There is an aphorism that says “we are not getting the right answer, but we are asking the right question,” which is crucial. Readers of this site are certainly aware of the boulevards like ‘real money’, ‘honor money’, ‘fiat’ money, printed money, borrowed money … ad infinitum.
Aristotle actually named the desirable properties of money;
Money must be durable
Money must be transferable
Money must be divisible
Money must have intrinsic value
To what question did Aristotle’s qualities answer? The question “what brings good and not so good money”. This question is fundamentally different from the question of “what is money”. If we ask what money is better / not so good, we assume that we already know what money is and what money is not … a big assumption.
Throughout recorded history, many things have played the role of “money” (mainly a store of value and a means of exchange); cattle (pecus … Roman origin pekuniary) salt (salary origin), cowry shells, cocoa beans, even cigarettes in prison camps during World War II … and of course gold and silver over the ages.
But before we think about what money is better, we have to decide what money is … bad or good … and what money is not. One way to understand this dichotomy is to study history; a history of money … and a history of real and fake money.
Note that cattle, salt, marten shells, cocoa beans, cigarettes, monetary metals, etc., these are all ‘things’ … so they are real items. Not a single “promise” or “IOU” in the group. On the other hand, paper “money” (banknotes) is nothing but a promise … of something.
To make it clear, we will simplify; consider a pound of sugar as a ‘thing’ … and an ‘IOU as a pound of sugar’ as a promise. I borrow a pound of sugar from you and give you an IOU for “one pound of sugar”; then the difference is obvious; “things” (a pound of sugar) … and a promise … paper debt subscriptions.
So, you say? You can definitely use sugar to sweeten coffee … but not so much (paper) IOU. If you hold a pound of sugar, great; you own and can use it; but IOU by no means. You will only have real value if you apply for an IOU.
Note that a pound of sugar is an asset … no matter who holds it. On the other hand, the IOU is an asset as long as you have it in your hands; claim per pound of real sugar. Crucially, in my view, the same is an IOU commitment; after all, it is a claim to the actual item, the pound of sugar that I must return to you when it is presented to me by the IOU.
An IOU is either an asset or a liability, depending on the point of view; by IOU holder. On the other hand, sugar is a “pure” or “real” asset; valuable no matter who hand is in it.
This is what Aristotle considered to be an “intrinsic value” … sugar has an “intrinsic” value rather than a “derived” value that the IOU has. Simply put, an IOU has value only to the extent that it is redeemable … and redeemable. This is often called “credit risk” or “counterparty risk” … the IOU is not very robust; it will become worthless if the author of the IOU fails to fulfill his obligations. Real things have no counterparty risk.
The same IOU that is an asset in your hands is also my responsibility … after all, if you present me with an IOU, I am obliged to give you back a pound of real sugar … and thus cancel the IOU. In fact, the IOU becomes worthless after redemption; paid in full … but a pound of sugar is still a pound of sugar … certainly not worthless.
So money puts out debt; this is a hallmark of “real”
money. When (if!) I return your pound of sugar, the IOU will be redeemed; the debt disappears, it disappears with real “things”. We could even agree to give you ½ pounds of salt instead of a pound of sugar; if you agree, then the IOU also disappears, again with real things. Replace silver and gold with sugar and salt …
Suppose you decide to trade your IOU with Jane for a pound of sugar, instead of giving it back to me … if Jane agrees, you will get your pound of sugar … but the debt is NOT extinguished; now it’s holding Jane and I’ll have to give Jane a pound of sugar if she presents me with my IOU. The IOU served as a medium of exchange; but NOT as a debt fireman. The IOU plays a (fake) monetary role, but it is not money because it cannot extinguish debt.
Not only that; Suppose I don’t use the pound of sugar I borrowed, but instead lend it to Joe; in return, Joe gives me an IOU for a pound of sugar … and magically, one pound of real sugar now has two IOUs against it. Who would have said that! One pound of sugar, two IOUs claim the same pound of sugar. This process can spread endlessly; Joe could borrow sugar again, etc … Infinite IOU is “backed up” by the same pound of sugar.
If you come to claim your pound of sugar, which I no longer hold, I cannot give you your sugar. Joe has it now; all I have is another IOU. Would you trade the IOU I gave you for the IOU I gave me? Ordinary exchange of debt bills … We are beginning to see how real things are categorically different from IOUs; debt subscriptions issued for money fail to extinguish debt; they can only change the debt holder.
But it improves not only for silly debts like the pound of sugar, but also for debts in the real world. Let’s look at two companies; call them Co. “A” and Co. “B”. Company “A” makes bushings … and company B buys bushings to incorporate into its own widget product line. “A” sells one hundred “B” bushings; then a record is created in ‘books A in the accounts receivable for’ one hundred passes sold ‘B’ for 100 monetary units, due within 30 days’.
Similarly, in “Books B, in accounts payable”, a record is created for “one hundred passes purchased from” A “for 100 monetary units, due within 30 days”. Nothing unusual yet; in 30 days ‘B’ pays ‘A’ and the bills are settled … The IOU is redeemed. Note that the IOU (for 100 passes) is an asset in the ‘A’ books, but a liability in the ‘B’ book … just like the IOU pound sugar. These IOUs are two sides, assets and liabilities at the same time, depending on the point of view.
Now suppose that management “A” and “B” decide to merge the two companies; “A” and “B” will merge to become Company “Z”. so what happens? Books ‘A’ and ‘B’ are consolidated; the total assets and liabilities are calculated together and appear in the accounts of the newly established company “Z”.
But wait; if “B” owes “A” (due from “B”, receivable from “A”) and “A” and “B” no longer exist, these numbers are transferred to “Z”; that is, “Z” owes 100 monetary units … “Z”? Who knows. No way; the items cancel each other … any debts or payments due to other companies remain … but transactions ‘AB’ are canceled. The IOU is dissolved by the merger of two previously independent companies.
In the meantime, what about the grommets ‘B’ you just bought? It is clear that these are now in the “Z” inventory; and ‘Z’ will incorporate them into their widget product line. Real things remain; IOU will disappear. Real things are potential money; real money can’t just disappear. IOU is not money; they can and will disappear. It’s also easy. Now replace the Treasury and the Federal Reserve with “A” and “B,” replace the Fed’s vouchers and bills with bushings and utensils!
Bottom row; Real things ‘net’ assets can be ‘real’ money … good or not so good. IOUs that are assets / liabilities cannot. Unfortunately, the word asset is used incorrectly, referring to both “net” assets and commitments, which are assets on the one hand and liabilities on the other. This is the main reason why the counterfeit system we currently live in is dying … and only real money containing real assets can save our economy … and our civilization.