The Free Market Center
The Free Market Center
To repay his loan plus interest the grower pays the bank $1,175. That payment consists of $1,000 of principal plus $175 of interest.
| Grower | Dealer | Bank | Money/Deposits |
|---|---|---|---|
| Pays the bank $1,175* | Not involved | Receives $1,175 from grower. | No change in quantity of money. |
| Account Balance: $325. |
Account Balance: $1,750. |
Account Balance: $1,425. |
Total Money: $3,500. Deposit Liabilities: $3,500. |
* $1,000 principal plus $175 interest.
After paying the loan the grower now has $325 in his account; the dealer continues to have $1,750; and the bank now has a balance of $1,425.
The grower’s balance of $325 represents the money profit, after paying his interest, that the grower made on the seed he sold to the dealer. (He has also profited by 900 bu. of corn seed in his inventory.) The $1,425 balance for the bank consists of the original balance of $1,250 plus the $175 in interest earnings for the bank. The dealer, although he now only has $1,750 in his account—less than he had in the beginning—has 800 bushels of corn seed in his inventory that he did not have when this whole transaction began.
I will cover the net changes in all accounts, including the amount of corn, in the summary of this model.