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Can someone explain me why coins are assets and notes are liabilities for the U.S. Federal Reserve?

I know coins are made from "precious" metals, but even notes are made from various materials too, so I am assuming its not because of this reason. Could anyone explain the logic behind this?

closed as off-topic by keshlam, Victor, Dheer, user32479, JoeTaxpayer Feb 12 '16 at 3:19

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Coins are assets because its the actual money. Notes are liabilities because the Federal Reserve is obligated to pay money on these notes. Basically a Federal Reserve $1 note in your pocket is an "I OWE YOU" from the Federal Reserve, not money. While a $1 Susan B is not a "I OWE YOU" but the actual $1 worth of currency.

Coins are minted by the US Government, the only authority to mint coins and create physical currency in the US. Federal Reserve doesn't mint coins, and doesn't create physical currency in the strict sense. It only prints its own obligations that are accepted as legal tender on par with coins. Printing more of the obligations doesn't create more money, as opposed to what many people are thinking and saying. It only creates more liability for the Federal Reserve. The Fed covers this liabilities with the US Treasury bonds, which it can use to cover its debts, and thus the Fed notes are covered by the US government indirectly.

Coins are no longer made of precious metals since the 1960's. Last circulating coin made of silver was the 1969 50 cents coin (40% silver). All the rest of the denominations stopped being made of silver after 1964. Since then precious metals are only used for collectibles and bulions.

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    so coins and US Notes are actual money(assets) whereas Treasury Notes and Bills are liabilities? I am confused between federal note and treasury note, aren't they one and the same? – user793468 Sep 23 '13 at 22:35
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    They're not the same at all. Treasury notes (T-Notes) are treasury bonds that pay interest over certain periods of time. Federal Reserve notes are the regular bills you use in your day-to-day life, they do not pay interest. T-Notes are liabilities for the US Government, and assets to those who hold them (including the Fed). – littleadv Sep 23 '13 at 22:37
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    @Muro IOU means that they will give you $1 on demand per each $1 on the note. Yes, coins, that's the only thing the US Government issues as currency. You can go to any bank that is member of the federal reserve system and demand to credit your account with the X amount of dollars in exchange for the notes, or give you coins in the same value. Notes are accepted on par, but they're not the money, they're obligations of the Federal Reserve. The only issuer of the currency in the US is the US Government, and it only issues coins (now) – littleadv Sep 24 '13 at 6:51
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    @Muro where did you read that? I wrote that they're backed by the US treasuries. How the US will pay its obligations is up to the US Congress. Currently it only issues coins, none of them made of gold. Feds charts include both the coins and the notes, to the best of my understanding. As I said, notes are legal tender on par with the coins. – littleadv Sep 24 '13 at 17:00
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    @Muro again, where did I say that? You're making stuff up as usual and then demand from me citations to what you've imagined? You're so tiring. The notes are backed by the treasuries, it doesn't mean you can redeem them for treasuries. You can, if you buy treasuries, but its a purchase, not redemption. The notes themselves are legal tender, nothing to redeem there. The Federal Reserve will redeem them for treasuries from the US government, and in fact - that's what its doing for years. – littleadv Sep 24 '13 at 17:10
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A $1 note and four quarters are both real money, but how (and when) they become real money is different.

How the Fed accounts for bills

The important thing is that the Fed's stockpile of cash that it gets from the Bureau of Engraving and Printing isn't "real money" (i.e. M0) yet. That cash is only used for fulfilling withdrawals from reserve accounts. You can't use it to buy a car, or a house, or to pay Janet Yellen's salary...no one, not even Janet, can use even a single dollar to buy a Diet Coke. In other words, it's not really an asset. Or a liability. Or anything but a stack of paper in the Fed's vaults that looks astonishingly like money, but isn't.

The upside to this is that when the BEP makes a delivery of fresh bills to the Fed, or when the Fed destroys old, ratty bills that aren't usable anymore, the Fed's balance sheet doesn't change. That's good! Those are practical considerations, not financial ones.

The downside is that there's nothing on the asset side of the sheet to explain how the Fed's liability to a bank is reduced when the bank makes a cash withdrawal from its reserve account. So the Fed balances it's balance sheet by recording an increase in a different liability: the cash in circulation. Kinda like transferring the balance on a credit card: you're paying down one liability by increasing another one. It looks a bit silly, but less silly than recording the destruction of old bills as an "expense" of the face value of the bills.

How coins are different

Coins, on the other hand, become money as soon as the Treasury gets them from the Mint. If they wanted to, they could pay their employees' salaries by ordering coins from the Mint for cheap, giving them to their employees at face value, and reaping fat profits as a result. In fact, that's pretty much exactly what they do: when someone wants quarters, the Treasury mints them at less than face value and then sells them at face value.

In practice the Fed does all of this buying and then distributes the coins according to demand. The important thing is that this bunch of coins is not like the Fed's stockpile of bills. It's already real money, and therefore shows up as an asset.

How much does this distinction matter?

Not much. If the Fed bought coins at the cheaper price from the Mint instead, stockpiled them like they stockpile bills, then distributed them as usual, the extra profit just goes to the Treasury anyway, like all the Fed's profit does. However, as things are, the Fed's purchases of coins are recorded on the Fed's balance sheet at face value, which is kinda silly.

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