Money for the Issuer: Liability or Equity?

3.1.1 Accounting Treatment

Importantly, the International Public Sector Accounting Standards Board has officially taken a position whereby (i) when there is a substantial engagement to give something to the holder, there is a true debt; (ii) when the outflow of resources is only probable, there is a provision; (iii) when the outflow of resources is only possible, there is only a contingent liability; and (iv) when the outflow of resources is remote, there is no liability at all (IPSASB, 2020). Accordingly, this official pronouncement, too, supports the AVM in concluding that when money is irredeemable, it is not a liability of the issuing entity.

But, if irredeemable fiat money is not a liability, what is state money and how should it be accounted for (correctly) in financial reports?

When the state issues irredeemable fiat money (i.e., representation of value created ex nihilo) and sells in exchange for goods and services (by spending it) or in exchange for credit claims (when it lends it), the proceeds originate a form of income, specifically “revenue income,” which corresponds to the resources that fiat money allows the state to acquire. Notice that income may take the form of capital income or revenue income. The former does not relate to running a business, while the latter typically arises from running business activities (Maheswari, 2013).

Issuing state money thus generates seigniorage income to the issuing state. This holds a fortiori when state money is issued to outright finance government expenditures as its nature of income (in terms of resources acquired) is immediately evident. In any case, under current accounting practices, this income is (incorrectly) unreported in the income statement of the issuing entity. In the case of the central bank money, for instance, it is (incorrectly) reported under the central bank’s “liabilities.”

In fact, when money is issued by a public-sector entity, the income should accrue to the entity’s owners – the citizens, as ideal “shareholders” of the “res publica,”^[7] and when money is issued by a privately owned central bank, the income should accrue to the central bank’s private owners. If the income is not distributed to the owners, it should be recorded as retained earnings and would become equity, consistent with BIS’s Archer and Moser-Boehm (2013).

Issuing money is the same thing as producing and selling goods, as money bears value similarly to any goods. If money is sold (such as in exchange for goods or assets) or loaned (leased), it falls under IFRS 15 and 16, respectively. When money is sold against goods, services or real or financial assets (such as, for instance, when the central bank “prints” reserves and sell them against securities, which are claims on real resources), the proceeds from such sales should be accounted for as revenue: the fair value of the goods, services, or assets received in exchange for money should be recognized as revenue (see IFRS 15, Section 66 et ss.).

Notice that the margin between such revenue and the cost of issuing (producing and distributing) money is called “primary” seigniorage. Primary seigniorage is the income (revenues minus costs) that the issuing entity receives from the fiat money used to purchase any form of value (goods, services, and financial and real assets), that is, the value of the real resources that money can buy minus its issuing cost (Chart 1).

Chart 1

Primary seigniorage in accounting.

Conversely, when money is leased (loaned), the money issuer is the same as a lessor in a finance lease (and the lessee receives all the risks and rewards associated with the money leased, see IFRS 16, Appendix A). In this case, the money leased is accounted for as credit (as it is correctly done in current practice), not as a liability (as it is incorrectly done in current practice), and the lessee should account the money leased as an asset (as it is correctly done in current practice, whereby it is recorded as cash), while the associated debt should be accounted for as a liability (as it is correctly done in current practice). The margin between the interest revenue and the costs of issuing the loan is what is called “secondary” seigniorage and should be recorded as revenue in the financial statements of the issuing institution; it is the interest income that the state receives on the money created and loaned out.

Notice that when fiat money is loaned, the income to the issuing entity combines both primary and secondary seigniorage, which both originate from the use of the value created by fiat to purchase real resources. From this standpoint, and in terms of accounting, the permanent or temporary time profile of the transaction is not relevant. Income is generated through a money creation transaction and can be undone through a transaction of opposite sign, which destroys the money previously created. Moreover, in accounting, the mutual offsetting of entries is not admitted because it affects the clarity of financial reports: when money is issued and leased, capital increases, and any increases in capital are equity, while the reverse holds when money is returned as loan repayments. Yet, the sequence of offsetting transactions does not alter the nature of money as equity. In addition, to the extent that a net positive stock of money issued as loans is outstanding, an equal positive stock of corresponding revenues (i.e., primary seigniorage) is also outstanding, which in accounting terms represent the equity of the money issuer.

Nowadays, only a fraction of secondary seigniorage (that on banknotes) is recorded in central bank financial statements, while primary seigniorage and secondary seigniorage on reserves are concealed – the former is recorded on the claims side of the balance sheet (among the liabilities) and the latter is mixed with other revenues and expenses of the income statement and not properly evidenced.

