How to account for sovereign central-bank money
Bookkeeping is hardly a favourite pastime. Money and banking, however, are in fact about nothing else than accountancy and balancing of accounts. As monetary reform has been gaining attention, ever more experts raise the question of how to account for sovereign money on the balance sheets of central banks and banks.
The first and actually not so good idea was to continue the practice of entering money into the books as a liability of the money creator. A better idea then was to treat sovereign money like coin, that is, as a liquid asset only, which adds to the equity rather than to liabilities. But the coin or equity approach still has its little drawbacks – which can be overcome by an extension of the equity approach as suggested in this new paper on >
Some basic ideas on the matter in a nutshell >
Overcoming the present inconsistency in accounting for coins, notes and reserves (or, respectively, future CBDC) on the central banks' balance sheets requires three fundamental facts to be acknowledged:
1. A central bank today is not a bank like any other, but a nation's or currency area's monetary authority that creates base money, or legal tender, respectively, basically at its own discretion.
2. A central bank today issues its legal tender to banks by way of crediting bank accounts against collateral, or by purchasing securities at the open market; however...
... the money credited and the credit contract are two different things that need to be understood sui generis and hence would have to be registered separately. The central-bank money in whatever solid or informational form consists of monetary tokens. By its very nature such a token is a monetary asset only, neither a claim on someone nor a liability to whosoever.
Accordingly, a central bank's issuance of money would have to be accounted for as an asset swap: the money tokens swapped for a claim on the debtor to pay interest and repay the principal.
3. Within the present framework of central-bank accountancy, the above reality can hardly be represented in a consistent way. The crux of the matter is how to enter newly created monetary assets on a central bank's balance sheet without either conjuring the money out of a hat or distorting the notions of credit and liability, or overstretching the notion of equity.
The answer to the problem was basically already given by David Ricardo: separating a money creation unit of the monetary authority from its banking unit.
Here is a 6 pages paper on the matter that served as an input to an online workshop of the Alliance for Just Money in May 2022: How to account for sovereign central-bank money >
as well as a video recording of that workshop >
Further approaches include the following:
• Thomas Mayer of the Swiss Vollgeld-Initiative has identified > Seven ways of how sovereign money can be brought into circulation
• Similarly > Accounting for Sovereign Money. Why State-Issued Money is Not 'Debt' by Ben Dyson and Graham Hodgson of Positive Money.
• Andrew Jackson (Positive Money) has nicely put together
T-accounts representing the transition from bankmoney to sovereign money >
• Uli Kortsch (The Monetary Trust Initiative) and Jamie Walton (American Monetary Institute) on > Public Money Accounting Principles in the US.