Posts Tagged ‘loans’

The 6th Grade Financial Crisis

December 2, 2008
When one of my software engineer friends was in 6th grade his teacher decided it would be a good learning experience for the kids if she created a mock economy. She had no idea how popular and profound the experiment would be.
Kids could now trade for durable goods (lunch components, spit wad shooters) without immediately needing an equally valuable item to trade back as required in the barter system. The introduction of currency was a massive success and the classroom economy blossomed.
 
Even as a kid my friend was well known for his analytical skills so was assigned the job of class banker. He turned out to be a very good banker. In adult society, bankers play an important role loaning money to people with earning potential and a need to buy. For example, buying a car to drive to your first job*, or a house to raise a family. In short, a healthy banking environment is a lubricant of possitive economic activity.
 
I suppose the teacher intended that the classroom banker would loan out small amounts of money to kids who just had to have that cookie for lunch. However, it didn’t work out quite that way. For each loan my friend gave he received a 10% commission. It didn’t take him long to realize that the more transactions he as involved in the richer he’d be. So when fellow students wanted to buy goods he was quick to market his services.
 
The teacher’s photocopy machine offered an endless supply of cash so his bank rapidly pushed tens of thousands of dollars into the classroom economy. The flood of cash rapidly pushed up prices. Spit-wad shooters started selling for thousands of dollars each. The rising prices encouraged further borrowing. The bank had positioned itself at the very center of the economy. Much of the classroom spun deeply into debt–except for the banker who happily kept amassing his 10% cut. The banking industry was booming.**
 
Part of the classroom however boycotted the raising inflation. Literally–”boy”cott. In typical grade school fashion the girls didn’t believe in doing business with the boys. They happily traded with each other in tens and occasionally hundreds of dollars. They didn’t have a banker raking 10% off the top of every major transaction, nor did they need one. The isolated girls economy was breached only once when a girl let one of the boys buy part of her lunch for $2,000—instantly re-aligning the value of cash in the girl’s economy.
 
I would have liked to have known what eventually would have happened to the mock economy, but unfortunately about then the teacher decided to bring it to a close and the classroom reverted to the barter system once again.

 


*After that pay cash. 
** The expansion of the US banking industry during the mortgage boom was a very bad sign. The controlled collapse of the financial sector we’re seeing today is hopefully the start of a return to sustainable banking.

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