Money That Goes Up In Smoke  Share

Since being discovered by Christopher Columbus in 1492, tobacco has become a significant feature of our society. While its detrimental effects on health are now well-known, it was initially regarded as a medicine before becoming a symbol of freedom and a life style represented, for example, by the famous Marlboro cowboy. What many people don’t know is that tobacco was used as a means of payment at various times in history ….

Black slaves on a tobacco plantation in Virginia in the 16th century. © University of North Carolina.

Black slaves on a tobacco plantation in Virginia in the 16th century.
© University of North Carolina.

In the 17th and 18th centuries there was a shortage of metal currency in most of the “ New World” colonies, which were very dependent on Europe for their supplies. Barter was therefore the main system of trade between colonists. Very soon, certain goods became the normal means of payment: depending on the region, payments were generally made in flour, maize, cattle or …. tobacco. Cultivated from the end of the 16th century, tobacco was in fact the main crop of southern colonies such as Virginia and Maryland. In 1642, it actually became legal currency in Virginia, where it could be used to pay rents or fines, or to pay for goods imported from Europe. The tobacco was stored in large warehouses, and from 1713 onwards tobacco notes appeared : paper money issued by these warehouses and backed by the tobacco held in store. This system, which was also adopted by Maryland in 1747, persisted for more than 150 years.

Tobacco note dated 1771. © Colonial Williamsburg Foundation.

Tobacco note dated 1771.
© Colonial Williamsburg Foundation.

There are two main drawbacks to the use of agricultural products (such as tobacco) as means of payment: they have a limited life span and their quality is very variable. To overcome the first drawback, the legal validity of tobacco notes was limited to 18 months. In the 17th century, the second point was more of a problem because debts were systematically paid with the poorest quality tobacco. Once warehouses were set up, an inspection system was instituted and the inspectors had exclusive authority to issue tobacco notes. Some inspectors were more conscientious than others; consequently, the price of the tobacco and the value of the notes could vary according to the inspector’s reputation.
While tobacco was most widely used as currency in Virginia and Maryland, it also performed that function in other American colonies and on some of the Caribbean islands, in Brazil and even in Oceania.

12 shilling note dated 1776 from New Jersey, with a tobacco leaf depicted on the back. © Museum van de Nationale Bank.

12 shilling note dated 1776 from New Jersey, with a tobacco leaf depicted on the back.
© National Bank Museum.

During the 19th century this use ended with the advent of official paper money, but it reappeared during the Second World War. As the allied soldiers received cigarettes in their combat rations, the great majority of them had become nicotine-dependent. In a famous article, R.A. Radford, an economics student at Cambridge University who went off to fight and was captured by the Germans in 1943, recounted the emergence of a market economy based on cigarettes in his prisoner-of-war camp in Bavaria. He describes how cigarettes progressed from being just a commodity and gained the status of currency, and how prices reacted to various external shocks. For instance, if food supplies were delayed or if inferior quality cigarettes came in, that could drive up prices. Since the cigarettes were regularly destroyed when they were smoked, the stock of currency remained relatively stable, preventing inflation. Even non-smokers accepted this form of payment because they were sure that they could subsequently find someone with whom to exchange their cigarettes.
However, the use of tobacco as a means of payment in the 20th century is not confined to this specific case. In the months and years that followed the end of the war, a number of European economies operated on a barter system to varying degrees. In many cases, cigarettes were the medium used for transactions. That was the case in Austria, Italy and the Netherlands, but the prime example is Germany where barter accounted for between a third and two-thirds of transactions from 1946 to 1948.
Between 1936 and 1946 the money supply had increased tenfold in Germany, whereas output had halved. In normal times that would have been bound to trigger rapid inflation, but that was prevented by price controls and rationing. However, since the official rations were inadequate, a black market developed where goods could fetch much more than the official prices. For example, the prices of butter, sugar, coffee and flour were up to 100 times higher on the black market. Large sections of the population regarded this trade as shameful, and most people preferred to exchange their goods rather than pay these exorbitant prices. The rejection of the Reichsmark was therefore not due to its depreciation but to its declining usefulness as a means of exchange.

Advertisement for a tobacco brand during the Second World War.  © Nationaal tabaksmuseum Wervik

Advertisement for a tobacco brand during the Second World War.
© Nationaal tabaksmuseum Wervik

Owing to the inherent limitations of the barter system (particularly the need for a double coincidence of wants), certain goods rapidly gained acceptance as new means of payment, including cigarettes which seem to have played a dominant role in this new economy. Cigarettes did in fact have certain characteristics that favoured their monetary role: strong demand from smokers guaranteed their acceptability, and they were convenient for both small and large purchases, the latter being paid for in whole packs. A cigarette could therefore be traded a hundred times before eventually being smoked. The main suppliers were American soldiers who received cigarettes in their rations, but also asked their friends and families to send them. In 1947, more than 95% of parcels sent from the United States contained cigarettes. If they were sold or traded on the black market, it was possible to make a huge profit. For instance, in Berlin it was possible to pay for the services of an orchestra for an entire evening with four packs of cigarettes bought for less than a dollar. Cigarettes were so valuable that some entrepreneurs had the idea of collecting the butts discarded by people leaving cinemas and American cafes, and using them to make new cigarettes with the residual tobacco.
Finally, a last example of the use of cigarettes as a means of payment comes from Romania in the 1980s, where the Kent brand was used for all sorts of transactions. Kents were the only cigarettes accepted, and could cost as much as $ 14 a pack on the black market, making these cigarettes far too expensive for the population to smoke. They were therefore traded until they were too badly damaged, and many of them were never smoked. Nonetheless, their possession was a sign of wealth in that country, where poverty was omnipresent.

Ludovic Bequet
Museum guide

Bibliography

Allen, L., The Encyclopedia of Money, ABC-CLIO, 2009.
Bignon, V., Cigarette Money and Black-Market Prices during the 1948 German Miracle, EconomiX Working Papers, 2009.
Einzig, P., Primitive Money in Its Ethnological, Historical and Economic Aspects, Eyre & Spottiswoode, London, 1949.
Humel, D., Commodity Money and Government Money, consulted on 28 April 2015. (https://www.unc.edu/~salemi/Econ006/G_Smith_Chapter_on_Money.pdf)
Leary, M., If You Have Kent Cigarettes, All Romania Is Your Oyster, consulted on 04 May 2015. (http://articles.philly.com/1988-04-28/news/26251481_1_kents-romanian-economy-romanian-currency)
Markham, J.W., A Financial History of the United States Volume I, M.E. Sharpe, 2002.
Mendershausen, H., Prices, Money and the Distribution of Goods in Postwar Germany, in The American Economic Review, Vol. 39, No. 3, 1949.
Radford, R.A., The Economic Organisation of a P.O.W. Camp, in Economica, New Series, Vol. 12, No. 48, 1945.
Ruffner, K.C., The Black Market in Postwar Berlin – Colonel Miller and an Army Scandal, Prologue Magazine, Vol. 34, No.3, 2002.
Smith, B.D., Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas, in Journal of Political Economy, Vol. 93, No. 6, 1985.