From nol.net!news.sprintlink.net!howland.reston.ans.net!agate!news.ucdavis.edu!csus.edu!netcom.com!atanu Tue May 16 01:33:55 1995
From: firstname.lastname@example.org (Atanu Dey)
Subject: A puzzle. Who paid for the Englishman's Vacation?
Organization: the Center of the Known Universe
Date: Sat, 13 May 1995 18:25:30 GMT
author. I asked for his permission to cross-post it to my
favorite group. I hope you like it too.
[ Article crossposted from sci.econ ]
[ Author was Gustave Rabson ]
[ Posted on Thu, 11 May 1995 15:04:02 GMT ]
I have a puzzle for you. According to Maurice Levi in his book
"Economics Deciphered" it was a Ph.D. exam question in economics at
the University of Chicago. I guess I would never have gotten my
their answer is wrong. But more of that later. First let me present the
I will use Maurice Levi's wording verbatim:
"There once was an upright and very proper Englishman who
sland. The Englishman had returned to the island so many times that
been honored promptly.
"Since the Englishman's credit was so sound, the islanders were
totally happy to allow him to pay by check, with the certain
knowledge that they were good checks. Indeed, so well known and
trusted was the Englishman on this tiny island that the islanders
example, if the restaurateur wished to pay the grocer partly with a
check he had received in payment for a meal, the grocer was happy
to accept the check. The grocer was then able to buy gas with the
check, and the Englishman's checks circulated in this way around the
sland. Indeed, the checks were never returned to the Englishman's
London bank for collection.
"Who paid for the Englishman's holiday?"
Well, who did? Here is Maurice Levi's answer:
"Clearly, the Englishman did not pay, since the checks were
never returned to London. Then it was obviously the islanders, but
checks - since everyone can spend the checks and everyone will
accept them - it is not the last people holding the checks. O.K., then,
"The answer is that all the islanders paid, and not just the ones
n the position of being able to "print" money. He had become like the
central bank in every country, which can print money that people
are willing to hold. (Indeed, they must hold central bank money
"printing" money, the Englishman had raised the tiny island's money
for the holiday? They paid by being left with reduced buying power
because of the higher prices. They paid through the inflation brought
about by the circulation of the checks.
"The goods and services consumed by the Englishman with his
newly created 'money' - **given an unchanged output of goods and
Well - it sounds reasonable. The Englishman increased inflation
on the island and that was essentially a tax that everybody paid.
But wait. What if the "output of goods and services on the island"
ncreased because of the influx of capital. What if the waiter who
ceramics factory he had dreamed about opening. Suppose the general
Englishman's "money" made investments possible that were not
In fact, is that so different from what happens when an
American entrepreneur borrows $60,000 to modernize his factory.
The bank loans him the money, that is they add $60,000 to his
account. But who paid for that $60,000? Well, the Federal Reserve
System requires that the bank have $10,000 in reserve, but where
William Greider, pp.59 - 61.] And who pays the banker's salary? The
bank can create money because people trust it. Just like the
Englishman on his beloved Aegean island.
On the other hand, suppose the Englishman (by the way, no
never left the island the situation with respect to them would have
been exactly the same as it was with the checks. Would you say that,
n this case, the Englishman's holiday was paid for twice? Once by the
Englishman himself and once by the islanders?
So what's the answer? The answer is that the question is
be paid for. That, in any interaction somebody wins and somebody
loses. If something good happens then something bad has to happen
n order to balance the books. Somebody must pay. They seem to
believe this although it is plain to everybody who cares to look that
the air is free, the sunrise is free, the rain is free. Good friends are
free. Love is free. Water used to be free. Wild berries are free. Who
Who pays for the wonderful gifts of our forbears? Language,
literature, art, music, mathematics, the wheel, the idea of money,
We accept it all and exploit it, yet nobody pays.
It is the task of economists to trace and explain the flow of
trust, sometimes not even that - and sometimes they are destroyed.
But the question "who pays" is a religious question not an economic
one. I believe this is always the case. I believe that asking who is
evening with our friends?" Or "who paid for the Englishman's
I believe that there is such a thing as a free lunch. Indeed we
are all guests, every moment of our lives, at a sumptuous free feast.
We can contribute to it, if we wish, and make it even more
for our fellow guests at the banquet table.
Show me a business that is not in debt
and I will show you a business headed for bankruptcy.