As a filmmaker (or would be!) you cannot avoid getting involved with money, so I’ve been thinking about the current downturn. Can it be explained? As a writer I’ve written a little story, which crudely illustrates the situation, at least, to me! I hope you find it useful?Jean was a lucky girl, she won £1000 on a government scratch card. She loved collecting porcelain and in four weeks time there was to be a local auction. She decided to put her money aside for four weeks in a new business called FirstBank.com. In Jean’s land banks could not charge or give interest. Jean’s deposit was FirstBank.com’s first customer and, as was the custom, 10% of the deposit (£100) was placed into a reserve fund (which already had £100 stored as a matter of law). The remainder (£900) was available to loan.
This was lucky for Frank, who knew of the auction and loaned £900, on a short-term basis, from FirstBank.com. In this country it was illegal to hold £900 or more at home, as a crime prevention measure, so Frank put the money into another new bank, SecondBank.com. Frank was SecondBank.com’s first customer and £90 (10%) was put into reserve (which already had the mandatory £100) allowing £810 to be loaned out.
How lucky for George, as just before the auction started he loaned the £810 from SecondBank.com on a long-term basis, with a repayment plan of £10 per month.
The auction room required payment by cheque or cash, after the sale, and so Jean and Frank took cheque books to the auction. George took his £810 in cash. Between them they had £1000, £900 and £810 respectively to spend on the day. At this stage readers should note that the original winnings of £1000 has become £2710 spread between three people!
On the day of the auction Jean out bids Frank and George for a piece of porcelain and spends her £1000. She pays by cheque and leaves with her purchase. In disappointment, Frank leaves but George purchases another piece for £800 cash then goes to SecondBank.com to repay £10 of his loan. Readers should note that of the £1000 winnings £1800 has been spent between Jean and George!
Now when the auction room presents Jean’s cheque to FirstBank.com they have only £200 reserve but fortunately for them Frank’s loan was due to be repaid on that date. However, when Frank goes to SecondBank.com to collect his £900 to repay FirstBank.com, he finds that they only have £190 reserve and the £10 of George’s first repayment. The rest of the £810, loaned to George, is not due back for months! SecondBank.com must seek a loan of £700 from the government or go bust but this takes time to arrange.
In the meantime Frank defaults on his loan of £900 from FirstBank.com and therefore FirstBank.com cannot honour Jean’s £1000 cheque and the auction rooms cannot pay its staff.
The £1000 put into the economy by the government, in the form of a scratch card, has become £2700 due to banking policy and was not a problem (if the money kept revolving), but once a demand is made, which is too great to be met, the entire system collapses.
And the net result is that the auction room made one man redundant and the government had to bailout FirstBank.com for £800 and SecondBank.com for £700. They also paid the redundant worker £300 for the period he was out of work. Thus the £1000 pumped into the economy lead the government to spend a further £1800 when the merry-go-round failed (a staggering 180% increase in the money supply!). If our little story had taken account of interest payments, bundled debt packages and the like then you’d have realise that this fictional country had been heading for financial thin ice for some time!
