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Loans meant to finance the production, and evolution of goods through the successive phases of production, storage, transportation, and distribution are considered as self-liquidating loans.This theory also states that whenever commercial banks make short term self-liquidating productive loans, the central bank should lend to the banks on the security of such short-term loans.

For example, they do not make sense for fixed assets, such as real estate, or depreciable assets, such as machinery.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.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.