The current practice, thus, bears an evident inconsistency between the correct accounting rule adopted for the lessee and the incorrect one adopted for the lessor. Accumulated revenues in the form of primary and secondary seigniorage constitute equity for the issuing institution. The assimilation of money to equity requires moving beyond the distinction between equity and liabilities, as discussed in Section II. A correct application of the IFRS should recognize that money accepted as legal tender or as a settlement instrument is not a financial instrument for the holder and, therefore, it cannot be debt for the issuer. 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 defines 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, state money is neither “credit” for its holders nor “debt” (i.e., a liability) for its issuer (Box 1). It is instead the net wealth of the holders and the net worth (equity) of the issuer.

Money accounted as issuer’s equity implies ownership rights. It is important to emphasize that these rights do not give money holders any possession entitlement over the entity issuing the money. Unlike the rights enshrined in shares, the equity that stands against money does not give money holders any residual claims on the net assets of the issuing entity, much as consumers buying goods from firms do not hold ownership rights on the selling firms. Money holders hold rights that are identical to those acquired by consumers purchasing goods from firms since selling goods that deliver utility to consumers is not conceptually dissimilar from selling an instrument, like money, which delivers to its acquirers a specific type of utility – that of settling financial obligations.^[8]

The rights embedded in money holdings consist of claims on nominal shares of national wealth, which money holders may exercise at any time (Box 2). Those who receive these claims acquire generalized purchasing power on national wealth, while those issuing the claims get in exchange a form of the gross income of equal nominal value: This income corresponds to the real resources the issuers can buy with the claims issued.

Based on double-entry rules, money under the proposed AVM is equity on the Claims side of the balance sheet and cash on the Asset side. When the money created is “sold” or “leased,” the value received in exchange is recorded on the Assets side and replaces cash, while the Claims side remains unaltered. For the stakeholders of financial statements, it is relevant to receive two kinds of information: first, the evidence of the source of income as separate from the general revenues, and not to be confused with liabilities; second, since the money created (by fiat) is either “sold” or “leased,” there must be some distinct evidence of the income received, namely, net “revenue” from selling money (primary seigniorage) and the interest income from leasing it (secondary seigniorage).

This distinction is useful both to avoid confusion between the two different sources of income and different types of money: only the state can appropriate directly and spend the income from primary seigniorage through coins issuance; all other issuing-money agents can only accumulate primary seigniorage into equity. Conversely, secondary seigniorage is already included in the Income Statement, and thus, there is appropriate evidence for it, although it is confused among several types of intermediation revenues.

3.1.2 Implications

Several critical financial and fiscal implications follow from the proposed approach, which all represent important new contributions of the AVM. First, income from seigniorage is systematically concealed and seigniorage is not recorded in the income statement (where it should naturally belong), while it is recorded on the balance sheet under debt liabilities, thus originating outright incorrect accounting records.

Second, primary seigniorage, that is, the income that derives from the money that is created ex nihilo and by fiat decisions and may be used to finance any exchange of value, should be distinguished from secondary seigniorage, which derives from the interest income received on the money that is issued and loaned. The state does not receive any secondary seigniorage from coins (they are not loaned), while central banks receive primary seigniorage from banknotes and reserve issuances (they typically account only for the former and not for the latter) and receive secondary seigniorage from reserve lending.

Third, central banks with the power to issue the national currency may “create” their own capital, and they can do so at any time they need to. In other words, to the extent that a central bank retains the power to issue money, it can never find itself in a position of having to request for recapitalization by the government.

Just by way of digression, the power to create one’s own capital is perhaps the most vivid example of what economists refer to as a “free lunch.” The free lunch from money issuance may be socially beneficial if the newly created purchasing power is employed to mobilize otherwise unutilized resources and to produce new output, or it may resolve only into higher prices with no net social benefits if no unused capacity is available. In this last case, however, the money issuer would still enjoy a free lunch in that it holds a claim on real resources that it would not hold, absent that power. Following money issuance, the whole “pie” of real resources would be smaller for each eater (due to the effect on prices), but a share of the pie would go to the one eater who has not contributed to its preparation: indeed, a free lunch for him, though at the expense of those who actually contributed to the pie (in other words, a “zero sum game” in which the money issuer gets the positive term of the algebraic addition). One could add that the former situation (one where there is unused capacity) is Pareto improving, while the latter is not. Obviously, should the money creation power be abused and engender hyperinflation, even the money issuer would no longer be in a position to appropriate a positive share of the pie and the whole pie might actually shrink overall.

