A rich tourist came to a small town in the middle of the financial crisis. Nobody in town had the money to pay back debts owed to other people. He went into the local hotel, placed a 200-dollar bill on the counter and went upstairs to check out what kind of rooms the hotel had to offer. In the meantime the hotel manager grabbed the bill, walked over to the butcher and used the bill to pay his debt. The butcher then took the bill to the cattle farmer and paid his debt to him. Next, the cattle farmer took the bill to the cattle feed supplier and paid his debt there. The cattle feed supplier then paid his debt to the local prostitute. The local prostitute brought the bill back to the hotel and paid her debt to the hotel manager. The hotel manager put the bill back on the counter. Then the rich tourist returns down the stairs and proclaims that he didn’t like the any of the rooms. He grabs the bill and leaves the city. A pity, but more importantly, the town was now debt free and optimism was back.
In the beginning of the story, everyone is bankrupt in the sense that nobody can pay their debts and then a temporary increase in the money supply facilitates transactions and in the end, all is hunky dory. How is this story similar to Krugman's baby-sitting coop example? What is the function of money here?
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