This has probably been on SD before but I’m sure there are people who have never seen it and may find it interesting.
Can someone explain how it works? Why has everyone’s debt been cleaned up, and how does everyone win?
A rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room and puts a 100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.
The hotel owner takes the banknote in a hurry and rushes to his meat supplier to whom he owes 100.
The butcher takes the money and races to his supplier to pay his debt.
The wholesaler rushes to the farmer to pay 100 for pigs he purchased some time ago.
The farmer triumphantly gives the 100 note to a local prostitute who gave him her services on credit.
The prostitute goes quickly to the hotel, as she was owing the hotel for her hourly room use to entertain clients.
At that moment, the rich Russian is coming down to reception. He informs the hotel owner that the proposed room is unsatisfactory. He takes back his 100 note and departs.
There was no profit or income. But everyone no longer has any debt and the small townspeople look optimistically towards their future.
The Three Stooges used a smaller version of this in one of their skits. One of them somehow acquires some money, exactly half what he owes one of the other stooges. They then pass the money around among themselves, two full circuits, with each hand-off discharging half the original debt that each owes the next. At the end, they are all paid off and the one who got the money in the first place still has it.
If any of them know it, then A can say “hey look, if I pay myself I dollar, I cancel a dollar of your debts too ! Consider it done !”
In the OP’s situation, the prostitute could have simply bartered … one service for another. The money wasn’t ever needed, because it was A swaps services with B.
But in the butcher-wholesaler-farmer ring … well it some coincidence that the value of each was $100 … thats not due to the Russian or its source being in a client of the hotel… Its too much of a coincidence… ordinarily someone has a bit of profit. But there is a profit - the farmer now has 100 pigs to raise… that will be a profit in the future.
The butcher expenses would be a different ledger than the room rental ledger, no? Something like restaurant v. rooms in a hotel? He’ll need to show the income from the diners as well as the income from the hooker. He’s busted.
And won’t they want to see that ADDITIONAL 100 that went back to the hotel guest - the 100 they already spent for the butcher, and thus puts the hotel at a minus 100?
There was no sale of services, so I can’t see why. Think of it as a credit charge instead, if that helps; there is no sale so the charge is cancelled at no cost to either party.
Let’s try this one more time.
If guest gave hotel 100, and then came back down and got the 100 back, it would be a wash and all is OK.
However, the hotel SPENT the 100. It is gone now. Credit and then debit. No money left in the till.
So, when he comes back and asks for his 100, they have to take the money from somewhere - meaning, from their other income. So the profit of 100 they would have made from the prostitute is now gone, as they have to pay the guest.
So in essence, they never got a PLUS from the prostitute’s payment, and are back to zip profit for the day. It is as if the prostitute never paid, as that 100 went bye bye before it was considered a 100 profit for the day’s work.
The hotel got paid twice - 100 from guest, and 100 from prostitute.
If they give the 100 back to the guest, theoretically, they should still have the 100 from the prostitute.
They don’t. They got screwed, and not in a fun way.
They never actually earn the $100 from the guest, that’s why it’s a credit charge. From the perspective of the guest that money is a loan that is credited to the hotel accounts, and even though it is not revenue for the hotel it can be used to pay bills, and just like with any other loan the creditor will want the money back eventually, which is exactly what happens.
They spent the money from the prostitute paying their bills. They started at -$100, not at $0. By the end of the day, they are up to $0, thanks to the prostitute paying them and enabling them to pay off their debt.
They started at zero - $100 payable (to the butcher) and $100 receivable (from the prostitute). After all is said and done, they end the day at zero - $0 payable and $0 receivable.
Yea, seems pretty straight-forward to me. Everyone in the town starts with 100$ in debt and a 100$ asset (the loans owed to them by other people), all accounts are balanced both before and after the transactions, and no one ends up any worse or better off because the Russian came to town, at least on paper. If people were willing to take transferred loans in lieu of payment, they could settle all accounts without the Russian’s cash.
Its basically a demonstration of the usefulness of liquidity. Everyone has a zero balance sheet, but because part of their assets aren’t tradable, they can’t pay off their loans. Its like if I don’t have any cash and owe you 100$, but do have 100$ worth of beef, I still have a problem if your not willing to take beef in payment. I still need a liquid assets to actually pay off my debts, even though on paper my assets balance my liabilities.
