Conclusion to Model 3

Conclusion to Model #3

In the fractional reserve banking system the following has occurred:

The grower has made a profit of $325 plus 900 bushes added to his inventory.
The seed dealer has added 300 bushels to his inventory, which cost a net of $500—for a book profit of $64 at current prices.
The bank has made $175 in interest.

As in model #1 (with the 100% reserve banking system), the whole system has gained 1200 bushels of corn*, and...

All of these transactions occurred with no permanent increase in the quantity of money.

Although the quantity of money increased by $1,000 during the period while the grower's loan remained outstanding, when the grower repaid his loan the quantity of money returned to the original amount.

Next, we'll look again at transactions in a fractional reserve banking system.

In the next model, however, the grower, sadly, will suffer a complete loss...

Notes:

* To say that the system as a whole either gains or loses as a result of any economic activity does not connote that the system has any ownership in the economic goods either produced or consumed. In a free market system only individuals realize gains and losses of specific economic goods, for only individuals (including legal entities) can own economic goods. The gains and losses for individuals, however, do represent gains and losses to an economic system of interconnected individuals through comparative advantage and exchange. The gains for individuals become available to all other members of the system, if they have the desire and capacity to exchange for the additional production. The losses for individuals deprive all other members of the system of the opportunity to exchange for economic goods formerly available.

A detailed discussion of this important point remains beyond the scope of this presentation.