ABSTRACT
The goods produced are then sold, and the firm’s incoming deposits after it sells what it has produced are used, first of all, to repay the loan it took up a year ago. We assume that the interest rate on the loan was 5 per cent. The bank makes a profit of €5 since it gets 5 per cent on the €100 loan. The firm also makes a profit of €5, which increases its equity if these earnings are retained, or alternatively, the earnings may be distributed to the firm’s owners (or to the workers if the firm is a profit-sharing cooperative), or some combination of these things. After repayment of the bank loan, the balance sheets look like this:
bank firm loan 100 deposits 100 deposits 110 loan 100 reserves 10 deposits 5 deposits 5 equity 5 equity 5
The bank has gained €10 in reserves, since customers of other banks have transferred €10 net to the firm. The firm keeps €5 from the €10, and the bank also keeps €5 for itself; the carry-over is counted as increased equity of the bank. The firm keeps €5 on its balance at the bank and has no corresponding liabilities. In the balance sheet above, these €5 are also booked as equity for the firm (the money is kept as retained earnings; it isn’t distributed as dividends or whatever). The original loan and the deposits that had been created have been cancelled, since by transferring its deposits the firm has amortised the loan.
