Let's give our simple economy some money that the workers can't produce for themselves and see what happens - the results are quite revealing. Let's also assume that specialisation has gone on so long that each worker apart from A has forgotten how to obtain basic food other than by trading something for it. This is similar to a real economy where very few people are able to feed themselves entirely by their own efforts because they don't own enough land or they don't know how.
We begin with everything progressing purely by barter - money hasn't yet been developed - but just as the workers recognise the need for something to serve as money they discover some gold nuggets at the edge of the river where they go to drink each day. Searching all around they eventually find 12 nuggets, all similar in size and as it happens the only nuggets that exist in the vicinity. They share them out and agree to use them as money, giving each the ability to buy, as before, enough provisions from the others for a week.
All progresses happily for so long that all memories of barter have long been forgotten. One day worker A decides that it would make sense to save some money in case of illness or injury and consequent inability to work, when the extra money will allow normal purchases until full working capacity is restored. In order to save money some normal spending must be abandoned, so no jewellery is bought (saving one unit in the first week) and one day of wheelbarrow maintenance[74] is skipped (saving another unit in the first week). Now worker B is left with one unsold unit of jewellery and Worker C is left idle for a day (C's other five days are spent repairing and replacing B's and C's own barrows at two days each and one day for A). B and C can still buy everything they need for the first week, but at the end of it they each only have three nuggets instead of the normal four, and A has six nuggets. Now even without A saving any more money the economy suffers continuing problems. B and C can't buy the normal amount of goods in the second week because they don't have the money. Each must forego one unit of goods but neither can forego basic food, so C foregoes jewellery and B foregoes a week's worth of clothes. A spends normally. At the end of the second week A has five nuggets - gained three nuggets by selling two units of basic food and one unit of clothes (the other unit would have gone to B but B hasn't the money to spend on clothes) but spent four nuggets, and still has the two nuggets saved last week. Additionally A now has one unit of unsold clothes. B has three nuggets again - spent three nuggets and gained three nuggets - and has one more unsold unit of jewellery as well as the one unsold from the first week. C has four nuggets - spent three nuggets but gained four nuggets by selling four days' worth of wheelbarrow maintenance. As long as A holds on to her two saved nuggets there will only be ten nuggets being spent each week, so no matter who buys what there will always be two additional units of goods that remain unsold each and every week. In fact as unsold goods build up people cut back on their production so between the three of them there will be two idle days every week - corresponding to the two nuggets that aren't being spent.
In an economy with a fixed amount of money a one-off reduction in spending causes a continuing reduction in wealth creation.
This is an unexpected and damaging feature of using a fixed supply of money in an economy - that a one-off reduction in spending causes a continuing reduction in the creation of wealth. The reason is that the number of transactions is limited by the amount of money being spent, so every time those 2 nuggets aren't spent 2 transactions aren't undertaken, so 2 units of wealth go unsold or alternatively 2 days that could be spent in producing something useful are spent in enforced idleness. What has happened is that the prime function of money as a medium of exchange for wealth has been subordinated to its unfortunate secondary function as a store of value.
If A saves more each week (which she can because she can manage without everything except basic food which she produces for herself), before long she will have all 12 nuggets, B and C will have starved to death (luxury food on its own isn't sufficient to sustain life) and A will be working 60 hours each week (30 for her own basic food and 30 for her own clothes - she still has the knife but no longer any wheelbarrows - so her rate of production has dropped by a factor of three). She no longer gets any luxury food, jewellery or wheelbarrows, but does have the 12 gold nuggets, which are completely useless. Her aim of saving money as a store of value in case of future illness or injury has backfired completely, much good did it do her!
This is the 'paradox of thrift' that was explained by Keynes in the 1930s. Saving money seems prudent for a single person or family but it is very imprudent for the economy as a whole. In economics we should beware of relying on our instincts - the results are very often not what we expect.
In this simple economy it is easily demonstrated what happens when someone tries to save money, but in a real economy where there are very many participants all trading with each other it is much less clear. It is also disguised by the fact that the money supply isn't fixed. If the supply changed in accordance with the real needs of the economy to maintain trade then when anyone spent less the loss of money could be compensated by an equivalent injection, and all would be well. But the money supply doesn't change in accordance with economic need, it changes in accordance with bank profitability - increasing in optimistic times when people are willing to take on more debt and banks are able to make more profit, and decreasing in pessimistic times when people are fearful of debts and banks fearful of losses. Therefore the money supply that an economy gets is completely out of line with what it needs. This makes both the money supply itself and the wealth production that depends on it extremely volatile. It is explained in detail in Part 2.
The paradox of a strategy being good for an individual but bad for the whole was illustrated very nicely by Joan Robinson (Robinson 1960 p41) using the analogy of a crowd watching a procession. If an individual stands on a chair then he or she gets a better view, but if everyone stands on chairs then no-one gets a better view. The general term for this kind of paradox is 'the fallacy of composition', meaning that just because something is true for a single item in a group of items it isn't necessarily true for the group as a whole.