Money for the Issuer: Liability or Equity?

Abstract

This study analyzes the nature of money through the lens of the international principles of accounting and lays the foundations of what it calls the accounting view of money (AVM). Using international accounting principles, the AVM argues that the fiat monies issued by the state (typically, cash, banknotes, and central bank money) are not debt and that in fractional reserve regimes, only a share of commercial bank money can be regarded as debt. The AVM argues, instead, that state monies and the nondebt share of commercial bank money are net wealth of their holders and net worth (equity) of their issuers and determines how the seigniorage associated with money issuance should be accounted for correctly in the financial statements of the issuing institutions. The AVM points to the correct way to account for the various forms of money in the financial statements of the issuing institutions, clarifies what the different accounting treatments imply for a correct understanding of the concept of money, and evaluates the related economic and economic policy implications.

Bank Deposits as Money Quanta

“…To the extent that this income is accumulated and undistributed, it is equivalent to equity and should be accounted accordingly. Deposits, therefore, consist of “debt-deposits” and “equity-deposits.” This (admittedly controversial) proposition is further explained in (Bossone & Costa, 2021), especially Boxes 1–3.…”

“…Deposits, therefore, consist of "debt-deposits" and "equity-deposits." This (admittedly controversial) proposition is further explained in (Bossone & Costa, 2021), especially Boxes 1-3.…”

“…The advantages of treating bank deposits as quantum objects are, at least twofold. First, whereas under the traditional view the claims side of a bank's balance sheet feature a clear distinction between liabilities and equity, with demand deposits sitting squarely on the former item line, the hybrid nature of deposits uncovers a different and richer underlying economic reality that, as the AVM shows, bears new accounting and financial implications, including for the different forms of income that bank's money creation power generates and should be appropriately recognized, (Bossone & Costa, 2021). Second, the hybrid nature of deposits and their tractability as quantum objects allows to incorporate within their analysis a broader range of risk and uncertainty dynamics that might uncover elements that would not be evident under traditional analysis.…”

“…Yet, how does the nature of debt obligations of bank deposits relate to the circumstance that a large share of such deposits are never going to be redeemed for cash or against settlement instruments under most circumstances (with the exception of extreme cases like runs on the banks)? The Accounting View of Money (AVM) shows that, in fractional reserve regimes (see below), banks deposits take a hybrid form, whereby only a share of them can be regarded (and accounted for) as debt, while the remaining non-debt share represents net worth (equity) of the issuing banks, (Bossone & Costa, 2021). The AVM 1 also shows the nature of deposit-issuing banks as hybrid institutions (part creators of money, and part pure financial intermediaries).…”

“…5.For an application of the money “sale” concept to today’s digital currencies and the related legal underpinnings, see (Bossone & Costa, 2021). …”