the issuing states, and are reported as a component of public debt under their respective national accounting statistics (ESA, 2010). Similarly, banknotes issued by central banks, and by extension central bank reserves (which represent the largest share of money base in every contemporary economy), are considered as liabilities of the issuing central banks and are accounted for as central bank debt to their holders.
By Biagio Bossone e Massimo Costa
In fact, even though the law says that money is “debt”, a correct application of the general principles of accounting does raise deep doubts about such a conception of money. Debt typically involves an obligation between lender and borrower as contracting parties. We wonder which obligation may fall upon the state from the rights entertained by the holders of coins, or which obligation may fall upon the central bank from the rights entertained by the holders of banknotes or by the banks holding reserves.
We specifically refer to these three “species” of money because they are all “legal tender”, that is, in force of a legal power, they absolve their issuers of any responsibility to convert them into other forms of value. This is not the case, obviously, for monies that are convertible on demand into commodities or liabilities issued by third parties (e.g., currencies of other countries). On the other hand, conversion of reserves into banknotes does not constitute a central bank’s debt obligation, since it only gives rise to a substitution of one form of liability for another that is issued by the same central bank and is not redeemable in any other form of value produced by third parties.
A similar question can be asked with respect to the money issued by commercial banks in the form of sight deposits, inasmuch as this money plays a similar role to that of legal tender in almost all bank-customer relations (excluding interbank obligations, which require central bank money as settlement asset). We shall return to this type of money later on in the article. Below we focus on legal tender monies issued by the state or the central bank.
Legal tender: if it is not debt, what else is it?
In the old days, local sovereigns guaranteed that the coins they issued contained a specific amount of precious metal (silver or gold). Still in those days, banknotes gave their holders the right to claim for their conversion into silver or gold coins. To be able to match those claims, sovereigns needed to hold adequate volumes of metal reserves. The same kind of obligation committed central banks with respect to their reserve liabilities issued to commercial banks. Therefore, all three species of money gave origin to true debt obligations that were legally binding on their issuers and could be triggered on demand by their holders at any point in time.
But this was the past. Today, convertibility has all but disappeared for each of the three money species under discussion. Coins have lost most of their relevance and have been largely replaced by paper money. Convertibility of banknotes has been suspended long ago, and the abandonment of the gold-exchange standard, about half a century ago, marked the definitive 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 any conversion obligation into commodities or third-party liabilities (except where the central bank adheres to fixed exchange rate arrangements, the economy is dollarized, or the country is under a currency board regime).
Therefore, although for legacy reasons, or simply due to conventional choice, money is still allocated as debt in public finance statistics and central bank financial statements, it is not debt in the sense of carrying obligations that imply creditor rights. Rather, it represents equity for the issuer and, as such, it implies ownership rights.
The “Accounting View” of money