The Free Market Center
The Free Market Center
The grower must first borrow money from the bank in order to buy seed to plant during the upcoming season. The grower borrows $1,000 from the bank in order to buy seed from the dealer.
In the first transaction the grower borrows $1,000 from the bank to buy seed.
In this system, since all accounts are “on-demand,” the bank makes the loan from its own funds.
| Grower | Dealer | Bank | Money/Deposits |
|---|---|---|---|
| Receives $1,000 from loan. | Not involved. | Transfers $1,000 to grower's account. | No change in quantity of money. |
| Account Balance: $1,000. |
Account Balance: $2,250. |
Account Balance: $250. |
Total Money: $3,500. Deposit Liabilities: $3,500 |
In this banking system, unlike the one in which we operate on a daily basis, this bank cannot lend money held for demand deposits. For that reason, and because it has no time deposits, the bank must lend its own funds.
After the transaction, the bank has only $250 in its account. The seed dealer still has $2,250 in its account.