The Free Market Center
The Free Market Center
| Beginning | Transaction #1 | Transaction #2 | Transaction #3 | Transaction #4 | |
|---|---|---|---|---|---|
| Beginning Balances | Grower borrows $1,000 | Grower buys corn seed for $1,000 | Grower sells seed to dealer for $1,500 | Grower repays loan: $1,000 principal + $175 interest |
The seed grower has managed to borrow $1,000, buy the seed, sell the seed from his harvest, and repay the loan with interest, all within a system fractional reserve banking.
The quantity of money does, in fact, expand during the period in which the loan to the seed grower remains outstanding from the bank. But note—and this is the important part—when the borrower repays the loan with interest, the quantity of money does not increase; it returns to the former level.