I’m reminded of a once popular parable which illustrates the circulation of money in a small community.

(I’ve heard other versions set in Ireland in the days of the punt.)

The Story of the $100 Bill goes like this:

In a small, struggling town, 100% of the residents are in debt, and times are hard.

A rich tourist walks into the town’s one hotel, lays a crisp $100 bill on the counter, and goes upstairs to check out the rooms.

The hotel owner immediately takes the $100 bill and runs next door to pay his debt to the pig farmer.

The pig farmer takes the $100 and rushes down the street to pay the feed store owner for supplies.

The owner of the feed store takes the money and runs to pay his debt to the local prostitute.

She then rushes to the hotel and pays off her room bill to the hotel owner.

The hotel owner places the $100 bill back on the counter just as the tourist returns, saying the rooms are unsatisfactory, so he pockets his money, and leaves town.

The Outcome

No one earned anything, and the tourist left with his original money.
However, the entire town is now out of debt and looks to the future with a little more optimism.

Key Themes of the Story

Velocity of Money: The same banknote was used by a whole lot of people in a short time, clearing multiple debts.

Trust and Circulation: The story shows how money functions as a medium of exchange based on trust.

Local Economy: It highlights how keeping money local (“circulating” it) can benefit a small community.

There are several ways to think about this parable.

But they all must recognise that these transactions have made no change in any of the residents’ NET wealth.

At the beginning each resident has a $100 liability. Then each acquires an offsetting financial asset of $100. At the end, they all have neither. So the $100 note has simply acted as a clearing mechanism.

If you want to think of the town as a distinct economy, then the rich tourist has temporarily increased the town’s money stock/supply by $100.

In effect, he has made a short-term loan of a new $100 bill, increasing liquidity. The $100 provides the residents with a trusted medium of exchange that allows them to clear their offsetting debts.

Or if you broaden the economy to include the tourist, his short-term loan has provided liquidity through increasing the transactions velocity of money.

If the rich tourist hadn’t provided the loan, any of the residents could have accomplished the same result by borrowing $100 from someone else, assuming that someone else had $100 to lend.

No new goods and services were produced (they had been produced/provided already). But borrowing from the tourist may have cost less interest (zero percent) than otherwise.

A more legalistic analysis might be that the hotel owner only gets a zero percent loan by embezzling: using the tourist’s deposit without permission.

In answer to Timothy’s original question, let’s not add to employers’ existing burdens by making them sort of responsible for helping employees with pre-existing debts.

Maybe send them to debt counselling agencies, if they’re willing to admit to having unmanageable debts in the first place, which sadly many aren’t.

An afterthought..