We will continue our story of Rich Man and the Merchant. Since now you know who they are, please do not confine your self to thinking about the two characters only. I write these pieces, because I want to communicate the economic issues and concepts underlying. Rich Man and Merchant are just players in our game. Though very much factual players. I would like you to look at the broader issue, while understanding the concepts. Much of this Part and the rest are imaginary, only using the foundations built on the Part 1, to explain some economic concepts.
At the ending of Part 1, we saw how the Rich Man put much pressure on the Poor Merchant to reduce its debts. But, the Poor Merchant cannot give the discounts and forgive all or even most of the debts. After all he is under no obligation to do that. But Merchant understands one important matter that, if the Rich Man is not able to buy much, then Merchant will loose more than just his future business, he would also loose much of the money the Rich Man owes him. Therefore, the Merchant is ready for a compromise. Rich Man meanwhile is searching for a way out.
Rich Man finally strikes gold. He finally hits upon the idea, what if he could give the Merchant "I Owe You [IOU] notes" or "Promissory Notes" in return for the consumption, past and future. The advantage for the Rich Man is he would not have to bring up the money to pay the merchant in full. Technically, the Rich Man buys himself some time before he can make the payment to the Merchant. The advantage for the Merchant is that he can transfer IOU notes given to him by Rich Man, to others like Albert, Louis and other merchants and buy his needs. This frees all the blocked debts owed by the Rich Man, and Poor Merchant too has opportunity to be rich.
An agreement is reached. Whenever the Rich Man, buys the merchandise from Merchant and other merchants too, Rich Man writes out a Promissory Note for the difference he has to pay [remember the Rich Man also sells goods to others]. In the Promissory note he states that he will pay the bearer of the Promissory note certain sum of gold coins, which is equal to the difference he has to pay. This arrangement is prosperous and liked by everyone. Because none of the merchants have their capital and profits locked up. For example, if Albert gets a Promissory note for 100 gold coins, he does not have to wait for Rich Man to pay at the end of tenure; he can simply buy the goods from other merchants and pay them with this IOU note. Merchants, are happy because their trading turnover increases, increasing their wealth, personal consumption and happiness.
But then, good times never last for ever. The problem in this arrangement is: after sometime, the consumption of the Rich Man grows so much [taking a particular rate of growth in his standard of living], that he has to finally start a printing press to print the IOU notes. This goes on for some time. May be a couple of years. Finally, slowly but surely, it dawns upon the Merchants of the village, that If all the merchants went one day together with the Promissory notes, Rich Man would not be able to pay for them in gold as promised in the note. The Rich Man simply did not have that much of gold.
The slow realization of the value of Promissory notes sinks in amongst the Merchant community. Slowly, but surely, Merchants one by one, start to attach more risk if the merchandise is paid for by the Rich Man's Promissory notes. In other words, the Promissory notes loose their value in the eyes of these men. But inspite of their caution, the Merchants cannot stop trading with the Rich Man; after all he is the biggest consumer in their village. And more trading is also bringing these Merchants more wealth that which they are able to enjoy.
The summer does not last for ever. The Rich Man cannot buy for ever. Other merchants cannot also stop selling to Rich Man, because if they do most of their families will be idle, as there is no one other than Rich Man to buy such huge quantities. The cycle has to come to an end. Let us assume, the entire market now realizes the Rich Man's IOU is lesser worth than stated. Trades people stop taking the Promissory notes. They know if they exchange the merchandise for the Notes then they may not be able to exchange the notes for their requirement. That is, they know the value of the Notes will become lesser and lesser in future. So why take it. But, what about them who are holding large amounts of gold coins in the form of Promissory notes, like our Poor Merchant [china man]. The large holders initially hold off against selling the notes for lesser value, as it will bring down the value of their total worth! Merchants like our Poor Merchant cannot even sell part of it, because if the market comes to know they are selling, the panic will start and which in turn will lessen their worth. They are kind of trapped. Their greatest benefit is in helping the Rich Man stabilize and not go down. By helping the Rich Man, again by selling products to him, in exchange of Notes that are loosing value every day.
[You may say, we are at this present juncture in the world economy. It must be remembered, this is Part is fake, but the underlying economic assumptions and concepts are in working order.]
From here on the story becomes complex, as every section of the society in the village is affected. The possibilities of what can happen are also enormous.
