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 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.
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.
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.
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- 7 https://www.google.co.jp/