So What Is Money… Really

There is a saying that states “it’s not getting the proper answer but asking the proper question” that’s crucial. Readers of this site are surely conscious of blurbs like ‘real money, ‘honest money, ‘Fiat’ money, printed money, borrowed money… endlessly.

Indeed, Aristotle named the desirable qualities of money;

Money must be durable

Money must be portable

Money must be divisible

Money must have intrinsic value

What question were Aristotle’s qualities the solution to? The question ‘what makes good vs not so good money’. This question is fundamentally different from ‘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 isn’t… an enormous assumption

During recorded history, many things played the role of ‘money (mainly store useful and medium of exchange); cattle (pecus… Roman origin of pecuniary) salt (origin of salary) cowry shells, cacao beans, even cigarettes in POW camps during WWII… and in fact Gold and Silver through the ages.

But before brooding about what’s better money, we’d like to make a decision what’s money… bad or good… and what’s not money. a method to know this dichotomy is to review history; the history of cash… and therefore the history of real vs. fake money.

Notice that cattle, salt, cowry shells, cacao beans, cigarettes, monetary metals, etc. are all some quiet ‘stuff’… that’s they’re real items. Not one ‘promise’ or ‘IOU’ within the bunch. On the opposite hand, paper ‘money’ (banknotes) is nothing but a promise… of something. To make this clear, let’s simplify; consider a pound of sugar because the ‘stuff’… and an ‘IOU a pound of sugar’ because of the promise. I borrow a pound of sugar from you, and provides you an IOU for ‘one pound of sugar’; then the difference becomes obvious; the ‘stuff’ (a pound of sugar)… and therefore the promise… the paper IOU.

So what, you say? Well, you’ll certainly use the sugar to sweeten your coffee… but not such a lot the (paper) IOU. If you hold the pound of sugar, great; you’ve got ownership, and may put it to use; but the IOU, no way. as long as you redeem the IOU will you hold any real value? Notice that the pound of sugar is an asset… regardless of who holds it. On the opposite hand, the IOU is an asset while it’s in your hand; a claim on a pound of real sugar. Crucially, from my point of view, the exact same IOU may be a liability; in any case, it’s a claim on me for a true item, a pound of sugar that I even have to offer back to you on being presented with the IOU.

The IOU is either an asset or a liability, counting on the purpose of view; the author of the IOU vs. the holder. On the opposite hand, sugar may be a ‘pure’ or ‘real’ asset; valuable regardless of in whose hand it happens to reside.

This is what Aristotle considered ‘intrinsic value’… sugar has ‘intrinsic value, instead of the ‘derived’ value the IOU has. In simple words, the IOU has value only thus far because it is redeemed… and redeemable. this is often often called ‘credit risk’ or ‘counter-party’ risk… the IOU isn’t very rugged; it’ll become worthless if the IOU writer defaults. real McCoy has no counter-party risk.

The exact same IOU that’s an asset in your hand is my liability… after all, if you present me the IOU, I’m obligated to return to you a pound of real sugar… then extinguish the IOU. Indeed, once redeemed, the IOU becomes worthless; paid fully… but the pound of sugar remains a pound of sugar… never worthless.

Thus, money extinguishes debt; that’s the hallmark of ‘real money. When (if!) I return your pound of sugar, the IOU is redeemed; the debt disappears, is extinguished by real ‘stuff’. We could even negotiate that rather than a pound of sugar, I offer you ½ pound of salt; if you agree, then the IOU is additionally extinguished, again by real McCoy. Substitute Silver and Gold for sugar and salt…

Suppose you opt to trade your IOU to Jane for the pound of sugar, instead of handing it back to me… if Jane agrees, you get your pound of sugar… but the debt isn’t extinguished; now Jane holds it, and that I will need to give Jane the pound of sugar if she presents me with my IOU. The IOU served as a medium of exchange; but NOT as an extinguisher of debt. IOU plays a (fake) monetary role but isn’t money because it cannot extinguish the debt.

Not only that; suppose I don’t use the pound of sugar I borrowed, but instead lend it to Joe; successively, 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 thought! One pound of sugar, two IOU’s claiming an equivalent pound of sugar. This process can proliferate without stopping insight; Joe could lend out the sugar again, etc… Endless IOUs ‘backed’ by an equivalent pound of sugar. If you come to say your pound of sugar, that I not hold, I cannot offer you your sugar. Joe now has it; all I even have is another IOU. Would you exchange the IOU that I gave you for the IOU Joe gave me? The mere exchange of debt notes… We start to ascertain how real McCoy is categorically different from IOUs; debt notes masquerading as money cannot extinguish debt; they will only change the holder of the debt. But it gets better, not only for silly debt sort of a pound of sugar IOU, except for debt within the world. Let’s check out two companies; call them Co. ‘A’ and Co. ‘B’. Company ‘A’ makes grommets… and Company B buys grommets so as to include them into its own line of widgets. ‘A’ sells 100 grommets to ‘B’; then on ‘A’s books, in assets, an entry is made for ‘one hundred grommets sold to ‘B’ for 100 monetary units, payable in 30 days.

Similarly, in ‘B’s books, in Accounts Payable, an entry is made for ‘one hundred grommets bought from ‘A’ for 100 monetary units, payable in 30 days. So far, nothing unusual; in 30 days, ‘B’ pays ‘A’, and therefore the accounts are settled… the IOU is redeemed. Notice the IOU (for 100 grommets) is an asset on ‘A’s books, but a liability on ‘B’s book… a bit like the IOU pound of sugar. These IOUs are two-faced, assets and liabilities at an equivalent time, counting on point of view.

Now suppose management of ‘A’ and ‘B’ plan to merge the 2 companies; ‘A’ and ‘B’ merge to become Company ‘Z’. So what happens? Well, the books of ‘A’ and ‘B’ are consolidated; the entire assets and total liabilities are added, and appear within the books of the newly created Company ‘Z’.

But wait; if ‘B’ owes ‘A’ (payable of ‘B’, receivable of ‘A’) and ‘A’ and ‘B’ not exist, will these numbers be transmitted to ‘Z’; that’s, ‘Z’ owes 100 monetary units… to ‘Z’? Whoa. No way; the things cancel one another… any debts or payments thanks to other companies will stay… but the ‘A-B’ transactions wipe out. The IOU is consolidated out of existence by the merger of two previously independent companies. Meanwhile, what about the grommets that ‘B’ just bought? Clearly, these are now within the inventory of ‘Z’, and ‘Z’ will incorporate them in its line of widgets. the important stuff stays; the IOUs disappear. real McCoy is potentially money; real money cannot just disappear. IOUs aren’t money; they will and do disappear. It’s that straightforward. Now substitute Treasury and Federal Reserve System for ‘A’ and ‘B’, substitute treasury bills and Fed notes for grommets and widgets!

The bottom line; real McCoy, ‘pure’ assets are often ‘real’ money… good or not so good. IOUs that are assets/liabilities cannot. Unfortunately, the word asset is misused, applied to both ‘pure’ assets and to promises that are assets in one hand but liabilities in another. this is often the core reason why the fake money system we currently live under is dying… and only real money comprising real assets can save our economy… and our civilization.


By Mk Faizi

I am a blogger.