The Free Market Center
The Free Market Center
Next, the grower buys 500 bushels of corn seed from the seed dealer for $1,000 (a price of $2.00 per bushel).
When the grower pays the seed dealer for the seed, he has no idea that he does not transfer a commitment for "real" money to the dealer. He transfers the promise of the bank.
| Grower | Dealer | Bank | Money/Deposits |
|---|---|---|---|
| Pays $1,000 for seed. | Receives $1,000 from grower. | Not Involved. | No change in quantity of money. |
| Account Balance: $0.00. |
Account Balance: $3,250. |
Account Balance: $1,250. |
Total Money: $4,500. Deposit Liabilities: $4,500. |
This transaction takes all of the money the grower borrowed from the bank, leaving his account balance at zero. At the same time the seed dealer’s account balance has increased from $2,250 to $3,250, and the bank still has $1,250—it was not involved in this transaction.
The seed dealer sees no problem with accepting from the grower a check drawn on the bank because this deposit liability consists of an additional promise from the same bank where the dealer already has his account. This money should work as well as that which the dealer had before selling the seed to the grower.
The grower now goes back to his farm to plant the seed and attend to it for the growing season. If he has a successful season,…