Falkor
First published http://surff.blogspot.com/2005/11/rich-mans-story-part-2.html
Rich Man's Story: http://surff.blogspot.com/2005_11_20_archive.html
At the ending of Part 1, we saw how the Rich Man put much pressure on the Poor Merchant to reduce its debts. But, the Poor Merchant cannot give the discounts and forgive all or even most of the debts. After all he is under no obligation to do that. But Merchant understands one important matter that, if the Rich Man is not able to buy much, then Merchant will loose more than just his future business, he would also loose much of the money the Rich Man owes him. Therefore, the Merchant is ready for a compromise. Rich Man meanwhile is searching for a way out.
Rich Man finally strikes gold. He finally hits upon the idea, what if he could give the Merchant "I Owe You [IOU] notes" or "Promissory Notes" in return for the consumption, past and future. The advantage for the Rich Man is he would not have to bring up the money to pay the merchant in full. Technically, the Rich Man buys himself some time before he can make the payment to the Merchant. The advantage for the Merchant is that he can transfer IOU notes given to him by Rich Man, to others like Albert, Louis and other merchants and buy his needs. This frees all the blocked debts owed by the Rich Man, and Poor Merchant too has opportunity to be rich.
An agreement is reached. Whenever the Rich Man, buys the merchandise from Merchant and other merchants too, Rich Man writes out a Promissory Note for the difference he has to pay [remember the Rich Man also sells goods to others]. In the Promissory note he states that he will pay the bearer of the Promissory note certain sum of gold coins, which is equal to the difference he has to pay. This arrangement is prosperous and liked by everyone. Because none of the merchants have their capital and profits locked up. For example, if Albert gets a Promissory note for 100 gold coins, he does not have to wait for Rich Man to pay at the end of tenure; he can simply buy the goods from other merchants and pay them with this IOU note. Merchants, are happy because their trading turnover increases, increasing their wealth, personal consumption and happiness.
But then, good times never last for ever. The problem in this arrangement is: after sometime, the consumption of the Rich Man grows so much [taking a particular rate of growth in his standard of living], that he has to finally start a printing press to print the IOU notes. This goes on for some time. May be a couple of years. Finally, slowly but surely, it dawns upon the Merchants of the village, that If all the merchants went one day together with the Promissory notes, Rich Man would not be able to pay for them in gold as promised in the note. The Rich Man simply did not have that much of gold.
The slow realization of the value of Promissory notes sinks in amongst the Merchant community. Slowly, but surely, Merchants one by one, start to attach more risk if the merchandise is paid for by the Rich Man's Promissory notes. In other words, the Promissory notes loose their value in the eyes of these men. But inspite of their caution, the Merchants cannot stop trading with the Rich Man; after all he is the biggest consumer in their village. And more trading is also bringing these Merchants more wealth that which they are able to enjoy.
The summer does not last for ever. The Rich Man cannot buy for ever. Other merchants cannot also stop selling to Rich Man, because if they do most of their families will be idle, as there is no one other than Rich Man to buy such huge quantities. The cycle has to come to an end. Let us assume, the entire market now realizes the Rich Man's IOU is lesser worth than stated. Trades people stop taking the Promissory notes. They know if they exchange the merchandise for the Notes then they may not be able to exchange the notes for their requirement. That is, they know the value of the Notes will become lesser and lesser in future. So why take it. But, what about them who are holding large amounts of gold coins in the form of Promissory notes, like our Poor Merchant [china man]. The large holders initially hold off against selling the notes for lesser value, as it will bring down the value of their total worth! Merchants like our Poor Merchant cannot even sell part of it, because if the market comes to know they are selling, the panic will start and which in turn will lessen their worth. They are kind of trapped. Their greatest benefit is in helping the Rich Man stabilize and not go down. By helping the Rich Man, again by selling products to him, in exchange of Notes that are loosing value every day.
[You may say, we are at this present juncture in the world economy. It must be remembered, this is Part is fake, but the underlying economic assumptions and concepts are in working order.]
From here on the story becomes complex, as every section of the society in the village is affected. The possibilities of what can happen are also enormous.
Falkor
First published http://surff.blogspot.com/2005/11/rich-mans-story-part-2.html
Rich Man's Story: http://surff.blogspot.com/2005_11_20_archive.html
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