I'm All Out of Cash... Do You Take Mooncakes?

American Public Radio's "Marketplace" is always an engaging listen. And today's show is no exception. In brief: the odd liquidity of the Chinese mooncake. Well, not the mooncake itself, but the promise to tender one on demand. As it turns out, vouchers for mooncakes have become like currency, with every bearer knowing they're cashable, and every buyer knowing they sell. And this phenomenon, I think, is sort of demonstrative.

I've always been awestruck by network effects. Something gains (or loses) its subjective appeal by virtue of its ubiquity–and by huge margins. It's not everyday you see that. Few of us would opt for Fords because they outsell Hyundais. Yes, we might consider it: maybe it's a proxy for something that does matter, like the availability of service or cost of parts. But the commonality itself is unimportant–and really, really unimportant if Hyundais are massively price competitive or stay on the road forever.

But network effects are basically the only thing mooncake notes have going for them. As the segment notes, few people actually eat mooncakes. They're like the Chinese fruitcake: it's a nice gesture, but an uneconomic one. After all, who wouldn't prefer something not consigned to spoiling in the fridge? The same is true with mooncakes. They aren't valueless, but they aren't hot sellers. They aren't without utility, but it's mainly sentimental, and something most people could do without.

But it's precisely that commodity that you'd think would spur the vouchers! We backed dollars in gold and mortgage-backed assets in houses because of their commodities. And we did so thinking that they'd never gain traction if we didn't. Who wants to store their wealth, the argument goes, in a vessel that might not hold it? Commodities are key, uh, aren't they?

But, of course, the dollar never cared. The dollar never rested on the gold that's tucked away at Fort Knox. The gold standard was scrapped, the dollar lost its backing, and the people never blinked. And I think this teaches an important lesson: if the dollar can rest on nothing–and nonetheless function fine–so too can notes for not-nothing. And however inutile and ridiculous that not-nothing is, that's not really the issue. The issue is people use it–a lot of people. And they use it precisely because they expect everyone else to too, and to continue to use it in the future. That's the network effect. That's the positive reinforcement occasioned by widespread use. And that, I think, is the key to the mooncake note. The mooncake's just a patsy; the note's what's all the rage.