On the 29th of October I posted an article written by Stephen Mulholland that I found in the FinWeek about the Multiplier Effect. In a later edition some guy named Wilhelm Loock wrote back with a response to Stephen. I found it interesting and a nice follow on from that article.
Wilhelm writes:
“The 4 businessmen were caught in a relentless credit trap. Even if all 4 businessmen were sitting around a table together, with each 1 ready to recieve his R100 and pass it onto the next person he owed it to, that was simply not possible as none had the money to start with.”
He continues:
“A possible solution could have been in a reverse stream in kind. In other words, instead of paying R100 in cash, the woners offered one night if free accomodation to the baker, the baker R100 of bread to the butcher, the butcher R100 of meat to the garage; and the garage then elivering R100 of fuel to the boarding house free of charge.”
“However, an arrangment such as that might not have satisfied the needs of all parties. For example, the baker may have wanted fuel rather than one nights accomodation. The situation would, of course, not have arisen if each one paid cash initially. But that didnt happen and the mutual debt relationship continued until the salesman turned up.”
“His R100 was the trigger allowing every individual to pay his debt. Unknowingly, the salesman had acted as a moneylender or a banker. His R100 didnt appear but was repaid after it had served as an “advance” and the owner of the boarding house had used it (like an investment).”
“In fact, the role of the R100 as a loan is so obvious that the salesman could rightly have demanded free drinks during the 3 hour period he sat at the bar – as interest on his loan.”
Mulholland’s story offers to valuable lessons:
- The role of banks in the current business world
- Since the salesman offered the R100 before he had recieved the service it was in fact a saving that made the advance possible