From the power to create its own capital, it follows that central bank independence may never be threatened by problems of undercapitalization and that the “optimality” of central bank capital can be defined only in relation to the monetary policy objectives that the central bank is mandated to pursue. That is why central bank capital matters: a structural tendency toward negative capital, for instance, which would require continuous “self-creation” of capital by the central bank, would be inconsistent – and therefore suboptimal – vis-à-vis a low inflation objective, while a structural tendency to a too high level of capital would be inconsistent – and therefore, again, suboptimal – vis-a vis a full-employment objective (Archer & Moser-Boehm, 2013).

Fourth, the aforementioned implications identify with clarity who would be in a position to provide the ultimate backstop in a crisis situation. Discussions around the backstop function often entail a (rather paradoxical) circularity argument whereby when at stake is the risk of a government defaulting on its own debt obligations, the monetization of debt through money creation is usually considered – at least, in principle – as providing the last-resort remedy to avoid default: the central bank would be the backstop. On the other hand, when at stake is the risk of a central bank running into financial losses, the government is invoked as the last-resort provider of the extra capital needed to rebuild the central bank’s equity position: in this case, the backstop is the government. Yet, the two options cannot be true at the same: the true backstop can be only the entity that holds the power to issue the currency. Buiter (2008) argues that the taxpayer, through the state treasury, is the ultimate and only guarantor of central bank solvency. In fact, based on the aforementioned argument, Buiter’s assertion holds in the deeper and more general sense that the backstop function can only work if there are real resources available in the economy that can be extracted from their owners (through either explicit taxation or the implicit (inflation) tax inherent in money creation) for the purpose of financing the backstop. It should be noted, however, that even before getting to the point where real resources are physically exhausted, in actual circumstances, a confidence crisis in a country economy might be such that people would want to dump both government debt and cash in exchange for foreign securities, thereby neutralizing the ultimate backstop role of the central bank. Under such circumstances, the backstop function (its financing) could be provided only by an external entity. The key conclusion, here, is that while financial capital is not a constraint on central banks (in the sense that central banks can always “produce” their own capital), they should never want to find themselves in situations where their capital position is inconsistent with their policy objectives and the need to protect their (internal and external) credibility.

Fifth, under the accounting practices currently adopted by national governments and central banks, seigniorage is largely underappreciated. It will be necessary to identify all sources of seigniorage and estimate it, as well as the share of seigniorage that is returned to its potential “owners” (its holders), and to assess its impact on economic activity, the economy’s incentive structure, and the distribution of national wealth across society. Moreover, for public finance purposes, the application of correct financial accounting principles would allow to increase the transparency of the fiscal budgets and central bank balance sheets by removing the incorrect practice of associating state money to “debt.”

Finally, an argument can be made whereby the government should be entitled to receiving back the (correctly estimated) seigniorage extracted by the central bank from the economy (after having made provisions for covering the central bank’s running and capital costs). This would in no way weaken the financial position of the central bank, which would always be able to operate the country’s monetary policy agenda based on its underlying objectives and with not the concern for its own level of equity. The use of seigniorage income by the government would be a fiscal policy decision that should be subject to the country’s political process, taking into consideration distributional and macroeconomic aspects, but having clear in mind the principle that seigniorage income ultimately originates from, and belongs to, the wealth of the country’s citizens.

3.2.1 Accounting Treatment

Commercial bank money constitutes a debt liability for deposit issuing banks since these are under an obligation to convert deposits into cash on demand from their clients and to settle payments in central bank reserves at the time required by payment system settlement rules.

However, in a fractional reserve regime, banks hold only a fraction of reserves against their total deposit liabilities. The amounts of reserves they actually use for settling interbank obligations are only a fraction of the total transactions settled. The more limited is the use of cash in the economy, and the larger the economies of scale in the use of reserves (as permitted by payment system rules and clients’ nonsimultaneous mobilization of deposits), the lower is the volume of reserves that banks need to back up the issuance of new deposits.

Payment system rules affect the use of reserves via two channels: the settlement modality (i.e., netting or gross settlement) and the technology adopted. Modern technologies introduce elements of netting into gross settlement processes and increase the velocity of circulation of reserves, thereby allowing banks to economize on the use of reserves for any given volume and value of payments settled. In the hypothetical case of a fully consolidated banking system in a cashless economy where all agent accounts sit with only one bank, all payments and transfers would be “on us” for the bank. The bank would need no reserves for settling transactions and would be under no debt obligation to its clients, and it might create all the money that the economy would be willing to absorb, without any need for holding reserves. In such a case, the money would have the same power as legal money in settling all debts.

