very basic finance textbook

Why? You have Google. If you want simple you have simple. If you want to drill down to detail or check some esoteric fact, it is at your finger tips. There is no such thing as "an introductory finance textbook".

Here's a question for you:

A man holidays on an island where he is trusted and well-known. At the end of his stay he pays his hotel bill with a signed cheque. He leaves the name blank for the hotel owner to fill in later. The next day the hotel owner has a bill to pay and he pays it using the signed cheque. Everyone knows the cheque is good, everyone is able to exchange it for goods, it is never presented at a bank.

Who paid the hotel bill?

I like it. The easy answer is that the plumber (or whoever the bill to the hotel was from) paid the man's hotel bill by not cashing the cheque, yet having supplied his services. Of course the plumber might in turn have used the cheque to pay his babysitter, who used it to buy CDs from a shop, whose owners used it as part of their publicity budget to sponsor a local G&S society in a production of Pirates. The society used it to pay the brilliant visiting actor/singer who plays the Major General. This chap turns out to be none other than our man on holiday, who, recognising his own cheque, tears it up, which is why it is never presented at a bank.

So who paid our man?

Surely this is exactly the same as if he paid the hotel bill by cash, except that with cash we have to go a few steps further back to the BOE (or central bank of whatever the currency is). His cheque is being used in exactly the same way as a central bank uses banknotes.

So he paid his own hotel bill, the hotel paid the plumber etc, as would be case if cash were used. Is this the right answer?

wow, is that one of those questions where many concepts of finance are put to the test? anyway, i'd say nobody paid the bill ! bloody 'ell.... since nobody cashed the cheque, the man has technically not paid yet..................... hmm......

i agree that info is readily available from the net, but i require something substantial at university level, not as a private investor. besides, whenever yer reading any textbook on say real estate finance, i find it impractical to stop to search for a term like leverage,debenture,etc and examples of what they mean on the net as it disrupts the flow of thoughts, imo.

Nearly, if he used cash he'd have to either earn it or borrow it, but in the case of the uncashed cheque *he* is his own central bank, in effect he is issuing his own currency which is obviously just a piece of paper that is perceived to have some value solely by confidence held in the individual (issuer).

Which is no different to the Bank of England or Fed except they do things on a much grander scale, on such a scale that nobody actually stops and questions what is actually backing the pieces of paper in their pocket, no wonder this is called an 'hallucination'.

Confidence is the only thing that makes people perceive a worthless bit of paper as having intrinsic value, or possibly the mistaken belief it still backed by something tangible like gold. It could be said that Fort Knox is more about creating trust in an institution than about the security of some anachronism.

In your scenario the plumber has lost the wages he should have received for his acting. Anyone who shreds the cheque does indeed pay the hotel bill.

But on this island the cheque never gets shredded. It keeps circulating round and round.

Oops I've miscast the plumber. Should read "the man on holiday has lost the wages he should have received for his acting".

It is integral to the answering of this question that the man visits an

Any person holding the cheque received it for full value, but can exchange it for full value. However the hotel keeper is not out of pocket for eggs, bacon, laundry or rent, so somebody has paid for the holiday.

"Troy Steadman" wrote

That's a long time!

"Troy Steadman" wrote

Really? Even many years after the death of the "holidaying man"? ;-(

You think people will continue to accept it?!

That is not the answer.The islanders have the utmost faith that the cheque will be honoured, no matter how many generations the debt has passed down to.

If they've grown used to accepting it for so long why would they suddenly stop and question its validity? The very fact it has been circulating for so long would actually add to its legitimacy.

A problem could arise if the son of the holiday maker decided to visit the island his dad raved on about with his own cheque book, what would happen if he stayed for some time and started signing open cheques for everything he consumed on the island.

To start with he could claim that his largess is no different to a continuation of his father's cheque and he could give the impression there are funds implicitly backing the cheques and that they should trust his good name and the family's reputation.

If he stuck around for 6 months and cleared out the off licence on a regular basis using ever increasing numbers of cheques... how long would that last? When would people start questioning things, when would things hit breaking point.

If everyone on the island is sitting on dozens of these new cheques then would anyone dare suggest the emperor has no clothes?

Very eloquently put. Aztech I know you know the answer to this, but for Tim and Ronald:

The off-licence has been "cleared out" but it's owner has not. In fact this was his best year ever! He's spent his cheques on:

Somebody's been cleared out...but who?

"Troy Steadman" wrote

Then they are mistaken...

"Troy Steadman" wrote

... because debts are not passed on from generation to generation.

"Aztech" wrote

Probably because it is now more than 6 months from the date written on the cheque!

That doesn't matter. Cheques don't expire or become invalid simply because 6 months have expired. At least not on Troy's island. In any case, since no-one seems to have any intention of presenting the cheque to any bank, whatever rules banks might have about when to query them won't apply to this scenario.

I do Finance at university level. Feel free to despam my address and e-mail me for my reading list.

Joe

The national debt is, that's quite a different beast :-

In message , Troy Steadman writes

The original drawer's balance sheet will show the cheque as a creditor, in the same way as the Bank Return shows notes in issue. So the drawer paid the original bill. The fact that the cheque doesnt get presented isnt relevant.

Assuming that each subsequent holder of the cheque (for the purposes of this example) accepts the cheque in exchange for a service (rather than in exchange for assets), then on receiving the cheque the holder's balance sheet shows the cheque as an increase in assets. If the holder then passes it to somebody else, again in return for a service, the assets drop, so the holder has 'paid' for his service.

In message , Tim writes

I think Troy has misled you, in this fictitious island the 'account holder deceased' answer on an unpaid cheque doesnt apply and, as you say, the 'debts' arent passed form generation to generation, it remains in the estate of the deceased. In fact it isnt a debt at all, it is a liability. The dosh is still stashed in the drawer's account awaiting the presentation of the cheque.

But how is the original drawer any different to the second, third or forth business down the chain, and so on. What is the disadvantage of being the starting point of the cycle?