Nick Edmonds — Ledger Accounting for the Monetary Circuit

Some of the basics for double-entry book-keeping are as follows:

1. We can generate any number of ledgers for different items or stages in a process. Note that a ledger does not necessarily relate to something that we might think of as a balance sheet item. Purchases and sales have ledgers as well, even though these are purely income items. We may decide to be more or less aggregated with our ledgers, depending on what we want to record. For example, we might have a single purchase ledger or we might have a number for different types of purchase.

2. A debit is any of: an increase in the value of an asset, a decrease in the amount of a liability, or an item of expenditure. A credit is any of: a decrease in the value of an asset, an increase in the amount of a liability, or an item of income.

3. Each time we put a credit in one ledger, we must put an equal debit in another ledger.

Some of these ledgers may look familiar. In particular, the ledger for a deposit account is essentially the same as the depositor's bank statement. The statement dates will not typically coincide with the dates at which the bank is drawing up its own accounts but, apart from that, they record the same entries and balances.

The most interesting thing I think about this exercise is that we are seeing what bank money actually is. In other words, this process is not simply a record of money movements - it is the actual money movements themselves. If the non-bank agents maintain their accounts with the same bank, then nothing else is going on, beyond what we see here. (If they have accounts with different banks, then each bank (and maybe the central bank) will need to make entries and there will also be wire confirmations, but the essence of the money movement is still just the entries in the ledgers.)

Another thing worth noting is that the transactions have a specific date, but no time. Although there is an increasing use of real time gross settlement, it is not an essential feature of the way ledger money works. This means that there is no fact of the matter as to in what order payments occur during the day.

Reflections on Monetary Economics
Ledger Accounting for the Monetary Circuit
Nick Edmonds

When a bank creates a deposit by making a loan it is making a promise to credit other accounts at the depositor's discretion. In this way the depositor's asset is moved to another account, and if the account is in another bank, then the band's deposit liability is transferred to the recipient's bank for crediting to the recipient's account. This involves the original depositor's bank to credit the reserve account of the recipient's bank, thereby drawing down its own reserve account, an asset account. This leaves the loan outstanding as an asset of the original borrower's bank. 

Nothing changed other than ledger entires but money was moved from account to account. Some of that was bank money in deposit accounts and some, in the case of interbank transfer, was government money (reserves) in the payments system. The only physical exchange perhaps involved checks, but increasingly banking is done electronically, all by keystrokes. Unless cash is withdrawn in the process or paper checks exchanged, the procedure is notional rather than actual and notational instead of physical.