Grower Defaults on Loan

Grower Defaults on Loan - Model #2

The grower had no seed to sell. He has no money with which to pay his loan. His situation leaves him with no alternative. He does not pay his loan—he defaults.

Mouseover this button to see previous graphic.

Grower	Dealer	Bank	Money/Deposits
Defaults on loan. Does not pay principal or interest.	Not involved	Receives nothing from grower.	No change in quantity of money.
Account Balance: $0.00.	Account Balance: $3,250.	Account Balance: $250*.	Total Money: $3,500. Deposit Liabilities: $3,500.

Grower

Dealer

Bank

Money/Deposits

Defaults on loan. Does not pay principal or interest.

Not involved

Receives nothing from grower.

No change in quantity of money.

Account Balance:
$0.00.

Account Balance:
$3,250.

Account Balance:
$250*.

Total Money: $3,500.

Deposit Liabilities: $3,500.

* The Bank absorbs entire loss in its own account. The Bank's account balance does not increase to the former level—and more—as it did with the loan pay-off. Again, no money transaction occurs and none of the balances change.

Since the grower ends with no money (and no assets), the bank cannot recover any of the money it loaned to the grower. The bank must absorb the entire amount of the loss. This set of transactions, with its sad conclusion, redistributes the money balances, but it has no effect on the total deposit liabilities and the total quantity of money.

The next page contains a consolidated recap of the loan default in a 100% reserve banking system...