Mullah Nasruddin's Camel

When Ahmed the camelherd passed away, there was much sorrow in his corner of Arabia. He had been a simple man, and was much loved by his neighbours - simple herders all - and didn't have enemies to speak of. Ahmed had seventeen camels, a reasonable number, that was enough to sustain his family. His real wealth, he was fond of saying, were his three sons - Abdullah, Asad, and Ali. He had raised them well and taught them all that good men and good camel herders needed to know. Good simple men they all were. And that was part of the problem.

Ahmed wasn't known to be particularly fond of arithmetic, but had left a strange will. To my eldest son Abdullah, he wrote, I leave four ninths of my camels, and my role as the head of the family. To Asad, I leave a third of my camels, and to Ali the youngest, a sixth. Live a simple but good life, he wrote, and remember what I have taught you.

The camelherders of Ahmed's circle were not highly fond of arithmetic, but they knew enough to do what they normally needed. However, no amount of calculation seemed to yield sensible whole results in this case. Abdullah couldn't take his share of seven and seven ninth camels - how could he? Neither could Asad or Ali claim their absurd shares. So the sons went on living as usual, and the problem of how to divide up their camels unsolved.

When Mullah Nasruddin rode in on a caravan from Baghdad to visit Ahmed's family one day, there was much wonder. It was then that everyone found out that Ahmed had been a student of philosophy in Baghdad during his youth, and had given up city life to live as a camel herder. Nasruddin had known him in his youth, and had come to pay his respects.

So, they put the problem of the will before the learned Mullah - learned, of course, from their point of view. Nasruddin had been kicked out of university, unlike Ahmed who had left on his own, and lived by his wits alone. And his wits were at their end here. His arithmetic did not yield any sensible results either. Knowing that suggesting that the herders kill some of the camels and divide the meat to handle fractional numbers wouldn't be taken well, he did not. As only the truly wise can, he admitted his inability to solve the problem.

Having eaten well and slept well in the tent the herders gave him, Nasruddin got ready to leave for Baghdad in the morning. But before he left, he called together all the herders and addressed them. Sleep, he said, had a way of clearing the mind, and he could not leave without helping his friend's sons. Therefore, he said, he wanted to gift a camel to them.

There was much consternation at this - Nasruddin was known to be not well off, and owned not more than one camel. Whether he actually owned one was a mystery as well, but his word had to be taken for it. The herders could not accept his gift knowing that it was probably beyond his ability to give. But the rules of hospitality were such that a guest's parting gift must be accepted. And so it reluctantly was. Nasruddin promised to have the camel sent with the next caravan that came that way.

Perhaps, said Nasruddin, once the herders had decided that Ahmed's sons must accept his camel as a gift, we could take another look at the troublesome will. Let's see, he said, with the total number of camels at eighteen, Abdullah gets four ninths of that number - eight - Asad gets a third - six - and Ali gets a sixth - three. The herdsmen nodded their heads, the arithmetic was a lot simpler now. After the sons had led away thier share of the herd it was noticed that one camel - Nasruddin's gift - had not been claimed, for nine, eight and six add up to seventeen.

Even the simplest of herdsmen saw what had been done there, and praised Nasruddin's wisdom. As a gift for solving the knotty problem of Ahmed's will, he was presented with a gift of, yes, a camel. Nasruddin rode with a caravan back that day to Baghdad, and all was well.

......

Nasruddin didn't actually own a camel, but an imaginary camel did just as well as a real one in this case. This happens to be how the modern banking system works, where modern money is like Mullah Nasruddin's imaginary camel in many ways.


A long time ago, money used to be "real" - either made of actual precious metal, or backed by an equivalent reserve of precious metal. These days, for reasons best explained by real economists, most money is not backed by anything. Central banks decide how much money circulates in the economy. Also, most money is just numbers on a computer instead of actual currency notes.

The Central Bank, the controller of money supply - RBI, Federal Reserve, or other such entity - lends some amount of money (or fictional camels) to banks. Banks lend this fictional money to other people or entities in turn. If you work for a living, it's likely that your employer pays you with fictional money that it borrowed from a bank. You deposit that money into your bank account, and the bank can promptly go lend that money to someone else again. Thus not only are you paid with fictional money, but the same fictional money is lent again and again and again as it circulates through banks. To keep depositor liquidity managable(meaning, so you can actually withdraw money when you need it), banks have to maintain a 'fractional reserve' - a certain fraction of the money that they take in as deposits or borrowing must be retained without lending.

So how does the system work? It is presumed that players in the economy create value, but need to borrow money as capital. Once they are able to sell their product for a higher price than all the inputs into it, they return the money they borrowed plus interest and pocket the remaining profit. Banks use the interest they earn to pay interest in turn to depositors and the Central Bank. All is well at the end of the day and the fictional camels return to Baghdad.

What about money that remains in your bank accounts - your savings? As goods and services that the economy produces (the GDP) increase, the money supply is increased to match, at least in theory. Fictional camels then magically become real, something even Mullah Nasruddin could not do.

What if things go bad and some borrowers are unable to repay? The loss must be borne by shareholders and depositors in the bank whose money (real camels) must replace the money (fictional camels) borrowed and released into the economy. Why? If money supply outpaces GDP growth, more money ends up chasing the same number of goods and services, so inflation results. In reality, some amount of inflation always happens partly because banks tend to be optimistic in pushing more money into the system than is absolutely necessary.

Sometimes, things go really bad, and banks go insolvent - they have not enough equity capital to compensate for the loans that have not been repaid. In theory, they just go bankrupt. In reality, governments bail banks out by lending them more fictional camels, in the hope that they'll do better next time. The banking and financial system - and the fictional camels - are what run the capitalist economy. A lot depends on the system not running out of camels, fictional or real.

Therefore, the show must go on.

Statutory warning: The Mad Hatter is not an expert on Mullah Nasruddin folktales. Also, anything he says about economics may just be a load of imaginary camels.