r100 from hand-to-hand

Finweek English Edition - - Opinions Disguised As Facts - WiL­heLM P. Loock

YOUR “AGE­ING cor­re­spon­dent” doesn’t miss any­thing – he’s too sharp for that. I be­lieve Stephen Mul­hol­land ( Fin­week, 23 Oc­to­ber) didn’t want to spoil read­ers’ puz­zling out the so­lu­tion by pro­vid­ing it him­self.

So let me try. The four busi­ness­men were caught in a re­lent­less credit trap. Even if all four were sit­ting around a ta­ble to­gether, with each one ready to re­ceive his R100 and then pass it on to the next per­son he owed it to, that was sim­ply not pos­si­ble as none had the money to start with.

A pos­si­ble so­lu­tion could have been a re­verse stream in kind. In other words, in­stead of pay­ing R100 cash, the own­ers of­fered one night of free ac­com­mo­da­tion (or liquor) to the baker; the baker R100 of bread to the butcher; the butcher, R100 of meat to the garage; and the garage then de­liv­er­ing R100 of fuel to the board­ing house, free of charge.

How­ever, an ar­range­ment such as that might not have sat­is­fied the par­ties’ needs. For ex­am­ple, the baker may have wanted fuel rather a night’s free ac­com­mo­da­tion. The sit­u­a­tion would, of course, not have arisen if each one had paid cash orig­i­nally.

But that didn’t 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 banker. His R100 didn’t dis­ap­pear 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 three-hour pe­riod he sat in the bar – as in­ter­est on his loan. The SA Rev­enue Ser­vice would no doubt ar­gue the point about it be­ing non-mar­ket-re­lated in­ter­est and launch an in­quiry.

Mul­hol­land’s story of­fers two valu­able lessons: the es­sen­tial role of banks (de­spite their faults and, of course, at a price) in the cur­rent busi­ness world and, sec­ond, since the sales­man of­fered the R100 be­fore he’d re­ceived the ser­vice it was in fact a sav­ing that made the ad­vance pos­si­ble.

Fi­nally: note that the mul­ti­plier ef­fect re­ally played a ma­jor role here, in that the sales­man’s + R100 was re­spon­si­ble for the -R400 (-R100 x 4) be­ing con­verted to a fi­nal value of zero.

Apolo­gies for spoil­ing a re­ally good story with facts.

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