that state. And yet the dinars continued to change hands.
By the end of the year, however, the occupation government was printing new dinars, at first with Saddam still on them (for familiarity), then transitioning into something that resembled the Swiss dinar (to promote confidence). The brief, unplanned experiment in postfiat monetary theory was over, but the results were unambiguous: a stable money, even a completely unbacked currency, beats out inflationary government paper in both value and marketability.
While it may seem that Gilligan's fellow castaways would reject Howell's dollars as worthless, the case of the Saddam dinar (and the Swiss dinar before it) offers evidence in favor of "worthless paper."
For an understanding of the afterlife of government currency, we need briefly to review the history and theory of money itself.
Direct & Indirect Exchange
Money arises naturally out of barter. This isn't just a historical fact but was theoretically proven by Ludwig von Mises in his Theory of Money and Credit: money can only have developed from barter.
Imagine Gilligan's Island without the Howells and their paper dollars. Without money, commodities exchange directly: coconuts for fish, fish for bamboo, etc. But even with barter, some commodities are more marketable than others. Perhaps one of the castaways might eventually buy one of the Professor's books, but they will more often purchase Mary Ann's coconut-cream pies — or the coconuts themselves. Coconuts are more marketable than books.
Over time, the commodity that is most marketable becomes popular for indirect exchange: the Skipper trades his fish for Ginger's decorative shells, not because he wants shells, but because he knows he can trade them for Gilligan's coconuts. The price of a commodity is its exchange ratio for the most marketable good, e.g., 12 shells per coconut. The value of the shell money is based on the goods it traded for yesterday — since we can't know what prices will be today. Right now, the Skipper is willing to trade one of his fish for two coconuts, and he knows that Gilligan was recently willing to trade his coconuts for a dozen shells each, therefore the Skipper wants to price his fish at two-dozen shells each: enough to buy two coconuts. Prices can change from day to day, but today's new prices will be based on the prices of other things yesterday.
Exchanges that started in barter evolve toward a common money currency — decorative shells, in this example (and also in the more historical examples of trade among coastal Africans and North American Indians). Now suppose the Professor found the use of shells to be primitive and irrational — "a barbarous relic!"
The Professor, having successfully invented many new tools, decides to invent a more rational money. He finds a way to preserve palm leaves and mark them with denominations. The denominations do not represent a claim for a certain number of shells. The numbers refer only to each other and to nothing else, no other commodity. If they have value, it is only because the Professor says they have value.
Would anyone use the Professor's new money?
Any new commodity can come onto the market, but its price will be newly negotiable, and its marketability (how many people will trade their goods for it) will be as-yet undetermined. This would be the status of the Professor's new "currency." Its marketability, and therefore its value (as money), would be unknown. Money is, by definition, the most marketable good: that thing which people will most readily accept in trade will also be that thing that fosters indirect exchange. Even if the others wanted to acquire preserved palm leaves, the leaves could not possibly become the most marketable commodity overnight and could therefore not start out as money. If the Professor's leaves become money, it will be through the same barter-based process that made the decorative shells into money. (Notice, however, that if this were to happen, the unit of value would be the physical leaf and not the arbitrary denomination marked on the leaf. There's no reason a bartered leaf marked "1,000" should trade for ten times as much as a bartered leaf marked "100.")
Does this make fiat money impossible? Obviously not, or we wouldn't be using it now, but it does mean that it has to evolve slowly and in discrete stages. Murray Rothbard recounts the process in his book, What Has Government Done to Our Money? At each stage in the transition, from barter to pure commodity money to monopoly coinage to demand deposits to fractionally-backed bank notes to completely unbacked government fiat, the earliest value of the new incarnation is based on the latest value of the older form of money. Today's new money requires yesterday's prices.
Over centuries, governments have taken over money from the market, and in the 20th century, most currencies became unbacked by anything other than the force of the state. But, as we see in the case of postwar Iraq, the fiat history of a currency can serve as the starting point for its postfiat valuations. The Saddam dinar doubled its value (measured against the dollar) in only two weeks, but it couldn't have gotten started without its previous, albeit inflationary and unstable, exchange value. At that point, astonishing as it may seem, no government was necessary to maintain the value of the money. The market can reclaim money from government.
Why did the unbacked paper do better than the US dollar? Because the quantity of dinars was relatively fixed, while the supply of dollars grew. The law of supply and demand tells us that, all else being equal, a rise in the supply of a thing will lower the price of that thing. The thing, in this case, is the dollar itself; its "price" is its buying power, which the Iraqis watched erode drastically within days.
This is why the castaways value Thurston Howell's paper dollars: because whatever absurd amount he may have brought with him for "a three-hour tour," that amount is now fixed. Dollars are the most stable currency available on Gilligan's Island, and the government has nothing to do with it. Or rather: the absence of government has everything to do with it. If people are allowed to pick their own preferred money, they will pick whatever holds its value most reliably.
What about Gold?
It would be tempting to see the postfiat currencies as second-best options, valuable only in the absence of true commodity money, such as gold. But we have to avoid the fallacy of inherent value: gold became the universal money not just through its inherent "money-like virtues" but because, over the centuries, its supply became fairly stable. Platinum, for instance, has all the apparent virtues of gold (and may well exceed gold in at least one virtue: the transportable value-per-unit-weight) but because it is being actively and productively mined, its supply (and therefore its exchange value) is unstable — for now. Someday, however, if the platinum supply levels off, we gold bugs might jump ship for the higher-valued metal.
So would hard money — "real money" — be better for the island economy than the paper dollars Thurston Howell brought with him? Should the castaways have recovered the gold from the lagoon and used it instead of Howell's paper?
Actually, there is reason to believe that the postfiat dollars of Thurston Howell III would make better money than island gold.
Remember that Howell has already extracted the easiest gold before the other castaways learn of the mine. So what do the others do? They begin charging Howell higher prices for their goods and services. He's free to decline such exchanges, of course, but the pampered millionaire can't live comfortably without help from those around him — and their help is now very expensive.
Yes, it's just a dumb TV show, but in this case we see the laws of economics accurately portrayed: once the castaways realize they're marooned indefinitely, their economic thinking focuses on the limited resources of the island. As Mises claimed, any fixed amount of money is the correct amount of money for a given economy. Prices will adjust. If the supply of gold money is high, and the available goods and services are few, then prices will be very high in terms of gold. And in this context, the gold money supply isn't fixed: the mine is still there, with who knows how much more gold yet to be extracted. Under an island gold standard, the supply of money might increase at any time, and anticipation of that fact will drive current prices still higher. The money ends up heavier than the goods it trades for.
The government paper in Howell's suitcases, on the other hand, is easy to transport, hard to counterfeit, lighter than gold, and whatever amount of it the millionaire managed to bring with him is the amount there's going to be for a while.
On this isolated island, and in this isolated context, paper beats gold.[product:0]
None of this is to suggest economic sophistication on the part of the show's creators or writing staff. But Gilligan's Island Economics can provide useful thought experiments for the same reasons Robinson Crusoe Economics has served as a staple of classical and Austrian School economics texts.
One thing Gilligan has, which Crusoe doesn't, is a shared culture with the others on the island. If Robinson Crusoe had been shipwrecked with a chest full of British banknotes, they wouldn't have done him any good. Friday would be more likely to trade for shells or gold than he would for the strange paper.
But on Gilligan's Island (and in the Kurdish rebel territories, and briefly in Baghdad), people who are already used to making their exchanges in slips of unbacked paper can continue to do so profitably without the hand of government. The invisible hand of the market serves them better — even when dealing in government paper.