Credit and business stimulation

The role of banks

Within the capitalist economy not only are new enterprises constantly appearing and becoming prosperous, but also enterprises which already exist are always making new plans and trying to improve their position. Investment is essential in order to implement such new plans. Part of these investment funds is furnished from the enterprise's own funds accumulated in the past, but most of it is raised in the form of credit advanced by banks.

As mentioned earlier, banks have various kinds of deposits – in our model they have time deposits and current (or sight) deposits. When time deposits are used there is no question of the money being withdrawn within the prescribed period; even with current deposits there is no question of the total on deposit being withdrawn on demand, despite such deposits being used when it is not known when the money is to be withdrawn. Since whatever proportion it is (for example 90%) remains in the form of deposits, the bank for its part is able to set aside a certain amount of cash from current deposits (i.e. 10%) in preparation for deposit withdrawals by depositors. Not only can the banks feel easy about lending to entrepreneurs the total amount of time deposits and 90% of current deposits, but the banks themselves can use the interest on the money they loan to pay the interest to their time depositors and make a profit from these activities.