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So, what exactly is money?

So, what exactly is money?
"""It is said that """"it is not getting the right answer, but asking the right question"""" that is important. Readers of this site are probably familiar with phrases like ""real money,"" ""honest money,"" ""Fiat money,"" ""printed money,"" ""borrowed money,"" and so on.
Indeed, Aristotle identified the desirable characteristics of money: money must be durable.
Money must be transportable.
Money must be divided.
Money must have inherent value.
What was the answer to Aristotle's qualities? The question of what makes good money versus bad money. This question is fundamentally different from 'what is money'. When we ask what money is better/worse, we assume that we already know what money is and isn't... a big assumption.
Throughout recorded history, many things served as'money' (primarily as a store of value and medium of exchange); cattle (pecus... Roman origin of pecuniary) salt (origin of salary) Cowry shells, cacao beans, and even cigarettes in WWII POW camps... and, of course, gold and silver throughout the ages.
But, before we can consider what is better money, we must first define what money is... bad or good... and what it is not. One way to understand this dichotomy is to study history, specifically the history of money... and the history of real vs. counterfeit money.
Cattle, salt, cowry shells, cacao beans, cigarettes, monetary metals, and so on are all examples of'stuff'... that is, real items. There was not a single ""promise"" or ""IOU"" in the bunch. Paper'money' (bank notes) on the other hand is nothing more than a promise... of something.
To illustrate, consider a pound of sugar as the'stuff'... and a 'IOU a pound of sugar' as the promise. When I borrow a pound of sugar from you and give you an IOU for 'one pound of sugar,' the distinction is clear: the'stuff' (pound of sugar) and the promise... the paper IOU.
So, what do you think? You can definitely use the sugar to sweeten your coffee... but not the (paper) IOU. If you own a pound of sugar, that's great; you have ownership and can use it; but an IOU, no way. Only when the IOU is redeemed does it have any real value.
Take note that the pound of sugar is an asset... regardless of who owns it. The IOU, on the other hand, is an asset while it is in your possession; it is a claim on a pound of real sugar. Crucially, in my opinion, the same IOU is a liability; after all, it is a claim on me for a real item, a pound of sugar, which I must return to you upon being presented with the IOU.
Depending on who is writing the IOU and who is holding it, the IOU is either an asset or a liability. Sugar, on the other hand, is a 'pure' or'real' asset; valuable regardless of who holds it.
This is what Aristotle called 'intrinsic value'... sugar has 'intrinsic' value, as opposed to the 'derived' value of the IOU. In other words, the IOU only has value if it is redeemed... and redeemable. This is often referred to as 'credit risk' or 'counter-party risk'... the IOU is not very tough; if the IOU writer defaults, it will become worthless. There is no counter-party risk with real stuff.
The same IOU that you hold as an asset is also my liability... after all, if you present me with the IOU, I am obligated to return to you a pound of real sugar... and thus extinguish the IOU. The IOU becomes worthless once redeemed; paid in full... but a pound of sugar is still a pound of sugar... certainly not worthless.
Thus, money extinguishes debt; this is the distinguishing feature of'real' money. When (if!) I return your pound of sugar, the IOU is redeemed; the debt is extinguished by real'stuff'. We could even agree that instead of a pound of sugar, I would give you 12 pounds of salt; if you agree, the IOU is also extinguished, once again by real stuff. Silver and gold can be substituted for sugar and salt...
Suppose you decide to trade your IOU to Jane for the pound of sugar instead of returning it to me... if Jane agrees, you get your pound of sugar... but the debt is NOT discharged; Jane now holds it, and I will have to give Jane the pound of sugar if she presents me with my IOU. The IOU functioned as a medium of exchange, but NOT as a debt extinguisher. IOU serves a (false) monetary function but is not money because it cannot extinguish debt.
Not only that, but suppose I don't use the pound of sugar I borrowed, but instead lend it to Joe; in exchange, Joe gives me an IOU for a pound of sugar... and suddenly, one pound of real sugar has two IOUs against it. Who would have guessed? One pound of sugar and two IOUs for the same pound of sugar. This process can continue indefinitely; Joe could lend out the sugar again, and so on. Infinite IOUs backed by the same pound of sugar.
I cannot give you your sugar if you come to claim your pound of sugar that I no longer have. Joe has it now, and all I have is another IOU. Would you be willing to exchange the IOU I gave you for the IOU Joe gave me? Simply exchanging debt notes... We begin to see how real stuff differs from IOUs; debt notes disguised as money cannot extinguish debt; they can only change the holder of the debt.
But it gets better, not just for frivolous debt like a pound of sugar IOU, but also for real-world debt. Consider the following two companies: Co. 'A' and Co. 'B'. Company 'A' manufactures grommets... and Company B purchases grommets to incorporate into its own widget product line. 'A' sells a hundred grommets to 'B'; then on 'A's books, in Accounts Receivable, an entry is created 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 created 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 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... just like the IOU pound of sugar. These IOUs are two-sided, acting as both assets and liabilities at the same time.
Now suppose management of 'A' and 'B' decide to merge the two companies; 'A' and 'B' merge to become Company 'Z'. So, what happens next? Well, the books of 'A' and 'B' are consolidated; the total assets and total liabilities are added, and appear in the books of the newly created Company 'Z'.
But wait; if 'B' owes 'A' (payable of 'B', receivable of 'A') and 'A' and 'B' no longer exist, will these numbers be transmitted to 'Z'; that is, 'Z' owes 100 monetary units... to 'Z'? Whoa. No way; the items cancel each other... any debts or payments due to other companies will stay... but the 'A-B' transactions cancel 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 in the inventory of 'Z'; and 'Z' will incorporate them in its product line of widgets. The real stuff stays; the IOU's disappear. Real stuff is potentially money; real money cannot just disappear. IOU's are not money; they can and do disappear. It's that simple. Now substitute Treasury and Federal Reserve for 'A' and 'B', substitute treasury bills and Fed notes for grommets and widgets!
The bottom line; real stuff, 'pure' assets can be 'real' money... good or not so good. IOU's 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 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."""
 

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"So, what exactly is money?" was written by Mark under the Finance category. It has been read 118 times and generated 0 comments. The article was created on and updated on 13 January 2023.
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