The medium of exchange in prison, from tobacco to dots

Richard Davies, From pecan pralines to ‘dots’ as currency: how the prison economy works, The Guardian, August 30, 2019.

Though barter does happen in prison, it has problems:

The problem with barter is that it can be hard to find a swap that works. Often the person who wants what you are offering will not own the thing you want. Economists have called the rare situation in which a swap will work out the “double coincidence of wants”, ever since William Stanley Jevons explained the problems with barter, and how money solved them, in his 1875 book Money and the Mechanism of Exchange. Jevons outlined four separate roles that money can play. First, money is a medium of exchange, something that everyone accepts and that “lubricates the action of exchange”. Second, it is a “measure” – the way that prices are set out today. Third, it is a “standard” by which future prices may be set. Finally, it is a way to “store” value – it can transport economic value over distances or through time.

Because lots of things have the properties Jevons set out, lots of things can become a circulating currency. When a currency emerges in this unofficial way, it often has particular physical attributes that make it suitable. Above all, it must be an object that can change hands hundreds of times without losing value. Consumer goods – clothes, shoes, books – would be no good as currency since once they are bought they become second-hand and their price drops. Commodities – salt, sugar or grain – are much better currencies: second-hand salt is as good as new.

Furthermore, a commodity tends to make a good currency if it is “divisible” – easily chopped up and used in smaller trades. Another key criterion is durability. Food commodities that rot or spoil would make a poor currency. And finally, ease and cost of transport matters. Cotton, which is divisible and durable, may seem like a good informal currency, but it is so light that it lacks value in small quantities: any meaningful trade would require transporting huge sacks of it.

Prisons have a rich tradition of inventing informal currencies. The most obvious prison currency – always saleable and easily divisible – is tobacco. For a century, underground trading in Angola ran on it. But in 2015 smoking was banned, and tobacco and cigarettes became contraband. Around the same time, an aggressive new drug called mojo – a type of synthetic cannabis – began to infiltrate the prison, and many men became hooked. The underground economy was rocked. Its currency was now illegal, yet there was huge demand for this new drug. The foundations of the prison economy had shifted: what many men wanted changed, as did the way they could pay for it.

And then came dots:

The new “dot” payment system is the latest in the ever-evolving system of prison currencies. This new form of money started with a technological innovation. It was an idea that Blockbuster video came up with in the mid-1990s to replace the old, inefficient system of paper gift certificates: its first store card. Plastic and shaped like a credit card, it could be loaded with dollars. Unlike a paper gift certificate, it was durable, allowing parents and relatives to make periodic uploads as part of an allowance. The card formed a so-called “closed loop” between the person loading the credit, the company providing the goods and the person consuming them. Other stores quickly followed suit. By the late 1990s, most retailers had adopted some form of gift-credit system using plastic cards.

Financial firms spotted an opportunity, and soon offered their own cards. Money still had to be pre-loaded on to these cards, but the system was now an “open loop”. The cards were not restricted to a specific store – the cardholder could spend the money anywhere, or even withdraw it as cash. The idea was that the cards would be used by young adults – parents loading college kids’ cards with a monthly allowance – or as a modern alternative to traveller’s cheques. [...]

The name of the prisoners’ new currency comes from the popular Green Dot brand of these cards, which carry the Visa or Mastercard logo and can be used to make purchases wherever regular credit and debit cards are accepted. Some users have found ways to set up an account for the card without using their true identification details. They then buy a second card, this one a single-use scratch card called a MoneyPak, which is used to load the debit card with credit of anywhere between $20 and $500. Both cards can be bought pretty much anywhere: at Walmart, at CVS or any other pharmacy. Scratching away the back of a MoneyPak reveals a 14-digit number. This number, the “dots”, is the vital link, carrying up to $500 of buying power. The user goes online, logs in to their account and enters the number, and the credit appears, instantly, on their debit card.

The person buying the Green Dot card can pay in cash, as can the person buying a $500 MoneyPak, so there is no trace of who owns them. The beneficiary of the credit does not need to see the MoneyPak itself – all they need are the numbers. Texting someone the 14-digit “dots” using a contraband phone, sending them a photo or letter with the numbers, or simply communicating the numbers over a telephone call will do. The dots are a currency close to cash: an instant, simple and safe transfer of value over long distance.

To make a large cash payment, a prisoner asks a friend on the outside to buy a MoneyPak and to pass on the dots once they have done so. These 14 digits can then be exchanged with a guard or another prisoner for something in the prison, including drugs. By exchanging dots instead of cash, the prisoners keep their hands clean

The lesson:

Louisiana’s prisons have parallel economies. There is the illicit drug economy that runs on its untraceable dot currency, and alongside it a more innocent marketplace where basic necessities are mediated with some agreed item – currently coffee – acting as a currency. Trades in both economies work because of the most basic law of prison economics – that a prison is a place defined by unsatisfied needs, tastes and demands. Both economies are self-built, organic and highly innovative. Both show that a currency, the provision of which can seem like the ultimate role of the state in an economy, can be established completely informally. Prisons show that the human urge to trade and exchange is impossible to repress, and that solutions to future challenges are as likely to come from informal markets as formal ones.

H/t Tyler Cowen.