An explanation of bank liquidity described by Adam Smith: short-term loans advanced to finance salable goods on the way from producer to consumer are the most liquid loans the bank can make. These are self-liquidating loans because the goods being financed will soon be sold. The loan finances a transaction and the transaction itself provides the borrower with the funds to repay the bank. Adam Smith described these loans as liquid because their purpose and their collateral were liquid. The goods move quickly from the producers through the distributors to the retail outlet and then are purchased by the ultimate cash-paying consumer.
Also called the real bills doctrine. American Banker Glossary
Financial and business terms. 2012.