There is a story being circulated on the Internet that seems like propaganda, because it is found mostly on libertarian or conservative websites, and because it mentions Texas. Here is the story followed by my take on it.It is a slow day in the East Texas town of Madisonville. It is raining, and the little town looks totally deserted. Times are tough, everybody is in debt and everybody lives on credit. On this particular day a rich tourist from the East is driving through town. He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to pay his debt to the pig farmer. The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel. The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has lately had to offer her "services" on credit. The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor, paying for the rooms that she had rented when she brought clients to that establishment. The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything.
At that moment the traveler from the East walks back down the stairs, after inspecting the rooms. He picks up the $100 bill and states that the rooms are not satisfactory...... Pockets the money and walks out the door and leaves town.
No one earned anything. However the whole town is now out of debt, and looks to the future with a lot of optimism.That, ladies and gentlemen, is how the United States Government is conducting business today.
If that doesn't scare the hell out of you, then I don't know what will.
Well, one thing is sure, after this, I will not be leaving any hundred dollar bill on any hotel desks in Texas!
This paradox actually does illustrate one point quite well, the usefulness of non gold based paper currency. Which I think is the opposite of what was intended, knowing that Ron Paul opposes any currency not backed by gold. In this example you may notice that everybody actually had zero net debt. A simple way to clear up their outstanding debts would be if the hotel manager had written an IOU "payable to bearer" for $100, handed it to the butcher and waited until it came back from the prostitute - then he could tear it up, and everybody starts over. No U.S. currency is even required, just a paper with some reputable signature. Although, having been to Texas I'm pretty sure that the equivalent in Canadian currency would not have worked at all!
One other thing, the statement "no one earned anything" is actually false, in that each person had provided some goods or services to earn $100, the only thing lacking was a "medium of exchange", similar to what happens when credit shrinks. In this case, the $100 bill did the trick. But another medium of exchange could have worked too.
This story is interesting to me because it actually resembles what used to go on in isolated fishing communities in north east Quebec during the winter when the supply boat could not get through. In the absence of a bank, or of any outside trade, people would simply write checks to each other, which would then be passed around almost like currency until the supply boat came back in the spring with its on board bank branch. Then the residents of the village who were holding the checks at the time could clear them.
How very convenient that all those debts were for exactly $100!
ReplyDeleteYou're right, though ... it all comes down a question of fungibility: it doesn't matter what the medium of exchange is, as long as everyone involved in the transactions agrees.
As a lesson in economics, the story has little or no value. The 'earning' of course occurred when those debts were incurred.
And, as history amply demonstrates, there is normally no such symmetry in who holds the debt. Those with more of the money at the beginning of a given period by and large end up with even more of it at the end of that period - those with money grant the loans, earn the interest while those without end up transferring progressive amounts of their wealth to the more wealthy.
And what, if anything, that tale might have to do with the fiscal policies of the U.S. government escapes me.