In real-world economies, however, there are multiple banks whose payment activities generate interbank settlement obligations. Yet, the fractional reserve regime and the economies of scale that are made possible both by payment system rules and by depositors’ asynchronous mobilization of deposits reduce the volume of reserves needed by the banks to back their debts. Under increasing scale economies, banks can create more liabilities (by lending or selling deposits) with decreasing reserve margins for coverage. From both the aforementioned hypothetical case and this last observation follows that, all else equal, a more consolidated banking system affords individual banks lower coverage of their liabilities (and at lower cost) than a less concentrated system would.

More generally, absent (very extreme) adverse economic or market contingencies inducing depositors either to convert their deposit claims into cash or to transfer them across banks, the liabilities represented by deposits only partly constitute debt liabilities of the issuing bank, which require cash and reserve coverage.

By way of example, assume that debts are settled with reserves and banks create and issue deposit claims by lending them to clients at an interest. Under a fractional reserve regime, the outstanding stock of the deposits created by the banks is backed only partially (fractionally) with (costly) reserves (ever under most market stress circumstances). In this case, the “unbacked” stock of deposits (i.e., the stock of interest-earning loaned deposits net of the stock of costly reserves), which banks can create at will (until they find borrowers willing to borrow at the given terms and conditions), is a free resource that banks have used to “buy” revenue earning assets (i.e., the interest earning credit claims). In the banks’ balance sheet, these real claims are recorded on the assets side (until they are repaid) and the free resource created (as determined above) should be recorded as equity.

In other words, in fractional reserve regimes, the uncovered part of the banks’ deposit liabilities are a free resource that did not exist before its creation and, once created, can be used to buy claims on real resources (say, loans generating capital and interest payments). This free resource is a source of income accruing to the deposit issuing banks. To the extent that this income is accumulated and undistributed, it is equivalent to equity and should be accounted accordingly. Demand deposits, therefore, consist of “debt deposits” and “equity deposits.” This (admittedly controversial) proposition is further explained in Box 3.

The double nature of deposits is stochastic in as much as, at the time of issuance, every deposit unit can be either a debt-deposit (if, with a certain probability the issuing bank receives requests for cash conversion or interbank settlement) or an equity-deposit (with complementary probability). Faced with such stochastic double nature of its money, a commercial bank finds it convenient to provision the deposit unit issued with a level of reserves that equals only the expected value of the associated debt event (possibly augmented by some unexpected variation margin), rather than the full value of the deposit unit issued.

Here, “stochastic” refers to the fact that – ex ante – a bank creating one unit of deposit expects (probabilistically) that only some share of that unit will translate into debt, while the remaining share (still probabilistically) will not be subject to requests for conversion into cash or reserves. The share of debt-deposits (or equity-deposit, as its complement) is a stochastic variable that is influenced by behavioral and institutional factors (e.g., cash usage habits and payment system rules) as well as by contingent events. In times of market stress, the share of debt-deposit tends to increase, while it tends to be low when trust in the economy (and the banking system in particular) is strong. Policy and structural factors that strengthen such trust (e.g., the elasticity with which the central bank provides liquidity to the system when needed or a deposit insurance mechanism) increase the share of equity-deposits.

This argument is evident when applied to the whole banking system, but it holds also for each individual bank, albeit to different extents depending on the size of each bank for a given payment settlement system and cash usage and on its risk profile, where size refers to the volume and value of payment transactions that the bank intermediates relative to the total payment transactions in the system. From the discussion so far, it follows that, all else being equal, the stochastic share of debt-deposits for a small bank is greater than for a larger bank. Vice versa, the larger is the bank, the greater is the share of equity contained in its deposit liabilities.

In conclusion, while the conventional view holds that commercial bank money (demand deposits) is a liability (debt) of the issuing commercial banks, the AVM argues that, in a fractional reserve regime, commercial bank money is only partly a debt obligation of the issuing commercial bank, with the residual part constituting equity of the same commercial bank in the form of accumulated and undistributed income. As in the case of state money discussed earlier, however, such equity would correspond to the accumulated and undistributed income generated by deposits and should therefore not be confused with bank’s capital with its attendant rights and obligations.

