Re: [Pen-l] Question on T Accounts

[Jim Devine <jdevine03@xxxxxxxxx>]

Bill Lear wrote:
> I'm reading Randy Wray's book on money, and took a detour through
> Heilbroner and Galbraith's *The Economic Problem*.  On p. 335, they
> introduce the notion of a "T account" and say, regarding assets and
> liabilities: "it is obvious that the two sides of the balance sheet
> must always come to the same total.  *The total of assets and
> the total of liabilities are an identity*." (emphasis in original)

I don't know how many people follow this convention, but I distinguish
a "balance sheet" from a "T chart." In a balance sheet, assets =
liabilities  + net worth (A = L +  NW), with both L and NW on the
left-hand side. In a T-chart exercise, on the other hand, it's
typically assumed that NW does not change, so that the _change_ in
liabilities =  the change in assets (where both liabilities and assets
are positive numbers) so that the change in assets (dA) - the change
in liabilities (dL) = 0.[*]

If they're talking about a balance sheet, H&G must be assuming that NW
= 0. Or they're talking about a T chart and changes in A and L,
assuming that NW is constant.

> I'm trying to work through some examples based on some of Wray's
> writings and I'm having trouble understanding how T accounts work
> when, to me, it appears you can have assets with no corresponding
> liability, and the identity mentioned above falls apart.

yes, NW does not correspond to L. It's the excess of A beyond L. It's
what's called equity capital,  capital, or equity.

> For example, let's say I purchase some land, and a bank building, and
> have $1 million in cash with which to open a bank.  I put
> the cash in the vault and open my doors for business, ready to prey
> upon ... uh serve the public.
>
> At this point, before any other accounts have been opened, what does
> the T account for the bank look like?  The assets would be the $1
> million, but what are the liabilities?  Would it be my ownership
> stake, i.e., shares of the company that I own?

the bank has no liabilities at this point. Your shares are claims on
NW. They do not represent debt (L).

[*] of course, NW does change, often without warning. For example, it
could turn out that a lot of the A are worthless paper, based on
sub-prime mortgages, financial engineering, Ponzi schemes, etc. Of
course, that never happens.
-- 
Jim Devine / "If heart-aches were commercials, we'd all be on TV." -- John Prine
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