Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

174 Money, Bank Credit, and Economic CyclesIn this case Bank A clearly acts as a true financial intermediary.Its managers recognize and take advantage of a businessopportunity. 4 Indeed, they see a chance to make a profit, sinceat one place in the market there is a lender willing to loanthem money at 10 percent interest, and at another Business Zis willing to take out a loan at 15 percent, leaving a profit differentialof 5 percent. Therefore, the bank acts as intermediarybetween the original lender and Business Z, and its social functionconsists precisely of recognizing the existing disparity or lack ofcoordination (the original lender wished to loan his money butcould not find a creditworthy borrower willing to take it,while Business Z urgently needed a loan of 1,000,000 m.u. andits managers did not know where to find a suitable lender).The bank, by obtaining a loan from one and granting a loan tothe other, satisfies the subjective needs of both and derives asheer entrepreneurial profit in the form of the interest differentialof 5 percent.At the end of a year, Business Z will return the 1,000,000m.u. to Bank A, together with the agreed-upon 15 percentinterest. The entries are as follows:(3) Bank ADebitCredit1,000,000 Cash Loan granted 1,000,000(Repayment)150,000 Cash Interest receivedfrom Business Z(Revenue for the year) 150,0004 On the essence of entrepreneurship, consisting of discovering and takingadvantage of opportunities for profit, and on the sheer entrepreneurialprofit that results, see chapter 2 of Huerta de Soto, Socialismo, cálculoeconómico y función empresarial, pp. 41–86.