I have created a somewhat busy spreadsheet to illustrate some basics of bank accounting as I understand them. I suggest you have a look at it before you read the rest of the post. Going forward, I assume, for clarity's sake, that all transactions are recorded in the general ledger. That might not be the case in reality (see explanation here).
My spreadsheet example is adapted to an example Jamie, one of the participants to the discussion, has given in his laudable, easy-to-follow slide set here.
"Quadruple-entry bookkeeping", as I understand it, refers to two different real-life ledgers, or "books". Jamie gave an example in one of his comments:
Forget about creating money for a moment. Imagine the simplest possible economy where only one economic transaction takes place anywhere in the entire economy during an accounting period.
Imagine that the transaction is that my business sells you a bicycle for €100. Let’s look at this from both our perspectives.
Jamie’s perspective: I lose a bicycle and gain €100.
Antii’s perspective: You gain a bicycle and lose €100.
Macro-economic perspective: No gain or loss of either bicycles or money as the changes in Jamie’s position and Antii’s position cancel out. The macro-economy doesn’t care who has the bicycle and who has the money.
Note that there are FOUR position changes in the macro-economy that we must account for even in this simplest possible economy with only one transaction (two changes in bicycle inventories, two changes in money inventories).
If both Jamie and I kept records of our transactions (in a double-entry bookkeeping format), there would clearly be two different ledgers: Jamie's ledger and my ledger.
In reality, Jamie would probably make four entries on accounts in his ledger (see example here). Two of the entries would be related to his income: credit (CR) "Sales" and debit (DR) "Cost of goods sold"). The other two would be related to his assets: CR "Inventory" and DR "Cash"; "cash" includes checking account, if we are in the electronic age. (Notice that these are not the "credit-debit pairs"; those are "CR Sales, DR Cash" and "CR Inventory, DR Cost of goods sold"; see the example I linked to above.)
To simplify things, we can assume that Jamie sells the bicycle "at cost", so that his inventory is diminished by €100. It seems the purpose of Jamie's example is to highlight the asset positions, so we can overlook the income side (zero effect if goods are sold "at cost"). So, two entries: CR 100 Inventory, DR 100 Cash.
In the example, I, Antti, am not a business. That most likely means that I keep records only of my assets – not of my income. Two entries: CR 100 Cash, DR 100 Inventory (of assets/of bicycles).
Jamie's two entries and my two entries together are the four entries needed in "macroeconomic accounting", following the principle of "quadruple-entry bookkeeping", as suggested by Jamie. Looking at the entries, we could conclude that one person's credit is another person's debit, and vice versa.
What seems to remain unclear in the discussion is what happens in bank accounting. What kind of entries does a bank make in its ledger in different situations?
Here are two scenarios:
1. Let's take Jamie's example above and assume that we are talking about checking accounts, not physical cash. As far as I know, the bank would make only two entries in its ledger in this case: CR 100 on "Jamie's checking account" and DR 100 on "Antti's checking account". (Would taking a macro-perspective lead to sextuple-entry bookkeeping in this case?)
2. Nick's dad agrees on a $1,000 loan with his bank (see, again, my spreadsheet example). Outside of the bank ledger, a loan contract and possibly other documents are created and filed. In the bank ledger, two entries are made: DR 1000 on "Nick's dad's loan account" and CR 1000 on "Nick's dad's checking account".
In Nick's blog's comments, Jamie says:
Loans are assets for a bank. Assets are usually recorded in asset registers. I can’t say if banks have a specific name of their register of loans but I am pretty confident that this is correct.
I might interpret him wrong, but this sounds like he's suggesting that there are two different entries made in the bank's ledger to record (1) an asset of the bank ("green loan"), and (2) Nick's dad's loan/debt/liability ("red loan")? This is obviously not the case, as it is clear that the debit balance on Nick's dad's loan account is at the same time (considered as) an asset of the bank and a liability of Nick's dad (two perspectives).
The framework Jamie presents in his slide set doesn't seem compatible with the framework Nick has established by differentiating between green money and red money. In Nick's world, there are no loan accounts. There are only checking accounts that can be "overdrawn", and to Nick a positive (credit) balance is "green money" while a negative (debit) balance is "red money" – both primarily seen from the account-holder's (customer's) perspective. Nick also makes clear that he doesn't consider – in clear contrast to conventional accounting language – "green money" a liability of the bank (Jamie's "red money") nor "red money" an asset of the bank (Jamie's "green loan"). (I think the subject of overdraft and what I call a traditional loan – two alternative accounting techniques – deserve a "deep-dive" blog post. Let me know if you agree.)
I understand that we all use different implicit models when we try to make sense of the world. That's fine. But we all need to be able to tell the model from phenomena (reality). I think Nick does well in this regard, because it wouldn't cross anyone's mind that Nick thinks that the bank really uses red and green bits of paper, moving those between customers' boxes. But when I look at Jamie's slide 8, I cannot tell if Step 1 is supposed to be something that takes place in reality or not. As far as I know, it doesn't. And even if it did, I can't see any purpose in it. This is because the bank doesn't need to "create" or "manufacture" money (or medium of exchange) or loans. This has been understood since the overdraft was invented in Scotland in the 18th century. It was invented when a banker, with the help of a customer, realized that an account doesn't have to have "money" in/on it and still a payment can be made "from" it.
Quite a mess we've got ourselves in?