The little frontier town was struggling. People didn't visit much anymore. Everyone was miserable because they were all in debt.
Late one evening a man walked into the hotel. He wanted a room for the night. The hotel owner, Conrad, was happy to see a customer. It had been a while. Conrad collected the $20 for the room from the stranger. The stranger told Conrad that he had tools and sundry items for sale. He wanted to know who might buy them.
Conrad told the stranger that the town was full of poor people. Everyone was in debt and no one could afford to buy anything new. The stranger would have better luck in the next town. Disappointed, the stranger went off to bed.
Conrad was happy to be holding $20, but he knew he shouldn't use the money to buy anything from the stranger because he owed Morgan money for the whiskey that Morgan had been supplying to the hotel. So, before he changed his mind, Conrad walked to Morgan's and gave him the $20.
Grinning widely, Morgan thanked Conrad and said he feared he might never get paid back. The money was much appreciated. Now Morgan could pay Mr. Pella the money he owed for the glass bottles he bought to hold the rum. Morgan took the money over to Mr. Pella that very night and paid him.
Mr. Pella was very happy to get repaid because that allowed him to pay the Thomas brothers the money he owed to them. Shane Thomas had sold Mr. Pella the sand needed to make the glass bottles, and Roger Thomas had sold Mr. Pella the wood needed for the fires to heat and form the glass. He owed each of them ten dollars.
The next morning Mr. Pella found the Thomas brothers and paid each of them.
Shane straight away took his ten dollars to the innkeeper, Conrad, to repay him the money he owed the Conrad for the nights the Conrad let him stay at the hotel while Shane's house was getting repaired.
Roger was elated that he had finally gotten paid for the work he'd done. He saw the stranger as the stranger was headed out of town and stopped him. The stranger explained that he was a salesman. He sold Roger a brand new ax, perfect for chopping down trees, for $10. Roger was delighted with the new axe since his old ax could no longer hold its edge. Roger would be able to get back to doing work with this new axe.
As the stranger rode out of town he thought to himself, "That innkeeper lied to me. It seems like people in this town do have money. I just sold an axe for $10 that I only paid $5 for, so this is turning out to be a good trip for me."
That very afternoon Roger used his new axe to cut down some old hedge trees that had long been a blight upon the town. The townsfolk gathered in the evening around a bonfire of that hedge wood and sang songs and laughed and felt happier than they had in a long time. No one was in debt. Each felt unburdened and optimistic for the future.
Analysis:
What is it that makes an economy grow? Does it make a difference, to the economy, if a person stores thousands of dollars in a coffee jar at home, spends the money on products and services, or puts it in a bank account? What is the impact on the economy of each of those three actions?
This parable provides an example where the velocity of money is high, at least for one day. A high velocity generally indicates a healthy society. If something impedes the velocity, it can harm the economy.
In our history, the use of money in the form of coins and bills increased the velocity of money over attempts to directly trade commodities such as grains and chickens for goods and services. The move to digital currency and credit cards provided another boost to the velocity of money. We can now send money anywhere in the world instantly.
To learn more about the velocity of money, I suggest starting here: https://www.investopedia.com/terms/v/velocity.asp
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