investment bank granted the company 5,000 EUR worth of loan with the maturity of 20 years.

The
company spent the proceeds on a new machinery.

Assets: Machinery, +5,000 EUR Liabilities: Long-term liabilities, +5,000 EUR

Equity: no change

In order to keep the balance, we followed the rules of double entry bookkeeping. At the end of January-
2018, after booking all the events, the balance sheet looks like as follows:

Economic events, mostly exchanges, always happen to two agents simultaneously, which leads to
quadruple entry bookkeeping on the systemic level. If “A” does business with “B” then two changes
arise in both balance sheets, which means four changes altogether. (In Latin, four is quattuor, that is
where the term comes from.) Consider the following examples.

ABC Company, Balance sheet, at 31-Jan-2018 Assets (EUR) Liabilities (EUR)

Land 25,000 Long-term liabilities 20,000 Machinery 25,000 Short-term
liabilities 4,100 Inventories 5,000 Equity (EUR) 38,880 Supply
4,500 Cash 3,480 Total assets: 62,980 Total liabilities and equity: 62,980

Example: quadruple entry bookkeeping ➡ Company “X” buys inventories from company “Y” and pays
4,000 EUR for them. Before the transaction, the book value of the traded inventories was 3,500 EUR.

➡ Company “Z” pays 2,000 EUR wage to Mrs. M.

➡ Mr. Q. repays 100 EUR of debt plus 5 EUR interest to Mrs. S. in cash.

From an accounting point of view, there are two kinds of goods. Real economic goods are on the asset
side of one single balance sheet, while financial goods appear in two balance sheets simultaneously: on
the asset side of one balance sheet and on the liabilityequity side of another one. A slice of bread or a
bicycle are real economic goods; a mortgage loan, a commercial bill or a share are financial goods.

Financial goods on the liability-equity side are obligations, while those on the asset side are claims. A
commercial bill with the nominal value of 500 EUR is a claim to its owner and an obligation for its issuer.
The issuer is legally bound to pay 500 EUR when the bill matures. In case of default - i.e. if the issuer is
not able or not willing to pay -, the owner of the bill can sue the issuer.
Shares might be regarded as financial assets too, although in this case the issuer is not legally bound to
pay any money. Shares are rather economic than legal promises to pay dividends or provide capital
gains through the appreciation of their price. Disappointed owners - in case of no dividend payments
and no price increase - can punish the issuer company on the market by selling the shares. What
happens if investors start selling the shares of some company en masse? The price of the shares
plummets which leads to the simultaneous devaluation of the assets of the company. (Remember, the
value of the assets always has to be equal to the summed value of the liabilities and the equity. A price
drop of shares devalues equity and assets simultaneously.) As assets are collateral behind the liabilities,
a significant drop in their value can lead to financial difficulties.

Company “X” Company “Y” Inventories +4,000 Supply -3,500 Bank account -4,000 Bank account +4,000
Equity +500

Company “Z” Mrs. M. Bank account -2,000 Bank account +2,000 Equity -2,000 Equity +2,000

Mr. Q. Mrs.S. Cash -105 Liabilities -100 Claims -100 Equity -5 Cash +105 Equity +5

CHAPTER 2 MONEY AND BANKING FROM A HISTORICAL AND THEORETICAL PERSPECTIVE 2.1 Money in
history and theory The historical emergence of money can be related to the emergence of market-based
economies. For thousands of years, communities were organised by redistributive institutions,
centralised rules coordinated production, consumption, investment, etc. Ancient Egypt and Babylonia
are the most typical examples of redistributive empires, but even in the feudalistic European kingdoms,
markets played only a minor role for a long time. (Polányi, 1944: Chapter 4) These markets are
frequently described as places where rural farmers and urban manufacturers exchanged their products
directly. However, it is easy to see that barter is a very inefficient way of exchange, as the probability of
double coincident of wants is low and by the growth of the number of market participants, it gets even
lower. There is no historical proof that direct barter has ever played an important role in coordinating
markets (Wray, 1993). Since the very advent of locally organised markets, buyers and sellers have been
using a commonly accepted specific good as the medium of exchange. Primitive forms of money had
been used before as store of value and standard of deferred payments, but in lack of markets, they have
not functioned as the medium of exchange or the measure of value (Polányi, 1957). The most important
function of ancient coins was probably the fact that the state (the king or the queen) accepted them
when paying the taxes. This characteristic made primitive money generally acceptable on markets: as
everyone had to pay taxes, sellers accepted coins because they knew they could (and in most cases, they
should!) use them for tax payment, and they knew that other sellers from whom they would buy goods
were thinking in the same way. It is tautological, but money is accepted because it is thought to be