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

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Coins circulating as legal tender in national jurisdictions worldwide are treated as debt liabilities of the issuing states and reported as a component of public debt under national accounting statistics (ESA 2010). Similarly, banknotes issued by central banks and central bank reserves are accounted for as central bank debt to their holders.

Although the law says that money is “debt,” a correct application of the general principles of accounting raises doubts about such a conception of money. Debt involves an obligation between lender and borrower as contracting parties. Yet, for the state, which obligation derives from the rights entertained by the holders of coins? Or, for a central bank, which obligation derives from the rights entertained by the holders of banknotes or the banks holding reserves?

Money is not debt

Once upon a time, sovereigns guaranteed that the coins issued contained specific amounts of precious metals. Later, banknotes gave holders the right to claim conversion into silver or gold. A similar obligation committed central banks to their reserve liabilities issued to commercial banks. All three species of money thus originated true debt obligations that were legally binding on their issuers.

Today, convertibility has all but disappeared for the three monies. Coins have lost most of their relevance and largely been replaced by paper money. Convertibility of banknotes was suspended long ago, and the abandonment of the gold exchange standard (about half a century ago) marked the demise of “debt” banknotes even at the international level. Finally, the reserve deposits held by commercial banks and national treasuries at central banks are today delinked from obligations of conversion into commodities or third-party liabilities. 1

Therefore, although these monies are still allocated as debt in public finance statistics and central bank financial statements, they are not debt in the sense of carrying obligations that imply creditor rights.

Money is equity

Issuing legal tender involves transactions whereby money is sold in exchange for other assets (even when it is exchanged against credit claims under lending contracts). The proceeds from money sales represent a form of income, specifically a “revenue income.”2 Issuing legal tender thus generates income to the issuer. Under current accounting practices, this income is (incorrectly) unreported in the income statement of the central bank and instead (incorrectly) set aside under the central bank’s “liabilities.”

When money is issued by a public sector entity, the associated income should accrue to the entity’s owners: the citizens. When, instead, money is issued by a privately owned central bank, the income accrues to the central bank’s private owners. If it is not distributed to the owners, the income should go into retained earnings and become equity.

The assimilation of money to equity requires moving beyond the distinction between equity and liabilities as applied for investigating the nature of financial instruments.3 A correct application of the general accounting principles recognizes that money accepted as legal tender is not a financial instrument and therefore cannot be debt. International Accounting Standard (IAS) 32 defines a “financial instrument” as “a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity,” and an “equity instrument” as “any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities” (par. 11). Under these definitions, legal tender money is neither “credit” for its holders nor “debt” for its issuers. It is instead net wealth of the holders and net worth (equity) of the issuers.

Money accounted as the issuer’s equity implies ownership rights. These rights do not give money holders possession over the entity issuing the money (as shares giving investors ownership of a company or residual claims on the company’s net assets). Rather, they consist of claims on shares of national wealth, which money holders may exercise at any time. Those who receive money acquire purchasing power on national wealth, and those issuing money get in exchange a form of gross income that is equal to its nominal value. The income calculated as the difference between the gross revenue from money issuance and the cost of producing money is known as “seigniorage” and is appropriated by those who hold (or are granted) the power to issue money.

The “Accounting View” of money

The foregoing discussion sets a broad outline for what we here refer to as the “Accounting View” of money, which calls for understanding money by correctly applying to it the principles of general accounting. Several implications follow from the approach. Two are touched upon below; the third, concerning commercial bank money, is the subject of parts II and III of this blog.

First, rents from seigniorage are systematically concealed, and seigniorage is not allocated to the income statement (where it naturally belongs), while it is recorded on the liabilities side of the balance sheet, thus originating outright false accounting.

Second, primary seigniorage should be distinguished from “secondary” seigniorage, which derives from the interest income received on money that is issued and loaned. The state does not receive any secondary seigniorage from coins (they are not loaned). Central banks receive seigniorage from banknotes and reserve issuances but account only for the former, not the latter.

Preliminary conclusions

An important conclusion is that seigniorage is largely underappreciated under current accounting rules. It will be necessary to identify and estimate such seigniorage, the share of seigniorage that is returned to its legitimate “owners” (the citizens), and its effects on economic activity as well as on the economy’s incentive structure and the distribution of national wealth across society.

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

Finally, if money is accounted as debt, instead of considered as equity of the issuing entities and wealth for the society using it, it inevitably introduces a deflationary bias in the economy, which deserves analysis.


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

Maheswari, S. N. 2013. Principles 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, Brussels, Belgium.

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

Schmidt, M. 2013. “Equity and Liabilities: A Discussion of IAS 32 and a Critique of the Classification.” Accounting in Europe 10 (2): 201–22.


1 Except where the central bank adheres to fixed exchange rate arrangements, the economy is dollarized, or the country is under a currency board regime.

2 Income may take the form of capital income or revenue income. The former does not relate to running a business, while the latter arises from running business activities (Maheshwari 2013).

3 See, for instance, Schmidt (2013), PAAinE (2008), and PWC (2017).

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