Sunday, January 16, 2011

CR and DR

RealistTheorist quickly got the easy answer: CR is short for credit, DR is short for debit. One cookie.

The significance in this context comes from how that in the accounts presented the CR and DR are quoted from the perspective of my bank (Commonwealth Bank of Australia). Whenever one looks at one's bank statement what one is actually looking at is an extract from that bank's own accounting books, made available to the extent that one has the right to look at those books.

To the bank, the amounts listed as CR are liabilities. From their perspective these amounts are payable to me - CBA owes me those amounts (and hence they are also receivables in my own perspective). Here is the rub: in regards to my relationship with the CBA I have property in receivables from it, not in cash held by it. The amounts receivable by me and payable by CBA are the principals in a creditor-debtor relationship between us (likewise the sole DR is the amount I owe to the CBA on my credit card, and which amount to them is a receivables asset and not indicative of ownership in part of my physical cash holdings). This what the law, actual financial practice, and actual accounting practice have all now long been saying.

I don't know of any who made the following mistake, and I never made it, but it wouldn't hurt to give this warning against it: take care not to make the rationalist deduction "the amounts are listed as credit-side entries in accounting therefore they are items of credit in financial law". In fact it is the other way around, because the law takes priority and is what causes that financial-credit to be required to be listed on the credit-side in the books. Note that there are other reasons for listing credit-side entries in the books besides law-of-credit payables. Not every liability is an amount of financial credit, the equity holdings are also credit-side, and there even "contra assets" that are effectively credit-side even though their source is attachment to particular entries in the asset column (which is on the debit-side). The two contexts - accounting and finance - happen to use the same word, but what each context takes the word to mean is different to what the other takes it to mean and there is one point of overlap in referents.

The upshot of all this is that it further concretises the fact that in the real world today the bulk of the money supply is credit - in Australia as of Nov 2010, currency was $47b and demand deposits were $215b, giving an M1 of $262b. The credit in question is part of the money supply, additional to actual notes and coins, because I can easily reassign to others my property in claims upon the Commonwealth Bank of Australia. These monetised-credit mechanics are already here, fully in place and eminently capable of serving the needs of a sophisticated economy - and while something physical somewhere is necessary the use of credit as money does not strictly require physical cash (pay particular attention to paragraph 3 of this). The only thing that the financial sector need do if the courts begin taking heed of the epistemological complaints regarding the use of the word 'deposit' is simply to refrain from using that word. Until the rationalists on the topic of FRB understand that fact they are going to get absolutely nowhere in terms of theory and, in terms of practice in the event they actually succeed in influencing the courts, they will find themselves in the same position as the British Currency School when its members railed against FRB on notes in the mid 19th century: simultaneously listened to and promptly stepped around.


The numerical entry under the "available funds" column for my credit card line is the amount remaining unused from my credit limit. That's the amount I could further borrow but have not actually borrowed, so it isn't credit I've actually taken. Similarly, to get the CC relationship started I didn't have to make any initial deposits or whatnot in, so it isn't credit that I've granted the bank and the bank does not owe me anything either. In short, it is not as simple as saying "It's CR because it is available credit" in rationalist fashion as already warned against. So, here's another question for you - what does the implied credit-side classification of CR there signify? This time I don't know for definite, but I do have an educated guess that I am confident of.

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