III. Single-Entry Bookkeeping and Double-Entry Bookkeeping

Monetary Theory
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institutions will put all deposits in the Central Bank’s account, where finan-
cial institutions will basically lose the lending ability, and this means that 
they are unable to conduct normal operations,” which is the specific reflec-
tion of the so-called reserve payment in the conventional money theory. In 
this argument, the required deposit reserves paid by commercial banks will 
be shown as deposit reduction on the liability side of their balance sheets, 
while an increase of “deposits in the Central Bank” on the asset side, with 
both an entry of increase and an entry of reduction in assets and liabili-
ties, which is clearly out of line with the basic accounting principles that 
require balance of assets and liabilities. In fact, a certain amount of required 
reserves held by commercial banks required by the central bank have noth-
ing to do with any transfer or payment of liabilities of commercial banks 
such as deposits, nor is it relevant to operation. The required reserves are 
the liabilities of the central bank and only relevant to other liabilities as well 
as assets. The increase of required deposit reserve ratio or money expansion 
in deposits by the central bank means that commercial banks are required 
to maintain more required deposit reserves, and commercial banks need to 
increase creditor’s rights to the central bank by conversion of the creditor’s 
rights into the required deposit reserves or borrowing more debts from the 
central bank, in which the debts from commercial banks to customers are 
not involved; in theory the central bank can set required deposit reserve 
ratio at any level from 0 to infinity (note that it may not necessarily be 
100%), of course, which also requires the central bank to provide the cor-
responding base money and in fact required reserves are all bound to come 
from the central bank other than the commercial banks. 
In practice, the concepts of “granting loans with deposits,” “granting loans 
with excess reserves,” and “paying reserves with deposits” apply single-entry 
bookkeeping subconsciously with only one general ledger of “banks increase 
deposits” and “banks grant loans”; namely, in double-entry bookkeeping, 
deposit increase is only recorded on the liability side, and loan increase is 
only recorded on the asset side without any other corresponding items in the 
balance sheet. 
The essence of bank loans is the exchange of creditor’s rights between 
banks and their customers, which is credit exchange. Both sides increase 
their mutual creditor’s rights simultaneously and, of course, increase their 
mutual liabilities simultaneously. Reflected in their respective balance sheets, 
assets and liabilities go up at the same time: banks acquire loan assets and 
deposit liabilities, while customers obtain loan liabilities and deposit assets. 
This exchange is beneficial to both sides: banks can derive interest income, 
and customers pay interest costs while the assets obtained can be accepted by 
others—money, the most liquid asset. 

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Reforms in China’s Monetary Policy
Influenced by the conventional monetary theory, people unconsciously 
apply single-entry bookkeeping in their analysis, fail to truly regard bank 
deposits as bank liabilities while subconsciously viewing them as bank 
“assets” and believing that banks acquire creditor’s rights and customers 
acquire liabilities as a result of the borrowing activities of customers but fail 
to realize that customers must incur liability with a reason while assets must 
be increased simultaneously. Otherwise how could customers maintain a 
balance in balance sheets? Similarly, banks must also have more liabilities. 
When the money and banking theory makes an analysis to this step, some 
vague concepts such as “funds” or “loanable funds” attempt to fill up the 
loopholes and are relevant to the influence of old-style private banks.

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