So what is money…really
There’s an aphorism that goes “it’s not getting the right answer but asking the right question” that’s crucial. Readers of this site are surely familiar with presentation terms like “real money”, “honest money”, “Fiat money”, printed money, borrowed money… infinity.
Indeed, Aristotle named the desirable qualities of money;
Money must be sustainable
Money must be portable
Money must be divisible
Money must have intrinsic value
What question did Aristotle’s qualities answer? The question “what makes money good or not so good”. This question is fundamentally different from “what is money”. If we ask which silver is better/worse, we assume we already know what silver is and what it isn’t…a big guess.
Throughout recorded history, many things have acted as “currency” (primarily a store of value and medium of exchange); cattle (pecus… Roman origin of pecuniary) salt (origin of wages) cowries, cocoa beans, even cigarettes in POW camps during WWII… and of course gold and silver throughout the ages.
But before thinking about what is the best money, we have to decide what is money… bad or good… and what is not money. One way to understand this dichotomy is to study history; the story of money… and the story of real versus counterfeit money.
Note that cattle, salt, cowries, cocoa beans, cigarettes, monetary metals, etc. are all a kind of “stuff”… i.e. they are real objects. Not a single “promise” or “acknowledgment of debt” in the group. On the other hand, paper “money” (banknotes) is nothing more than a promise… of something.
To clarify this, let’s simplify; think of a pound of sugar as the “trick”…and an “IOU per pound of sugar” as the promise. I borrow a pound of sugar from you and give you an IOU for “a pound of sugar”; then the difference becomes evident; the “trick” (pound of sugar)… and the promise… the paper IOU.
So what, you say? Well, you can certainly use sugar to sweeten your coffee…but not so much IOU (paper). If you hold the pound of sugar, that’s fine; you own it and can use it; but IOU, out of the question. Only if you trade the IOU do you hold real value.
Note that the pound of sugar is a trump… no matter who holds it. On the other hand, the IOU is an asset as long as it is in your hands; a claim on a pound of real sugar. Basically, from my point of view, the same IOU is a liability; after all, it is a claim on me for real property, a pound of sugar, which I must return to you upon presentation of the IOU.
The IOU is either an asset or a liability, depending on the point of view; the author of the acknowledgment of debt against the holder. On the other hand, sugar is a “pure” or “real” good; precious, regardless of whose hand it is.
This is what Aristotle considered “intrinsic value”…sugar has “intrinsic” value, rather than the “derived” value of IOU. Simply put, the IOU has value only to the extent that it is redeemed…and redeemable. This is often referred to as ‘credit risk’ or ‘counterparty’ risk…the IOU is not very robust; it will become worthless if the author of the IOU defaults. Real things have no counterparty risk.
The same IOU that is an asset in your hands is my responsibility…after all, if you present me with the IOU, I am obligated to return you a pound of real sugar…and thus extinguish the acknowledgment of debt. Indeed, once redeemed, the acknowledgment of debt becomes worthless; paid in full…but a pound of sugar is still a pound of sugar…certainly not worthless.
Thus, money extinguishes the debt; this is the mark of “real” money. When (if!) I return your pound of sugar, the IOU is repaid; the debt disappears, is extinguished by real ‘tricks’. We could even negotiate that instead of a pound of sugar, I give you ½ pound of salt; if you agree, then the IOU is also off, again by real tricks. Substitute silver and gold for sugar and salt…
Suppose you decide to trade your IOU to Jane for the pound of sugar, rather than return it to me…if Jane agrees, you get your pound of sugar…but the debt is not NOT off; now Jane has it, and I’ll have 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 a debt extinguisher. IOU plays a (false) monetary role, but is not money because it cannot extinguish debt.
Not only that; suppose I don’t use the pound of sugar I borrowed, but rather lend it to Joe; in turn, Joe gives me an IOU for a pound of sugar… and like magic, a pound of real sugar now has two IOUs against it. Who would have thought! One pound of sugar, two IOUs claiming the same pound of sugar. This process can proliferate with no end in sight; Joe could lend the sugar again, etc. Endless IOU is “backed” by the same pound of sugar.
If you come to claim your pound of sugar, which I no longer have, 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 Joe gave me? Simple exchange of debt notes… We are beginning to see how starkly different real things are from IOUs; debt obligations disguised as money cannot extinguish the debt; they can only change the owner of the debt.
But it’s getting better, not just for stupid debt like an IOU pound of sugar, but for real-world debt. Let’s look at two companies; call them Co. ‘A’ and Co. ‘B’. Company “A” manufactures eyelets…and company B buys eyelets to use in its own line of widgets. “A” sells a hundred carnations to “B”; then on the books of ‘A’, in Accounts Receivable, an entry is created for ‘one hundred carnations sold to ‘B’ for 100 monetary units, payable at 30 days’.
Similarly, in the books of “B”, in the accounts payable, an entry is created for “one hundred carnations purchased from “A” for 100 monetary units, payable in 30 days”. Nothing unusual so far; in 30 days, ‘B’ pays ‘A’, and the accounts are settled…the IOU is redeemed. Note that the IOU (for 100 carnations) is an asset on “A’s” books, but a liability on “B’s” book…just like the IOU sugar pound. These IOUs are double-sided, active and passive at the same time, depending on the point of view.
Now suppose that the management of “A” and “B” decides to merge the two companies; ‘A’ and ‘B’ merge to become company ‘Z’. So what’s going on? Well, the books of “A” and “B” are consolidated; the total assets and the total liabilities are added together and appear in the books of the newly created company “Z”.
But wait; if ‘B’ owes ‘A’ (payable from ‘B’, receivable from ‘A’) and ‘A’ and ‘B’ no longer exist, will these numbers be forwarded to ‘Z’; i.e. ‘Z’ owes 100 currency units…to ‘Z’? Wow. Certainly not; items cancel each other out…any debts or payments due to other companies will remain…but ‘AB’ transactions cancel each other out. The IOU is consolidated by the merger of two previously independent companies.
In the meantime, what about the carnations ‘B’ just bought? Clearly these are now in ‘Z’s’ inventory; and ‘Z’ will integrate them into its range of widgets. The real stuff remains; IOUs disappear. Real things are potentially money; real money can’t just disappear. IOUs are not money; they can and do disappear. It’s so simple. Now replace Treasury and Federal Reserve with ‘A’ and ‘B’, replace Treasury Bills and Fed Notes with Carnations and Widgets!
The bottom line; real things, “pure” assets can be “real” money… good or not so good. IOUs that are assets/liabilities cannot. Unfortunately, the word asset is misused, applied both to “pure” assets and to promises which are assets on the one hand but liabilities on the other. This is the main reason why the fake money system we currently live in is dying…and only real money made up of real assets can save our economy…and our civilization.
