You've probably read the story about how a tourist solves the debt problem of a small town in Kenya just by placing a $100 note on a hotel's reception counter and taking it back a while later. It may have baffled you, since even though no one earns anything, everyone's debt is paid for. Well, there is no trick, so let's just demystify the puzzling story once and for all.
The story goes like this:
One day a tourist comes to the only hotel in a debt ridden town in Kenya. He lays a 100 dollar note on the table & goes to inspect the rooms.
Hotel owner takes the note & rushes to pay his debt to the butcher. Butcher runs to pay the Pig Farmer. Pig Farmer runs to pay the Feed Supplier. Supplier runs to pay the Prostitute, who in these hard times gave her services on credit. Prostitute then runs to pay off her debt to the Hotel Owner for the rooms she rented for her clients.
Hotel Owner then lays the 100 dollar note back on the counter. The tourist comes down, takes his money & leaves as he did not like the rooms.
No one earned anything. But the town is now without debt & looks to the future with a lot of optimism.
And that is how the world is doing business today!
Now, even though it sounds very intriguing at the first glance, there's nothing fishy going on here.
Let me explain: actually, the town was not in debt in the first place! Since the debt was circular, the $100 note just traveled and completed the circle.
For example: if they agree to transfer the debt to the next person (instead of actually paying), it solves the problem the same way, $100 note is not needed. Of course, in this case the circulation goes the opposite way (since debt is a negative concept).
So, without the tourist and his $100, the event unfolds like this:
- The Hotel Owner asks the Prostitute for $100.
- The Prostitute says she'll manage and then asks the Supplier to give $100 to the Hotel Owner, instead of paying her.
- The Supplier asks the Pig Farmer to give $100 to the Hotel Owner, instead of paying him.
- Similarly, the Pig Farmer asks the Butcher to pay the $100 to the Hotel Owner on his behalf, instead of paying him.
- Now, the Hotel Owner already owes $100 to the butcher. So the Butcher just tells the Hotel owner that he's cancelling out his payment of $100 and asks him to accept that as a payment from the Pig Farmer.
- Obviously, the Pig Farmer doesn't owe anything to the Hotel owner, so the Hotel Owner asks the Pig Farmer what the $100 is for (remember, there's no actual dollar note involved here).
- The Pig Farmer says it's the payment from the feed Supplier.
- The same way, the Feed Supplier says it's the Payment from the Prostitute. So the hotel owner accepts the cancellation offer and clears the transaction history with the butcher and the prostitute.
- Now that the Prostitute's debt to the Hotel Owner is cancelled out, the circle is complete.
- So the town is now without debt and everyone is happy (except probably the feed supplied, but I'm coming to that a little later).
As you can see, $100 note is not necessary at all. Without the tourist and his $100 note, this simply is a classic supply-chain of Barter Economic System, something that existed even thousands of years ago. The introduction of currency to the system simply made it easy and facilitated some additional benefits. For example, if there was a partial payment (something less than $100) somewhere in the chain, it would have been difficult to solve without currency.
So, there is no hidden catch is this popular story & thus you can say: business is usual 🙂
Of course, Modern Economic System is far more complex, but that complexity has nothing to do with this story.
Now, let's come back to the feed supplied. Instead of the tourist's $100 traveling from hand to hand, if the debt travels like I showed above, the entire town would probably know that the supplier went to the prostitute, LOL. So if anything, introducing the tourist and his $100 note in the town (even if temporarily), solves the privacy issue of the feed Supplier. It doesn't do anything else 😀