Money Labels

This post attempts to depict the various labels used to describe US money in a Venn diagram and an accompanying table. I've simplified the world into just four entities: The Treasury (Tsy), the Fed, the banks and the private sector non-banks. You can think of Tsy as a stand-in for the all the (largely non-private) non-bank Fed deposit holders (such as Treasury, the IMF, foreign central banks, and government sponsored enterprises (GSEs)), except for in the "Created/Destroyed by" column in the table where only the US Treasury is really meant. "Non-banks" means private sector non-banks in the table. JP Koning has a lot of good information on "moneyness" related issues. So does Cullen Roche.

Update #1: Sept. 28, 2013: By "Face Value" in the table I simply mean the dollar value written on the paper note or the coin, to distinguish it from the production cost of the note or coin. The "face value" of deposits are simply the value of the deposits. Also, by "paper notes" I'm really referring to Federal Reserve Notes (reserve notes). There's also such a thing as United States Notes (US notes) which are also paper bills, but they are very rare and have not really been produced since 1971 (I did not include a row for these in the above table). Unlike reserve notes, US notes are not "face value" liabilities of the Fed, but instead are direct liabilities of the Tsy (after they were printed and sold by the Tsy) although they don't contribute to the statutory debt limit (search for "United States Notes" in this document). Reserve notes are much more common than US notes (I don't believe I've ever seen a US note!).

Coins are not liabilities of any entity officially (they don't appear on any balance sheets as liabilities) however they are described by the Fed and Tsy as being "obligations" of the Tsy. This most likely refers to the fact that coins are accepted as face value legal tender by the Fed and Tsy and that the US Mint (a branch of Tsy) will purchase back damaged coins for their face value. JKH has described coins as "contingent liabilities" of Tsy.

By "Created/Destroyed By" in the table, I mean literally the physical creation and destruction of the physical money in terms of notes and coins. In terms of electronic deposits I mean the crediting (creation) and debiting (destruction) of deposit accounts, which corresponds to the increase and decrease of the balance in these accounts respectively.

Reserve notes are created and destroyed by the Bureau of Engraving and Printing (BEP) which is a branch of the US Treasury (Tsy). Coins are likewise physically created and destroyed by the United States Mint, which is also a branch of the US Tsy. In the case of reserve notes, however, the face value can be thought of to be created and destroyed by the Fed which sells and buys them from banks. While at the Fed, reserve notes are not entered on the balance sheet of any entity. The Fed purchases the notes from the BEP for their production cost, however, once they sell them to banks for their face value, they are entered onto the Fed's balance sheet as a face value liability of the Fed and a face value asset of the banks which purchase them... until the banks in turn sell them as an asset to other non-Fed entities. It's not until they are sold back to the Fed that they again are removed from all balance sheets, and they remain off balance sheet at the Fed until they are resold. If they are not resold they will eventually be destroyed. In this sense the Fed can be thought of as creating and destroying the face value of reserve notes. Coins are different in that they are face value assets from they day they are minted by the Mint and remain so until they are destroyed by the Mint. Similar to notes, however, the face value of coins is not the same as their production costs. Any profit made in the sale of coins is called seigniorage. As can be seen from the table at the bottom of this page, the Mint does not currently make positive seigniorage on pennies and nickles. Does that means it "makes" negative seigniorage on pennies and nickles? I don't know how to refer to that situation! ... if you do, let me know in the comments.

The concept of "inside" and "outside" money is normally defined with respect to the view from the private sector (which includes both banks and non-bank entities). All this means is that "inside money" is a liability of an entity inside the private sector (in this case banks). Outside money is NOT a liability of any entities within the private sector. This is the usual way of defining inside and outside money, however they are more generally relative terms. For example from the point of view of the Fed, reserve notes and Fed deposits are "inside money" even though they are both strictly liabilities of the Fed. In a similar manner, if a non-bank private entity were able to issue IOUs that were used as a form of money, those would also be "inside money" in the typical sense (i.e. w.r.t. the private sector). From the point of view of the non-bank private sector, bank deposits could be considered to be "outside money." However, I will almost always stick to the typical definitions of inside and outside money (as depicted in the above table) in this blog: i.e. w.r.t. the private sector.