What cigarettes & ramen teach us about the US dollar
Published on: 11 August 2024
About 0.5% of the entire US population is in jail.
One of the highest rates in the world.
The US is also one of the few countries that have privately run prisons.
Life inside US prisons is tough.
Some have watchtowers with signboards that read ‘One Warning Shot Only’.
If there is a riot inside the prison and the prisoners refuse to obey the jail guards, they will fire one warning bullet in the air.
The next shot will be fired at the prisoners.
Some have signboards with ‘No Warning Shots’ written.
The prisoners get fixed amounts of time to exercise, be in the open sky, eat, and use the washroom.
There are different kinds of prison sentences. Some inmates are in solitary confinement – they are not allowed to socialize with other prisoners.
Theft and violence is an ever-present threat to all prisoners.
Prisoners can get money by working in prisons or if their families send them.*
This money can be used to buy things from the canteens (also called commissary).
The kind of items sold in these canteens are limited.
Snacks, soaps, stationery, and some other basic supplies.
Besides this, they do not have any use for cash inside prisons. The prisoners do not have cash in their hands. A register is maintained in the canteens to track their balance.
Other than the canteen, not many facilities are available.
It is a prison after all.
Prison Economy
However, some prisoners have access to items and services that are not supposed to be available in prison.
Everyone washes their own clothes. But some prisoners hire other prisoners to do that for them.
Back pain? Someone will offer a massage.
Room (prison cell) cleaning services are available too.
In prisons, enemies and hatred between people are common.
If a prisoner wants his enemy beaten up without getting involved, he may hire someone to carry out the task for him.
Artistic prisoners offer their services like postcard-making during the Christmas season.
In prisons, a vast economy exists – even though the jail guards do not want it to exist.
Services are offered. Goods are sold.
But if cash is banned, how does this economy work?
Turns out, trade and economy find a way.
Prison Currencies
Ramen – similar to cup Maggi – can be bought from jail canteens.
This is used as currency.
One pack of ramen costs about $0.6.
But this one pack of ramen can be used to buy services inside the prison worth a lot more.
Therefore, the price of ramen is quite high inside the prison – in the prison economy.
Many prisoners do not eat the ramen. They store it.
The more ramen boxes you have, the richer you are.
All transactions are done using ramen boxes – cleaning, massage, postcard making, etc etc.
What happens if prisons ban ramen?
Again, trade and economy finds a way.
Ramen has not always been the currency. Prisoners used to treat cigarettes as currency.
Some time ago, tobacco and cigarettes were banned in most US prisons.
Cigarettes never vanished from prisons. But now that they were legally banned, they couldn’t be used openly.
This is when most prison economies switched to ramen.
Across the world, prisoners use different items as currency. Packaged fish, coffee, and spices – some prisons still use cigarettes.
Whenever an item is banned, a new item becomes the currency.
A currency needs to have a few properties: should be accepted by others in the economy, should be easy to carry and store, must be in relatively short supply, uniform, and a few other traits.
Any item that has these qualities can become currency.
Lessons
The prison economy and its currency have good lessons for us.
It helps us understand how real currencies work.
It practically explains why the US dollar is the currency of the world.
Many countries’ currencies are linked to the US dollar.
Even when two countries have to trade with each other (without the involvement of the US), they prefer to do so using the US dollar.
Since the mid-1900s, the US dollar proved to be a stable currency that was universally accepted.
Just like how prisoners rely on ramen to help them trade with each other, the US dollar helps the global economy function to a large extent.
This is why people keep a close eye on the exchange rates.
It is also why we in India are affected by changes in the INR-USD exchange rate.
Right now, 1 USD costs about Rs 84.
If the US dollar becomes more expensive, we have to pay a higher price for 1 USD.
It means our import bills go up. We have to pay more Rupees to buy and import anything.
But it also means that Indian items are cheaper for others to buy – they have to spend less US dollars to get more Rupees.
So export industries stand to gain from it.
Entire industries are linked to this.
One example: IT industry.
Our IT industry provides IT services to many countries. If the USD-INR exchange rate goes up (let’s say to Rs 90 per 1 USD), Indian IT services will seem cheaper to the US clients.
So those industries gain.
But Indian industries that import raw materials like minerals have to spend more money buying raw materials.
The opposite happens when the exchange rate falls.
The images above were generated using AI tools.
Quick Takes
+The central government has changed the LTCG tax rules for real estate. Owners now have 2 options: they can pay 12.5% without indexation or 20% with indexation benefit.
+UPI transactions rose 36% year-on-year to Rs 60 lakh cr in the April-June quarter (vs 44 lakh cr previous year).
+India’s automobile retail sales rose 13.84% year-on-year in July. 2-wheeler sales rose 17%, 3-wheelers rose 13%: FADA.
+The upper limit for UPI payments has been increased from Rs 1 lakh to Rs 5 lakh for tax payments: RBI.
+RBI kept the interest rate unchanged after a 3-day policy meeting. It also raised the inflation forecast from 3.8% to 4.4% for the July-Sept quarter.
+Amazon India has set up 4 hubs in Maharashtra, Haryana, Telangana and West Bengal to deliver urgent relief material under its disaster management initiative.
+The total value of bank loans in India rose 13.70% year-on-year in July: RBI.
6-Day-Course
Theme of the week: interest rates
We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper!
Question 1:
Banks borrow money from the RBI at an interest rate, that is known as ________________.
-Central interest rate
-Fixed rate
-Repo rate
Question 2:
All commercial banks in the country decides their interest rates of deposits and loans for their customers based on the repo rate.
-True
-False
Question 3:
If the inflation is too high in a country, the central bank will ____________ the interest rate.
-Decrease
-Increase
-Not change
Question 4:
If a person has a high CIBIL score, he/she will get a _____________ interest rate on a loan than someone who has a poor score.
-Higher
-Lower
-Same
Question 5:
After a central bank reduces the interest rate, it boosts the economic activity in that country. This can also lead to a situation where there is high demand for goods and services, and ultimately causing inflation.
-True
-False
Answers:
Q1: Repo rate
Q2: True
Q3: Increase
Q4: Lower
Q5: True
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest