The Liquidity Between Production and Payment

Firm-level uncertainty does not end when a firm has forecast customer demand. A second problem appears when the firm must pay workers and suppliers before sales cash arrives. This chapter examines that corporate-liquidity problem through the BIS concept of money elasticity: the practical ability to draw an overdraft or committed credit line when an obligation is due. The goal is to distinguish two questions that are often collapsed into “credit conditions”—how much customers can buy, and whether a firm can bridge the time between spending on production and receiving payment.

That timing gap can make a firm vulnerable even when its long-run business is viable. A manufacturer may have an order but need to pay workers today, prepay for an input, and wait several production rounds before the final customer pays. If the promised liquidity is available, the chain can continue. If the terms or limits of that liquidity tighten, the firm may cut inventory, shorten trade-credit terms, delay production, or pass the pressure to another firm. Network position determines how much cash-flow timing the firm must finance.

Elastic money is an operating capability

In a modern intermediary-based payment system, money is not limited to notes or to deposits that already sit in an account. When a borrower draws on an overdraft or committed credit line, a bank can create a deposit that lets the borrower settle an obligation immediately. The borrower chooses when to use the facility; the bank sets the terms, borrowing limit, and conditions under which the commitment can be honored. The BIS paper calls this demand-driven capacity to expand usable liquidity money elasticity.

The concept is easiest to see as a timing service. A firm buys an input or pays a worker at time one, but expects the cash from a customer at time two. A credit line allows the firm to use part of its future borrowing capacity at time one. When the customer pays, the firm can repay or restore the facility. The credit line has made the payment possible before the firm’s own cash flow arrived. It has not made the underlying production more efficient, but it has prevented a timing mismatch from stopping production.

This capacity is especially important in long production chains. The longer the path from initial production expense to final sale, the longer value-added payments and supplier commitments must be carried. A downstream firm may also need to pay part of the value embedded in an intermediate input before the input is delivered. If every firm had to wait for incoming cash before paying the next firm, a temporary delay could become a chain-wide blockage. On-demand liquidity helps the system settle obligations while goods continue to move.