This time let's see what happens to the quantity of money in a fractional reserve banking system when the bank makes a successful loan—fully repaid, with interest, by the borrower.

In a Fractional Reserve Banking System

Outcome #1 (Loan Repaid)

This third model depicts the effects on the quantity of money—within a fractional reserve banking system—using outcome #1, in which a grower borrows money and repays it with interest. The model shows the following transactions:

Grower Borrows $1,000

First, the grower borrows a thousand dollars from the bank for the purpose of buying corn seed.

Grower Buys Seed

Second, the grower buys seed from the seed dealer. He plants that seed; tends the corn crop during the season; then harvests the corn seed at season's end.

Grower Sells Seed

Third, after the growing season the grower sells some of his seed to the seed dealer.

Grower Repays Loan

Fourth, from the proceeds of his seed sale the grower repays the loan from the bank with interest.