How is money ‘destroyed’ when loans are repaid?

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When banks make loans, they record a new asset (the loan) and a new liability (the deposits that appear in the borrower’s account) on their balance sheet. When loans are repaid, the deposits (liabilities) are cancelled out against the loan (asset) and both sides of the balance sheet ‘shrink’. The deposits disappear from the economy. See Banking 101 Part 6 for an explanation of how this works.

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