I published a quote from Timothy
Byron McKeeby says:I’m reminded of a once popular parable which illustrates the circulation of money in a small community.
Sometimes referred to as “The Parable of the $100 Bill,” a story that explains how a single note can appear to clear substantial debts within a town.
(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..
While I agree with Bryn that for every debt there is an asset, the values of each may not be the same, at least to this retired bean counter.
If I was the butcher in that parable, for example, I might not always expect to recover 100 cents in the dollar from the embezzling hotel owner.
And the value of Venezuelan debt, I think, was only approaching 40 cents in the dollar after the recent abduction.
Meanwhile, Warren Buffett’s views on US T-bills seem to have fluctuated over the years. He described them most recently as “the safest investment there is”. And I also think Berkshire Hathaway now hold more T-bills than the US Federal Reserve holds.
Yet some years ago I can remember hearing (which means it may not be true) that Buffett “said” he would never pay $110 to receive $100 in US T-bills because it violates the fundamental principle of buying assets for less than their intrinsic value (ie not paying more than face value for a guaranteed return of face value). T-bills were also said to be “not a good asset” long-term.
But times (and liquidity preferences) change.
Shakespeare’s (or rather Polonius’s) “neither a borrower nor a lender be” may no longer work for most of us, including pension funds, but I like to think the intrinsic value of global assets (however acquired) exceeds the varying values of outstanding debts, by some margin.
I could be wrong, but, wouldn’t the hotel owner would be guilty of misappropriation of funds – the illegal or unauthorized use of someone else’s money or assets for personal gain or other improper purposes. It’s a serious crime, similar to theft or embezzlement.
No different than stealing the money and putting it back before the theft is discovered.
The analysis of the parable above did identify that possibility, BJ:
“… 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.”