Central bank liquidating assests
Inflation might therefore continue forever despite strict adherence by banks to the real bills rule.
Although the real bills doctrine continues to command a small following among some contemporary economists, by the late 19th century most bankers had abandoned the practice of limiting themselves to short-term commercial loans, preferring instead to mix such loans with higher-yielding long-term investments.
Unless a bank held cash equivalent to 100 percent of its demand deposits, it could not meet the claims of depositors were they all to exercise in full and at the same time their right to demand cash.
If that were a common phenomenon, deposit banking could not survive.
At all times a bank must maintain cash balances to pay its depositors upon demand.
It must also keep a proportion of its assets in forms that can readily be converted into cash.
Banks do not precipitately call in loans or sell marketable assets, because this would disrupt the delicate debtor-creditor relationship and lessen confidence, which probably would result in a run on the banks.
The presence of many short-term loans among a bank’s assets means that some bank loans are always coming due, making it possible for a bank to meet exceptional cash withdrawals or settlement dues by refraining from renewing or replacing some maturing loans.
The difference between the fair market value of a bank’s assets and the book value of its outstanding liabilities represents the bank’s net worth.
A bank lacking positive net worth is said to be “insolvent,” and it generally cannot remain open unless it is kept afloat by means of central bank support.
They may be repayable on demand (sight deposits or current accounts) or after a period of time (time, term, or fixed deposits and, occasionally, savings deposits).
The bank’s assets include cash; investments or securities; loans and advances made to customers of all kinds, though primarily to corporations (including term loans and mortgages); and, finally, the bank’s premises, furniture, and fittings.