There is an aphorism that “does not get the right answer but asks the right question” which is important. Readers of this site know obscure terms like 'real money', 'real money', 'Fiat money', printed money, borrowed money ... ad infinitum.
Indeed, Aristotle invented the desirable properties of money;
Money should last a long time
Money must be handled
Money must be divided
Money should have an internal value
Aristotle's fine qualities were the answer to what question? The question is 'what makes good vs not so much good money'. This question is very different from 'what money is'. When we ask what is the best / worst money, we think we already know what money is, and what money is not ... great consideration.
In recorded history, many things played the role of ‘money’ (especially the price shop and trading method); cattle (pecus ... Roman pecuniary origin) salt (income source) cowry shells, coconut beans, and even tobacco in POW camps during WWII ... and yes Gold and Silver over the years.
But before we consider what money is, we need to decide what is money ... bad or good ... and what is not money. One way to understand this dichotomy is to study history; money history ... and real money history vs. fake.
Note that beef, salt, cowry shells, coconut beans, tobacco, coins etc. they are all certain 'things' ... which means they are real things. There is no single 'promise' or 'IOU' in the group. On the other hand, paper money (bank notes) is nothing but a promise ... of something.
To make this clear, let's simplify; think of a pound of sugar as 'stuff' ... and 'a pound of IOU sugar' as a promise. I borrow a pound of sugar from you, and I give you IOU 'one pound of sugar'; then the difference becomes apparent; 'things' (a pound of sugar) ... and a promise ... paper IOU.
So, what do you say? Yes, you can use sugar to make your coffee sugar ... but not so much (paper) IOU. If you hold a pound of sugar, fine; you own it, and you can use it; but IOU, there is no way. Only if you use the IOU will you capture any real value.
Note that a pound of sugar is a commodity ... no matter who owns it. On the other hand, the IOU is an asset while in your hand; claim for a pound of real sugar. Worse, in my opinion the IOU itself is a debt; after all, it is a claim to me for the real thing, the pound of sugar I have to give back to you when I am introduced to IOU.
IOU is an asset or liability, depending on the opinion; IOU author against manager. Sugar, on the other hand, is a 'pure' or 'real' substance; is precious no matter who owns it.
This is what Aristotle took as an 'internal value' ... sugar has an 'internal' value, rather than an 'available value' that IOU has. In simple terms, IOU has value only as it is used ... and usable. This is often referred to as 'credit risk' or 'counter-party' ... the IOU is not very strong; it will be in vain if the IOU writer fails to do so. The real stuff has no counter-party risk.
The very IOU in your possession is my responsibility ... after all if you present an IOU, I am obliged to return to you a pound of real sugar ... and to cancel the IOU. Indeed, once it is issued, the IOU becomes useless; paid in full ... but a pound of sugar is still a pound of sugar ... certainly not in vain.
Thus, money closes debt; that is a 'real' money symbol. If (if!) I return your pound of sugar, the IOU is redeemed; the debt disappears, erasing the real 'things'. We can even argue that instead of a pound of sugar, I give you half a pound of salt; if you agree, the IOU is also turned off, and with real stuff. 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 get your pound of sugar ... but the debt IS NOT OVER; now Jane has it, and I will have to give Jane a pound of sugar if she gives me my IOU. The IOU acted as a means of trade; but NOT as debtor. The IOU plays a (counterfeit) role of money, but it is not money as it can wipe out debt.
Not only that; let's say I don't use the pound of sugar I borrowed, but instead I borrow Joe; he, Joe gives me an IOU for a pound of sugar ... and surprisingly, one pound of real sugar now has two IOUs against it. Who would have thought! One pound of sugar, two IOUs need the same pound of sugar. This process can increase indefinitely; Joe can borrow sugar again, etc ... Endless IOU's 'backed' the same pound of sugar.
If you want your pound of sugar, which I no longer hold, I can't give you your sugar. Joe still has it now; i have another IOU. Can you change the IOU I gave you instead of the IOU Joe gave me? Just the exchange of credit notes ... We are beginning to see how real things are different in the way of IOU's; credit notes pretending to be money that can wipe out debt; they can only change the credit holder.
But it gets better, not just because of an unreasonable debt like a pound of sugar IOU, but because of debt in the real world. Let's look at two companies; they call it Co. 'A' and Co. 'B'. Company 'A' makes grommets ... and Company B buys grommets to incorporate them into its widget product line. 'A' sells 100 grommets for 'B'; and in 'A books' books, Receiving Accounts, created entries '100 grommets sold in' B 'for 100 units of money, paid in 30 days'.
Similarly, in 'B' books, in Payable Accounts, the entry of '100 grommets purchased from' A 'in 100 units, paid in 30 days', is included. So far, nothing unusual; within 30 days, 'B' pays 'A', and accounts are paid ... IOU is used. Note IOU (100 grommets) is an A-book asset, but is a binding of the letter 'B ... as a pound of sugar IOU.These two IOUs, assets and liabilities at the same time, depending on the viewing area.
Now suppose the managers of ‘A’ and ‘B’ decide to merge the two companies; 'A' and 'B' come together to form Company 'Z'. So what happened? However, the letters 'A' and 'B' are included; the amount of assets and the total amount of liabilities are added, and they appear in the Company's newly established 'Z' books.
But wait; if 'B' owes 'A' (paid 'B', received 'A') and 'A' and 'B' no longer, will these numbers be transferred to 'Z' ; which means, 'Z' owes 100 units of money ... to 'Z'? Oops. Impossible; things cancel on their own ... any debts or payments due to other companies will remain ... but 'A-B' is canceled. The IOU was merged to form a consortium with two previously independent companies.
Meanwhile, what about the newly acquired grommets 'B'? Apparently these are now on the 'Z' list; and 'Z' will include them in its widget product line. Real things last; IOU disappears. Real things can be money; real money just can't disappear. IOUs are not money; they can disappear and disappear. It's that simple. Now replace Treasury with Federal Reserve instead of 'A' and 'B', change treasury bills and Fed notes grommets and widgets!
An important point; real things, 'clean' goods can be 'real' money ... good or not so good. IOUs are assets / liabilities cannot. Unfortunately, the word asset is misused, applied to both 'clean' assets and promising assets on the one hand but debt on the other. This is the main reason why the counterfeit money system we live in is currently dying ... and only real money combining real assets can save our economy ... and our civilization.
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