The Free Market Center
The Free Market Center
This chart shows the money balances held by each of the three players in the small economy. The last two columns show the total money in the system and the total deposit liabilities of the bank, which amount to the same thing.
Before the first transaction our grower friend has no money.
Since the bank holds all money, deposit liabilities equal total money.
| Grower | Dealer | Bank | Money/Deposits |
|---|---|---|---|
| Opening Balance: $0.00 |
Opening Balance: $2,250 |
Opening Balance: $1,250. |
Total Money: $3,500. Deposit Liabilities: $3,500. |
All parties have accounts at the bank for which the bank has deposit liabilities equal to total money.
To make it simple our grower begins this process with no money. He only owns his farmland. The seed dealer has $2,250 of money on deposit at the bank. The bank has $1,250 on deposit for its own account.
Some people might find it a bit confusing that the bank has money on deposit at the bank itself, but this reflects the way banks operate in reality.