3.2.2 Consistency with International Accounting Standards

The stochastic double nature of commercial bank money is consistent with the definition of liability provided by the new Conceptual Framework under IASB (2018), whereby “a liability is a present obligation of the entity to transfer an economic resource as a result of past events” (Section 4.26, Conceptual Framework) and “Financial reports represent economic phenomena in words and number. To be useful, financial information must not only represent relevant phenomena, but it must also represent the substance of the phenomena that it purports to represent. In many circumstances, the substance of an economic phenomenon and its legal form are the same. If they are not the same, providing information only about the legal form would not faithfully represent the economic phenomenon” (Section 2.12, Conceptual Framework).

In light of these definitions, demand deposits are a hybrid instrument – partly debt and partly revenue. The debt part relates to the share of deposits that will (likely) be converted into banknotes on demand or into reserve for payment settlement purposes and reflects the “substance” of the obligation underlying the deposit contract. The revenue part, on the other hand, relates to the share of deposits that will (likely) never be converted into banknotes or reserves and reflects the mere “legal form” underlying the deposit contract. This share of deposits is a source of revenue. Once accumulated, this revenue becomes equity. It should be noted that equity-deposits are not necessarily inert deposits; they mostly comprise deposit flows that move across accounts held in the book of the same bank and deposit flows that offset each other before settlement, none of which require reserves.

Now, since there are no accounting standards governing hybrid revenue-liability instruments explicitly, IAS 32 applies (in force of the analogy stated in IAS 8) and provides that, in the context of a hybrid liability instrument, the debt component must be separated from the equity one.^[11] From such separation follows that, once the debt component is identified, the residual left is the equity component.^[12] In the case of deposits, the share of deposits that (most probably) will not translate into debt liabilities represent retained earnings (that is, equity capital).

The application of IAS 32 is a textbook case. It implies that the financial statements of the issuing bank should report among debts only the share of deposits that give origin to a substantial obligation to transfer economic resources, while the residual share should be reported in the income statement as revenue. Moreover, since the share of profits attributable to this revenue is undistributed, they add to the bank’s equity.

To support the validity of the approach here proposed, take IAS 37 (on risk provisioning, charges, and contingent liabilities).^[13] This standard considers as debt all commitments that fall under the Conceptual Framework’s definition of “liability,” that is, those that generate outflows of economic resources with a probability greater than 0.5. Below such threshold, the liability is a contingent liability and must be reported only in the notes to the financial statements. Take also the recent innovation by IPSASB (2020), referred to in Section 3.1., which is very consistent with the AVM. In this regard, it should be noted that although the scope of the IPSAS extends to the public sector, the important innovation of the IPSAS as regards the treatment of liabilities is also in principle relevant for private sector entities, and such that private sector accounting framework should not neglect. Much as we have expressed our belief that the IFRS can contribute new blood into public sector accounting rules and practices, we also believe that new public sector accounting rules and practices could as well be valid for private sector businesses when they refer to general principles (as in the case of liabilities).

The implication is inescapable: the existence of formal claims is not alone sufficient for a liability to be considered as debt; the essential requisite is the probable outflows of economic resources. The probability is not per se relevant; it is so only if it allows for a faithful representation of the transactions involved as the aim is to provide information that is useful to investors, lenders, and other creditors.^[14] In the case of commercial bank money, the share of deposits that are not debt liabilities must be regarded as revenue, and since such revenue is not reported in the income statement, it constitutes retained earnings (equity).

3.2.3 A Third Accounting Category Beyond Liabilities and Equity?

While, in principle, the distinction between liabilities and equity does not seem to admit any tertius genus, the AVM suggests the possibility of a new accounting subcategory within the equity category. Traditionally, equity consists of capital, capital reserves, and retained earnings; a more recent addition is “reserves deriving from other comprehensive income” (previously called “capital maintenance adjustments”). The arguments underpinning the AVM point to the need for a new class of “cash reserves,” which would reflect the equity share of money issuance. A new category of hybrid instruments would emerge as a result: not between securities and shares (like traditional hybrid instruments), but between securities and revenues. Once capitalized, such revenues would merge in the new cash reserves subcategory. The proposed accounting treatment of money features interesting analogies with the way insurance liabilities are treated according to international standards (Box 4).

3.2.4 Implications

In fractional reserve regimes, commercial bank money – that is, demand deposit claims issued by commercial banks – has a double nature: it is partly a debt obligation and partly equity of the issuing commercial banks. This double nature originates from the power of banks to create a form of money that only partially features the nature of debt, as discussed earlier.

