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What Exactly Is Money?

What Exactly Is Money?
"""There is an adage that goes, """"Asking the correct question is more important than getting the right response. The phrases ""genuine money,"" ""honest money,"" ""Fiat"" money, printed money, borrowed money, etc., are no doubt familiar to readers of this website.
In fact, Aristotle identified the desirable characteristics of money as follows:
It must be portable money.
Money has to be divided.
Money needs to have inherent value.
What problem did Aristotle's characteristics solve? ""What makes good money vs. not so good money?"" What is money is completely unrelated to this query. If we question if money is better or worse, we're making a big assumption that we already know what money is and isn't.
Numerous items have served as ""money"" throughout recorded history (mostly as a store of value and a means of exchange); these include salt, cattle (pecus, which has Roman origins), and pecuniary (origin of salary) cigarettes in POW camps during World War II, cocoa beans, and cowry shells, as well as Gold and Silver throughout time.
However, we must first determine what is money—good or bad—and what is not money before considering what is better money. Studying history—the history of money... and the history of real vs. false money—can help you better appreciate this paradox.
Keep in mind that real objects such as cattle, salt, cowry shells, cacao beans, cigarettes, and precious metals are all examples of ""stuff."" There wasn't a single ""promise"" or ""IOU"" in the group. Bank notes that are printed on paper, however, are just promises of something.
Let's simplify this to make it apparent; imagine a pound of sugar as the ""material"" and a ""IOU for a pound of sugar"" as the promise. The contrast between the ""substance"" (the pound of sugar) and the promise—the paper IOU—becomes clear when I borrow a pound of sugar from you and offer you an IOU for ""one pound of sugar.""
What, do you ask? You can absolutely sweeten your coffee with sugar, but not so much with a (paper) IOU. If you possess the pound of sugar, fantastic; you are the owner and may use it; but not the IOU. You won't have any actual value till you pay back the IOU.
The pound of sugar is an asset, regardless of who owns it. On the other hand, the IOU is a claim on a pound of real sugar while it is in your possession, making it an asset. Importantly, the IOU itself is a liability in my eyes; after all, when I am presented with it, I am obligated to repay you for a real object, a pound of sugar.
Depending on who is looking at it—the one who wrote the IOU or the person who is holding it—the IOU is either an asset or a liability. Contrarily, sugar is a ""genuine"" or ""pure"" asset that is valued regardless of who owns it.
Aristotle referred to this as having ""intrinsic value"" since sugar has intrinsic worth as opposed to the ""derived"" value an IOU has. In other words, the IOU is only valuable insofar as it may be redeemed. This is frequently referred to as ""credit risk"" or ""counter-party risk"" because the IOU is not very durable and will lose all of its value if the IOU writer defaults. Real things don't have counter-party risk.
The identical IOU that you hold in your hand as an asset is also my obligation since, if you give it to me, I'm required to give you back a pound of actual sugar and therefore cancel the IOU. However, a pound of sugar is still a pound of sugar, therefore it is still valuable even after the IOU has been redeemed and become worthless.
As a result, money eliminates debt; this is the definition of ""genuine"" money. The IOU is redeemed when (if!) I return your pound of sugar; the obligation vanishes and is discharged by actual ""things."" If you agree, I'll give you half a pound of salt in place of a pound of sugar, and the IOU is likewise snuffed out by real things. Replace sugar and salt with silver and gold...
Instead of returning your IOU to me, let's say you choose to give it to Jane in exchange for a pound of sugar. If Jane accepts, you receive your pound of sugar, but the debt still exists; Jane now has it, and I will be required to give Jane the pound of sugar if she gives me her IOU. The IOU was used as a medium of transaction but NOT as a means of debt cancellation. IOU serves a (false) monetary function but is not money because it cannot pay off debt.
Furthermore, if I lend Joe the pound of sugar I borrowed rather than using it, Joe will then offer me an IOU for a pound of sugar. Suddenly, one pound of real sugar has two IOUs attached to it. Who would have imagined? Two IOUs each claiming to be for one pound of sugar Without a clear conclusion in sight, this process may continue; Joe could continue lending out the sugar, etc. Numerous IOUs that are ""backed"" by one pound of sugar.
I am unable to give you your sugar if you come to claim the pound that I no longer possess. Joe now owns it, leaving me with nothing except an IOU. Would you accept the IOU Joe offered me in return for the IOU I gave you? just exchanging debt notes We begin to see how fundamentally distinct actual things are from IOUs; debt notes that pass for currency can only alter the bearer of a debt; they cannot eliminate it.
But it gets better, not just for petty debt like an IOU for a pound of sugar, but also for genuine debt. Let's examine two businesses, Co. ""A"" and Co. ""B."" Company ""A"" manufactures grommets, and Company ""B"" purchases grommets to add to its own line of widgets. A creates an item in Accounts Receivable for ""one hundred grommets sold to ""B"" for 100 monetary units, payable in 30 days"" after selling 100 grommets to ""B"" on A's books.
Similar to this, an entry is made in ""B's books, under Accounts Payable, for ""one hundred grommets bought from ""A"" for 100 money units, payable in 30 days."" Nothing out of the ordinary thus far; the accounts are cleared, the IOU is redeemed, and ""B"" pays ""A"" in 30 days. Just like the IOU for a pound of sugar, the IOU (for 100 grommets) is an asset on A's books but a liability on B's. Depending on your perspective, these IOUs might be viewed as both assets and liabilities at the same time.
Let's say the management of companies ""A"" and ""B"" decides to combine the two businesses, creating Company ""Z."" So what occurs? The total assets and total liabilities are aggregated and shown in the accounts of the newly formed Company ""Z"" after the books of ""A"" and ""B"" have been combined.
However, what happens if 'B' owes 'A' (payable to 'B' and receivable to 'A') and 'A' and 'B' are no longer alive? In other words, will 'Z' be informed that 'Z' owes 'Z' 100 money units? Whoa. No way, the products cancel each other out. Any payments or debts owed to other businesses will remain in place, but the 'A-B' transactions will be nullified. The amalgamation of two formerly independent businesses eliminates the IOU.
What about the grommets that ""B"" recently purchased, in the meantime? Clearly, ""Z"" now has these in its inventory, and ""Z"" will include them in its widget product line. The genuine stuff endures while the IOUs vanish. Real things have the potential to be valuable, and valuable things don't vanish. IOUs are not money; they are subject to loss. It's that easy. 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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"What Exactly Is Money?" was written by Mary under the Business category. It has been read 27 times and generated 0 comments. The article was created on and updated on 16 November 2022.
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