American Finance Association

Cigarettes as Currency
Author(s): Peter R. Senn
Source: The Journal of Finance, Vol. 6, No. 3 (Sep., 1951), pp. 329-332
Published by: Wiley for the American Finance Association
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 CIGARETTES AS CURRENCY

PETER R. SENN
The Pennsylvania State College

THE NOTION IS WIDESPREAD that for a long period of time and in a

large economic area cigarettes served as currency in Germany after
the recent war. Probably the most explicit statement of this belief,
which the writer finds erroneous, is the following: "In Britain it [th
cigarette] never, even at the height of the American occupation, went
so far as to replace the existing metal or paper coinages. In occupied
Europe it did."' While we examine here only the German case, it is
probable that situations similar in many respects existed elsewhere.
In order to understand the role played by cigarettes as money, it is
essential to examine the historical background of the problem. Up to
the fall of I946 American cigarettes were not considered either as a
general measure of value or as an instrument of exchange.2 The Reich-
mark (henceforth RM) was still reasonably stable, black market
trading was limited, and the worst period of Germany's economic
decline had not yet begun. Although the price of cigarettes was very
high, it was fixed by the general laws of supply and demand.3
Usually cigarettes were sold for Reichmarks, which at that time
could be exchanged by American and British soldiers for pounds or
dollars. Consequently, a soldier could sell part of his ration, have all
the money he desired for his non-military expenses, and still save his
whole paycheck. Large dollar and pound profits were made in many
cases.4
However, in August of I946 the Allies took steps to alter the situa-
tion. A partial conversion of cigarettes into a money medium came
I. "The Tobacco Standard," The Economist (April I2, I947), p. 526. In this short
charmingly written article, a very mischievous doctrine finds its most complete expression.
2. German and other foreign cigarettes also played a role here but it was negligible for
two reasons. One was that the American cigarettes have always been regarded as the
best and the second that the Americans got a much larger ration than any other
group of nationals.

3. The price in September, I946, was approximately $I5o a carton in Berlin; this
varied widely.
4. Before the conversion stopped, i.e., in less than two years after the beginning of
the occupation, Americans alone had sent to the United States through the single
medium of army facilities more than $200 million in excess of that which had been paid
to this personnel in marks by the army. Consider also that this may have been one
of the less important ways to get profits home. See Jack Bennet, "The German Cur-
rency Reform," Ann. Amer. Acad. of Pol. and Soc. Sci., Vol. 267 (January, 1950), p. 44.

329

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 330 The Journal of Finance

about when the Allied powers opened barter stores.5 These stores
quoted prices in barter units. Since cigarettes partially meet the quali-
fications of a commodity money, they came to be regarded to some
extent as a standard of value and at times even served as a medium of
exchange. It should be emphasized, however, that barter stores were
not sufficient to instal cigarettes in general use. There were only a few
of them and they were never very important because more advan-
tageous bargains could usually be made on the black market.
A more decisive reason for the increased employment of cigarettes
as money came in September, I946. In their efforts to stop the black
market trade and loss of exchange due to the activities of their own
nationals, the British and Americans decided to make illegal the con-
version of Reichsmarks into dollars or pounds.6 They also attempted
to prohibit almost all non-official financial transactions between Allies
and Germans-a move that decided the extent to which cigarettes
would play a monetary role until the currency reform, eighteen
months later.7
As long as conversion of RM into dollars was allowed, there was a
fairly direct conversion rate which enabled the Germans to compute
how many RM equalled a dollar from the rate of exchange given by
the army to the soldier. With the decision to suppress "free" conver-
sion came the worst depreciation. The Allied soldier could no longer
profit from his cigarette sales in terms of dollar or pound profits at
home. He was not at all disposed to change his salary into RM at what
he felt was a low rate of exchange. Because of this, he used his ration
of cigarettes (he also had people at home send more to him) directly
for purchases instead of selling them. He turned away from the use of
RM as often as he could because of the ever increasing depreciation
of that currency (due not only to the lack of convertibility but also to
such other factors as low production, too much money in circulation,
etc.). He made his purchases with cigarettes and still sent his whole
dollar salary home, but the former dollar profits were now much more
difficult to obtain.
Thus cigarettes were to some extent a medium of exchange and a
measure of value between Allied soldiers and German nationals for
5. Barter stores had been established as early as 1943, when at least one was oper-
ating at Bremen. There is no record of the use of cigarettes as money substitutes in this
case. On August i6, 1946, a barter shop allowing 95 barter units per carton of cigarettes
was opened in Berlin.
6. The Economist, op. cit. The author estimates the British loss at 6o million pounds
in all of Europe, probably a minimum guess.
7. It is interesting to note that the New York Herald Tribune, European Edition,
correctly anticipates the new use of cigarettes as money in its edition of September I5,
1946. The increased growth of the black market also came at exactly this time. See
Klopstock, "Monetary Reform in Western Germany," Journal of Political Economy,
LVII (August, 1949), p. 278.

