The Free Market Center
The Free Market Center
The grower can accomplish the feat of borrowing money and repaying with interest because the payment of interest does not come from the expansion of the quantity of money. It comes, instead, from the increase in the product in which he deals i.e. corn seed.
This summary shows that the system as a whole does benefit as a result of this transaction.
Has this little economic system benefited from these transactions?
The quantity of money—after all transactions—has not increased (or decreased) at all.
The amount of corn seed, however, has increased by 1,200 bushels.
| Transactions Summary | ||||
| Grower | Dealer | Bank | Total | |
| Dollars | $ 325 | $ (500) | $ 175 | $ 0 |
| Corn Seed | 900 BU | 300 BU | 0 BU | 1200 BU |
| Balance Summary | ||||
| Grower | Dealer | Bank | Total | |
| Money | ||||
| Beginning Balances | $ 0 | $ 2,250 | $ 1,250 | $ 3,500 |
| Ending Balances | $ 325 | $ 1,750 | $ 1,425 | $ 3,500 |
| Change | $ 325 | $ (500) | $ 175 | $ 0 |
| Corn Seed | ||||
| Beginning Balances | 0 BU | 1200 BU | 0 BU | 1200 BU |
| Ending Balances | 900 BU | 1500 BU | 0 BU | 2400 BU |
| Change | 900 BU | 300 BU | 0 BU | 1200 BU |
| Grower | Dealer* | Bank | Total |
|---|---|---|---|
| Gained $325 plus 900 BU of corn seed. | Gained by the market value of 300 BU of seed less $500** | Gained $175 interest income. | Whole system gained by 1200 BU of corn seed. |
*At a market price of $1.88 to $2.00 the dealer's accounting profit could amount to $64 to $100.
($1.88 X 300Bu) - $500 = $64 or ($2.00 X 300Bu) - $500 = $100.
**Corn sold for $1,000 less corn bought for $1,500.
The payment of interest in any monetary transactions has to do with the amount or value of the goods for which the money is traded, not the amount of money paid.
The ownership of cash balances has changed. The quantity of money, however, although it expanded while the grower's loan remained outstanding, has return to the beginning level. But, the system has prospered. The amount of corn seed in the system has increased by 1,200 bushels.
The quantity of money, since no additional loans have been made, returns to the same level at the end as existed in the beginning. The system does, however, have 1,200 more bushels of corn at the end of this period of time than it had at the beginning.
Note: By saying that the whole system gained by 1200 bushels of corn, I do not imply that the system as a whole has any ownership in those additional bushels. The owners may consume or exchange that corn on their own volition. In this scenario every actor has gained by a combination of the shift in resources and money. The only quantifiable measure of the gain to this economy consists of the 1200 bushels of corn.