Eric Keetch offered an interesting anecdote in the Financial Times (August 12, 2009): In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an extended period and places a €100 note on the counter as surety while he demands to be shown the available rooms.
While he is being shown the room, the hotelier takes the €100 note round to his butcher, who is pressing for payment.
The butcher in turn pays his wholesaler who, in turn, pays his farmer supplier.
The farmer takes the note round to his favorite “good time girl” to whom he owes €100 for services rendered. She, in turn, rushes round to the hotel to settle her bill for rooms provided on credit.
In the meantime, the Russian returns to the lobby, announces that no rooms are satisfactory, takes back his €100 note and leaves, never to be seen again.
No new money has been introduced into the local economy, but everyone’s debts have been settled.
What’s going on here? In the end, no new money was introduced into the town, but all debts were paid. Is the money multiplier infinite? How do you explain what has happened? Did local GDP increase as a result of all debts being paid?