The “accounting view” of money: money as equity (Part I)

Coins circulating as legal tender in national jurisdictions are treated as debt liabilities in the issuing states and reported as part of public debt under national accounting statistics (ESA 2010). Similarly, banknotes from central banks and central bank reserves are taken into consideration as central bank debt for his or her holders.

Although the law claims that funds are “debt,” an effective utilisation of the overall concepts of accounting raises doubts about this kind of conception of money. Debt involves an obligation between loan company and customer as contracting parties. Yet, for your condition, which obligation comes from the legal legal rights entertained with the holders of coins? Or, for just about any central bank, which obligation comes from the legal legal rights entertained with the holders of banknotes or perhaps the banks holding reserves?

Funds are not debt

Not such a long time ago, sovereigns guaranteed the coins issued contained specific amounts of silver and gold. Later, banknotes gave holders the legal right to claim conversion into silver or gold. The same obligation committed central banks for his or her reserve liabilities issued to commercial banks. The Three kinds of money thus originated true debt obligations that have been legally binding by themselves issuers.

Today, convertibility has essentially disappeared for your three monies. Coins have mislaid a lot of their relevance and largely been substituted with paper money. Convertibility of banknotes was suspended extended ago, as well as the abandonment in the gold exchange standard (about half a century ago) marked the demise of “debt” banknotes even just in the world level. Finally, the reserve deposits held by commercial banks and national treasuries at central banks are today delinked from obligations of conversion into goods or third-party liabilities. 1

Therefore, although these monies continue being allotted as debt in public areas finance statistics and central bank fiscal reports, they are not debt concept of transporting obligations that imply creditor legal legal rights.

Funds are equity

Issuing legal tender involves transactions whereby funds are offered to acquire other assets (even if it’s exchanged against credit claims under lending contracts). The comes from money sales represent a type of earnings, particularly a “revenue earnings.”2 Issuing legal tender thus generates earnings for the issuer. Under current accounting practices, this earnings is (incorrectly) unreported inside the earnings statement in the central bank and rather (incorrectly) reserve beneath the central bank’s “liabilities.”

When funds are from your open sector entity, the connected earnings should accrue for the entity’s proprietors: the citizens. When, rather, funds are from the individually owned central bank, the income accrues for the central bank’s private proprietors. When not provided to the proprietors, the income goes into retained earnings and become equity.

The assimilation of money to equity requires moving beyond the among equity and liabilities as requested investigating the type of financial instruments.3 An effective utilisation of the overall accounting concepts understands that money acknowledged as legal tender is not an economic instrument and so can not be debt. Worldwide Accounting Standard (IAS) 32 defines a “financial instrument” as “a contract which brings a good economic asset of just one entity plus a financial liability or equity instrument of one other entity,” plus an “equity instrument” as “any contract that evidences a residual fascination with the assets from the entity after deducting its liabilities” (componen. 11). Under these definitions, legal tender funds are neither “credit” due to its holders nor “debt” due to its issuers. It’s rather internet insightful the holders and internet worth (equity) in the issuers.

Money accounted since the issuer’s equity implies possession legal legal rights. These legal legal rights inclination to slack money holders possession inside the entity issuing the money (as shares giving investors having the organization or residual claims round the company’s internet assets). Rather, they contain claims on shares of national wealth, which money holders may exercise anytime. Those who receives a commission acquire purchasing switch on national wealth, and people issuing money enter exchange a type of gross earnings that is the same as its nominal value. The income calculated since the among the gross revenue from money issuance and also the cost of manufacturing cash is known as “seigniorage” which is appropriated by those who hold (or are granted) the opportunity to issue money.

The “Accounting View” of money

This discussion sets a comprehensive outline that we here call the “Accounting View” of money, which requires understanding money by correctly joining it the concepts of general accounting. Several implications follow within the approach. Two are touched upon beneath the third, concerning commercial bank money, may be the subject of parts II and III from the blog.

First, rents from seigniorage are systematically hidden, and seigniorage is not allotted for the earnings statement (where it naturally belongs), though it may be upon the liabilities side in the balance sheet, thus originating outright false accounting.

Second, primary seigniorage needs to be distinguished from “secondary” seigniorage, which comes from the attention earnings received on money that’s issued and loaned. The problem does not have any secondary seigniorage from coins (they are not loaned). Central banks receive seigniorage from banknotes and reserve issuances but account only for the prior, and never the second.

Preliminary conclusions

An important conclusion is always that seigniorage is essentially underappreciated under current accounting rules. It’ll be necessary to identify and estimate such seigniorage, the proportion of seigniorage that’s returned towards the legitimate “owners” (the citizens), which is effects on business activities as well as on the economy’s incentive structure as well as the distribution of national wealth across society.

For public finances, the completely new approach should lead to “cleaning up” fiscal budgets and central bank balance sheets within the false practice of considering legal tender as “debt.”

Finally, if funds are accounted as debt, as opposed to considered as equity in the issuing entities and wealth for your society deploying it, it inevitably introduces a deflationary bias throughout the market, which deserves analysis.


ESA (European System of Accounts). 2010. ESA, Eurostat, European Commission, The town, Belgium.

Maheswari, S. N. 2013. Concepts of financial Accounting. New Delhi, India: Vikas Publishing House.

PAAinE (Pro-Active Accounting in Europe). 2008. “Distinguishing between Liabilities and Equity.” Discussion Paper, PAAinE, European Financial Reporting Advisory Group, The town, Belgium.

PWC (Cost Waterhouse Cooper). 2017. “Distinguishing Liabilities from Equity.” PWC, London.

Schmidt, M. 2013. “Equity and Liabilities: Legal Representative of IAS 32 plus a Critique in the Classification.” Accounting in Europe 10 (2): 201-22.

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