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 Cigarettes as Currency 33I

about a year and a half. The currency conversion of I 948 and the new
economic outlook attendant upon it had the effect of eliminating, for
all practical purposes, any other money than the new Deutsch Mark.
Superficial observation is perhaps the cause of the widespread mis-
understanding concerning the use of cigaretes as money in the Ger-
man economy. It is important to remedy this confusion, whatever has
caused it, by explaining that cigarettes did not find a great employ-
ment as money among Germans. There is much evidence pointing to
this conclusion. Most important of this evidence is the fact that during
the whole period under discussion, from the fall of I946 to the sum-
mer of I 948; certain basic necessities such as food, rent, clothing, and
transportation were price controlled and in some cases rationed. Even
though one could not quite live on the rationed commodities, this con-
trol gave to the RM an undoubted monetary value.
Furthermore it is well known that a large number of exchanges in
Germany took place in the form of barter, either directly or by com-
pensation.8 It is difficult to know just how extensive this barter trade
was. Estimates vary but the order of magnitude was from one-third to
two-thirds of all business transactions.9 It is even more difficult to
know exactly how important cigarettes were in this trade. However,
we shall indicate below, in our discussion concerning the tobacco
numeraire and the nature of the market, further evidence to support
the conclusion that cigarettes could not have played a significant role.
Because of the widespread practice of barter, one should not con-
clude that cigarettes were the accounting unit. Surprising as it seems
on the surface, the legally fixed price, or something close to it, was
most often the basis for this "compensation trade."'0 Tobacco was
not a widely used numneraire in German business. In this German
experience, one sees that money has many functions and that pres-
sures forcing the abandonment of some of its advantages will not nec-
essarily cause rejection in all of its uses.
The reasons for the different degrees of the employment of money
in German markets as a measure of value and a medium of exchange
are at once complex and interesting. Many years of rigid controls had
accustomed the Germans to a high liquidity. A state of suppressed
8. F. Lutz in "The German Currency Reform and the Revival of the German
Economy," Economica, XVI (May, 1949), p. 122, described this practice of compen-
sation well. "Every firm has several specialists called 'compensators,' on its staff. If,
for example, cardboard for packing was needed, the compensator might be obliged
to barter the plant's own products for typewriters, the typewriters for shoes, and the
shoes for cardboard."
9. Lutz, ibid., states ". . . the German economy rapidly deteriorated Into a barter
economy... ." This is a bit exaggerated in my opinion. For a more realistic discussion,
see H. Mendershausen, "Prices, Money and the Distribution of Goods in Postwar
Germany," American Economic Review, XXXIX (June, 1949), pp. 646-72.
io. Mendershausen, ibid., has a full discussion of this point, especially pp. 655-57.

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332 The Journal of Finance

inflation existed and they were quite used to the idea of being able to
spend their money only on certain things. However, the moment signs
of inflation began to appear old memories rushed to the front. The
Germans' psychological outlook completely changed, and the idea of
any liquidity was abhorrent. But where controls existed, only a cer-
tain amount of money could be employed. In the uncontrolled section
of the economy, prices were very high.
The effect of this on the businessman was quite interesting. He
might in some cases sell on the black market at high prices. For those
who were able this perhaps would lead to large quick profits. But
almost certainly it would also lead to termination of his business. This
was in part because of public opinion, which strongly supported con-
trols, and in part because of the possibility of legal action. More
important, the businessman saw at once that even with a large mark
income he could not buy materials with which to continue production.
He soon learned that the only sure way to get materials and stay in
business was to exchange commodities for commodities.
We might conclude this discussion by adding that there clearly were
not enough cigarettes to fill a small portion of German currency needs
even when the low level of the domestic economy is taken into account.
For the cigarette to have displaced even a significant fraction of the
estimated ioo billion RM of cash and non-blocked bank deposits
would have required far more cigarettes at a higher price than could
ever have been available. Even if this were not the case, the cigarette is
not an ideal money-commodity. It lacks durability and does not have
the essential property of concentrating high value in small volume-to
mention two major objections. It is a convenient barter commodity
for small-scale transactions and was never used for more than this.
There is simply no evidence to indicate that tobacco ever played a
significant role in the German economy.
One of the main reasons for this false idea of widespread cigarette
use as money is that Allied soldiers and civilians in Germany indulged
in black market practices to a surprising extent. As a result, they felt,
quite mistakenly, that all Germans behaved as did those who bought
or traded their cigarettes."
In summary, one can say that while cigaretes did play a monetary
role in Germany, it was minor one, taking place only for a short period
of time and in a limited economic area, primarily that between Allied
nationals and a relatively small number of Germans. What use they
did have can be directly traced to Allied administrative decisions.
ii. For a fictionalized but reasonably accurate account of life among the occupiers
in postwar Germany, see Gay Boyle, The Smoking Mountain (New York: McGraw-
Hill Book Company, Inc., 1951).

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