Friday, August 28, 2009

Answer: Who Paid for the Beers?

Most people reason that, since the man is getting something for a net cost of nothing, it is the bars that are being cheated out of beer. Another answer shifts the cost onto the banks or exchange companies. But the banks are not offering these exchange rates as an act of charity to border-town alcoholics. (Very little that banks do is an act of charity, actually.) They presumably have a reason for offering these rates. The best answer to the puzzle is that the man earns his beers by returning currency to its issuing nation.
Look at it this way. An alien walks into a bar and tries to buy a drink with an Alpha Centauri zlorqat. “Whoa, buddy!” says the bartender. “Pay up in American money or vamoose!” The bartender has a point. He will not be able to spend an Alpha Centauri zlorqat on earth. It is not general knowledge on this planet that there is intelligent life on Alpha Centauri, much less that they have an economic system based on a currency answering the description of what the alien has offered. The “culture of belief” in the value of the Alpha Centaurian zlorqat does not reach this far. To spend a zlorqat, the bartender would either have to travel to Alpha Centauri or find an exchange company or currency trader willing to make the trip for him. Both alternatives will be expensive, if not impossible.
The value of the U.S. dollar also diminishes beyond the U.S. border. It does not diminish much, given that it is a benchmark currency of a global economy. Still, it is sometimes difficult to find somebody willing to accept a U.S. dollar outside the U.S. There are situations where a U.S. dollar will not be accepted at all. This diminished spendability is reflected in the lower rate offered for U.S. dollars outside of the country. The Canadian bartender in the story is effectively saying, “We know this U.S. dollar is worth as much as a Canadian dollar, but it’s occasionally a hassle to spend it here. We’ll pay you ten cents to take it back to the U.S., where it will regain its full value.” This is how the man earns his beers.
Conceptually, the situation isn't so odd. Every country overvalues its own currency, compared to how it’s valued elsewhere. This near-universal fact is simply more apparent here because (a) the U.S. and Canada both happen to call their currency dollars and (b) the two are worth approximately the same. The puzzle is unrealistic, however, in that order towns with open borders rarely observe the official exchange rates. In a community where both U.S. and Canadian dollars commonly circulate, and where you can walk across the border without passing customs, it’s likely that everyone would value the two currencies at parity.

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