The “Yap” Currency

Yap is a small island in the south Pacific. So tiny, most of us won't be able to find it on a large-scale map even with directions. And yet, the island (and it’s currency) have become immortal, at least among the Economists! Almost every standard textbook of economics & particularly those on theory of monetary policy mention Yap & their currency called "rai" that they have been using for hundreds of years.

This, the rai, has no inherent property that makes it useful or valuable. It isn't made up of gold or silver or gemstones! It is in fact carved out of limestone quarries, located on another island, Palau, 400kms away! It cannot even be carried around easily; the largest coins can be more than 3 meters in diameter & weigh more than a ton! Their value is determined by a complicated set of rules, all of which only the natives understand. The number of lives lost while transporting them from Palau, the size of the rai, intricacy of the carvings on it, if any famous person was involved, are just some of the factors taken into account.

But they have another two very curious properties.

Any transaction involving these unwieldy coins doesn't have to involve actual physical transfer of the money to the new owner! The supposedly "primitive" Yapeans, with their native  commonsense, realized very early the logistical difficulties of carrying this money around. So they decreed, it can remain where it is. Some coins, as legend has it, have stayed in the same place for hundreds of years though they might have been a basis of innumerable deals,involving thousands of transfers of ownership!

How can that be? We find the idea as difficult to grasp as quantum physics.

The answer is, collective faith and communal memory. Just as the value of rai is decided collectively, all the transactions are noted and stored in the collective memory of the community! So everyone at all times knows the ownership of each rai, and there is complete mutual faith in everyone's integrity.

This mutual faith in everyone’s integrity is so strong that according to another legend, an expedition, while returning from Palau with a particularly large & exquisitely carved rai met a heavy storm, the boat capsized and the rai was lost. On somehow returning home, the survivors told their story. The community said "No Problems, (or whatever they say in Yapese on these occasions!), we believe u. That rai will be now a part of currency, with such and such value & u r now richer by that value!" So here is a valuable piece of legal currency, a few hundred miles away, at the bottom of the ocean, which hardly anybody has seen, and yet in circulation with full credibility!

Thus the record of transactions stored in the collective memory of the community serves as an authentic record of ownership.

For the highly advanced, scientific, white man it took another 500 years to come up with a comparable idea, the bitcoin! The record in the communal memory of the Yapese, their honesty & trust in each other's honesty have been serving the same purpose that the 21st century 'blockchain' does in the verification of the bitcoin and without the need for highly developed computers or complicated algorithms!

The reason the Yapese are discussed in the scholarly texts on economic & monetary theory is that they help underline a fundamental principle of monetary theory. Any currency derives it's credibility because the state willed it into existence and the common citizen has faith in not only the state but its assurance printed on the currency, "I promise to pay the bearer....."

It is precisely this credibility that is shaken by the events of the last few days. Not only the dramatic demonetization itself, but the constant flip-flops over the rules in it's wake, the shoddy implementation (the new notes that don't fit the old ATMs seems straight out of a B-Grade slapstick comedy!), the increasing lengths of the queues in banks & in front of the ATMs, when actually they should have been shrinking by now, all have shaken the common man's confidence.

There are daily reports of seizures of huge quantities of new notes from all over the country, while the common man is slumming it out in queues for cash that will barely see him through the week! The central bank (RBI), the official face of monetary policy & fiscal health of the country has presented an inexplicable lack of transparency throughout. And to top it all, the constant rumors about another dose of demonetization (this time of the new 2000 Rs notes) after 6 months! Can things be any worse for the common man?

There is hardly a citizen of this country who disagrees with the idea of rooting out black money. It is high on everyone's list of 'what's wrong with India'. Therefore, from the lowliest slum dweller to the upper-class, white collar professional, everyone is ready to smile & bear the present sufferings as the PM has asked. But he is also expecting that a set of really effective measures will be launched after these "50 days”, measures which will really deal a body blow to this cancer of black money. Because, even the illiterate “mazdoor & kisan” have realized by now that this edition of demonetization has failed to achieve it’s stated aims!

In the meantime, the central government as well as RBI have to take urgent steps on a war footing to restore the confidence of the citizens. To an ordinary layman like me, untutored in the naunces of economics, the present climate seems like we are hurtling towards economic & political disaster!

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There is an interesting twist in the above tale of Yap & the rai.

In the late nineteenth century an Irish-American explorer, Captain David O’Keefe was caught in a fierce storm in the Pacific. He was luckily washed ashore on Yap. The hospitable Yapese gave him shelter, nursed him back to health, and sent him back on his way. He naturally wanted to repay their kindness. So he returned with iron tools, better equipment for quarrying and modern sailing ships.

All this equipment & technology brought a glut of this so far rare currency, brought down it's value and for the first time in their history Yapese Economy witnessed inflation!

        The primitive natives again used their commonsense, sent O’Keefe away with his own island as a parting gift; confiscated all the 'new' coins and put a moratorium on quarrying new rai and the economy went back to normal! So much for the white man and his civilizing influence! History has repeatedly shown us that whenever & wherever the white man has arrogantly tried to educate and modernize primitive cultures, disaster is the inevitable result, at least for the natives!

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For a sober & informative analysis of what is wrong with this demonetization click here. 

For a very entertaining write-up on Yap & rai in more detail click here.

And there is always wikipedia & google!😉

Plz leave ur comments here or write to me.