Some critical implications follow, which represent new contributions of the AMV in addition to those discussed earlier concerning state money. The first implication is that a relevant share of deposits that banks report in their financial statements as “debt toward clients” generate revenues that are analogous to the seigniorage rents extracted from the economy by the state or the central bank through the issuance of legal money (coins and banknotes) and central bank reserves, respectively. This, in turn, bears implications for the way banks’ capital is calculated. Critical for this calculation is the probability factor discussed earlier, which characterizes each bank individually, depending on its relative size, its role in the payment system, and its risk profile.

The objection to this is that the creation of demand deposits cannot serve as a source of income since, should a bank end up in insolvency, all deposits would be withdrawn (to the extent that they are covered with assets or guaranteed). In fact, international accounting standards such the IFRS are conceived for, and hold, under the hypothesis of going concern, not under the hypothesis of liquidation. Under liquidation, money becomes a liability to the holders, just as the equity shares of a firm become liabilities toward the shareholders for any residual value of the firm. This change of status, however, does not (and cannot) change the ways transactions are represented in accounting terms, since substance must always prevail over form in normal conditions. However, as regards commercial bank money, under the AVM, only secondary seigniorage is appropriated and potentially distributable to shareholders, while primary seigniorage is a sui generis part of equity, not to be settled to holders (in which case it would be a liability) and not be distributed to shareholders, but to be kept invested in the bank.

The second implication is that commercial banks are hybrid institutions much as demand deposits are hybrid instruments. As issuers of debt-deposits (when they lend money), commercial banks are pure intermediaries. As issuers of equity-deposits, they are money creators. Due to the scale economies in the use of reserves, discussed earlier, smaller banks would tend to fall within the former category and larger banks in the latter. Notice that while the income earned on debt-deposits originates from intermediation, income on equity-deposits constitutes seigniorage.

Third, commercial bank seigniorage represents a structural element of acquisition of net real resources from the economy, and it is essentially a cost item for firms borrowing money to support production, with a rise in seigniorage potentially bearing implications that should deserve attention. Policy considerations could, for instance, be given to reducing seigniorage (say, by increasing banking sector competition or by limiting the average size of banks) or to transfer part of it back to the economy through the fiscal budget.

However, the merits of policy decisions in this area transcend the scope of this study. It should only be noted that the various tradeoffs involved in such decisions call for future research. For instance, if, on the one hand, a decision to tax commercial bank seigniorage would be justified on grounds that it represents a form of a private-sector rent, on the other hand, the same decision should recognize that part of seigniorage is a compensation of commercial banks providing society with an elastic mechanism of money issuance and a device to allocate money across the economy more efficiently than under a centralized mechanism. Issuing fiat money through a market decentralized money supply system (i.e., the commercial banking sector) affords much greater elasticity to an economy than a state centralized system based on commodity money. The greater elasticity translates into a more flexible and convenient accommodation of the money supply to its dispersed demand than if the money supply were determined by exogenous factors (e.g., the availability of the underlying real commodity) and were managed in a centralized fashion. A “normal” profit rate should therefore remunerate banks for the value they add to the economy by creating and allocating money as a public good, which the public demands and is willing to hold for the services it delivers. Seigniorage as unearned income would thus consist of any profits associated with money creation, which would accrue to banks in excess of the “normal” level.

Fourth, as a share of deposits are true liabilities, liquid assets must be adequate to enable banks to withstand anticipated and unanticipated outflows of cash and reserves. In addition, the primary seigniorage that corresponds to equity-deposits should accrue to the bank’s equity and should not be distributed as dividends. Currently, a share of deposits are diverted to bank profits through fees and commissions and are therefore privatized by the bank shareholders through dividends, possibly in excess of “normal” profits and especially in the case of banks with large bases of equity-deposits. The privatization of such extra-profits detracts from the stable flow of resource investment that should go into the bank. Appropriate metrics should be developed to assess these extra-profits quantitatively, which go beyond the scope of this study.

Finally, the aforementioned arguments offer good reasons why the equity originated by seigniorage should be estimated and accounted for correctly, and why stakeholders (including the authorities) should be able to identify it. In addition, correct accounting rules and value estimates of seigniorage would provide reliable indicators of the strengths of the accruing banks and a measure of their true market power and systemic relevance. Our main point is about one of the fundamental qualitative characteristics that financial information should feature: Faithful Representation. The fact that issuing money increases the equity of the issuer has to be recognized and represented faithfully, irrespective of the use of the financial information.