James Ahiakpor wrote:  
  
>I don't think it serves any useful purpose to deny that modern paper   
>currency (fiat money) is the liability of the central bank that issues   
>it.  The U.S. dollar is certainly not exchangeable into gold anymore, but   
>a defective dollar bill is, by "right," returnable to its issuer for a new   
>or non-defective one.  The dollar bill in my pocket is my asset; it is   
>also the liability of the Fed.  Why deny that?  The deposit slip I get   
>from my bank is a record of my asset (savings or financial wealth); it is   
>also a record of the bank's liability -- redeemable to me upon request.  
  
Since I have written on this in detail in "Money, Prices and Finance in the   
New Monetary Economics" (Oxford Economic Papers, March 1988) and in chapter   
5 of my The New Classical Macroeconomics, I won't go on too long.  But   
let's clarify things a little.  First, I don't deny that a checking account   
is an asset to me and a liability to the bank; the issue concerns only fiat   
money issued by the government.  Nor do I deny that the Federal Reserve   
records banknotes as its liability.  The question is whether this has any   
real significance.  It doesn't.  It is merely an artifact from a time when   
Federal Reserve notes were convertible into precious metals, which ended   
domestically when silver certificates were withdrawn in 1964.  That the Fed   
will exchange a worn note for a new one is a triviality.  To see how little   
significant the categorization of banknotes as liabilities is, consider   
U.S. coins.  Since 1964 these have been minted from base metal, and are   
every bit as much token, fiat money as the notes.  (From time to time, the   
government attempts to circulate dollar coins in hopes of supplanting   
dollar bills.  This is a simple technological change from a less enduring   
to a more enduring token.)  So, economically coins and notes serve the same   
function.  Yet, the coins are not recorded as liabilities of either the Fed   
or the government.  In fact, coins held by the Fed are counted as assets to   
the Fed, where notes non-yet-issued or returned by banks are not.  The   
difference is one of an accounting convention.  It is easily understood,   
given the history of the transition from backed to unbacked currency and   
from full-bodied coin to token coin; but it is not economically   
significant.  It obfuscates the fact that when I hold a dollar bill, I am   
at the end of the line (just as much as would have been in the past had I   
held a gold coin) where no one owes me anything in light of my holding the   
money.  
  
Kevin Hoover