From: Jack T. Bahl

Subject: having trouble finding the flaw

Professor Block,

I received the following from a friend and am having trouble seeing the flaw in the logic that I know must exist:

It is a slow day in the small Saskatchewan town of Pumphandle, and streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit. A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night. As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op. The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her “services” on credit. The hooker rushes to the hotel and pays off her room bill with the hotel owner. The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything. At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves. No one produced anything. No one earned anything. However the whole town is now out of debt and looks to the future with optimism. And that, ladies and gentlemen, is how a Stimulus package works.

I’ve followed you on LRC for years and admire your economic knowledge and your efforts on behalf of liberty.  Can you give me a hint or point me in the right direction?

Kindest regards,

Jack Bahl

Canton, Ohio

Dear Jack: I’ve asked Bill Barnett, my friend and mentor in Austrian macroeconomics and monetary theory, to respond to this question of yours. Here is his answer:

From: William Barnett <[email protected]>

Subject: Re: FW: having trouble finding the flaw

It has nothing to do with the tourist and the $100 bill.  Ceteris paribus, everyone in town has an asset worth $100 in the form of a note owed to each by someone, and everyone also has a liability of $100 note owed to someone else.  So each person’s net is $0.  The same result would occur if someone in town said let’s have a marshmallow roast, and when the fire got going everyone threw the notes they held into the fire.  Everyone would see their $100 asset destroyed, but they would also see the $100 note they owed destroyed.  And, they could all enjoy the marshmallow roast.

The Best of Walter E. Block