So What Is Money... Really

 There is an aphorism that states "it's not getting the right answer but asking the right question" that is crucial. Readers of this site are surely aware of blurbs like 'real money', 'honest money', 'Fiat' money, printed money, borrowed money... ad infinitum.

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 answer to? The question 'what makes good vs not so good money'. This question is fundamentallydifferent 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 is not... a big assumption.

During recorded history, many things played the role of 'money' (mainly store of value 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 of course Gold and Silver through the ages.

But before thinking about what is better money, 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; the history of money... and the history of real vs. fake money.

Notice that cattle, salt, cowry shells, cacao beans, cigarettes, monetary metals etc. are all some kind of 'stuff'... that is they are real items. Not a single 'promise' or 'IOU' in the bunch. On the other hand, paper 'money' (bank notes) is nothing but a promise... of something.

To make this clear, let's simplify; consider a pound of sugar as the 'stuff'... and an 'IOU a pound of sugar' as the promise. I borrow a pound of sugar from you, and give you an IOU for 'one pound of sugar'; then the difference becomes obvious; the 'stuff' (pound of sugar)... and the promise... the paper IOU.

So what, you say? Well, you can certainly use the sugar to sweeten your coffee... but not so much the (paper) IOU. If you hold the pound of sugar, great; you have ownership, and can put it to use; but the IOU, no way. Only if you redeem the IOU will you hold any real value.

Notice that the pound of sugar is an asset... no matter who holds it. On the other hand, the IOU is an asset while it is in your hand; a claim on a pound of real sugar. Crucially, from my point of view the very same IOU is a liability; after all, it is a claim on me for a real item, a pound of sugar that I have to give back to you on being presented with the IOU.

The IOU is either an asset or a liability, depending on the point of view; the writer of the IOU vs. the holder. On the other hand, sugar is a 'pure' or 'real' asset; valuable no matter in whose hand it happens to reside.

This is what Aristotle considered 'intrinsic value'... sugar has 'intrinsic' value, rather than the 'derived' value the IOU has. In simple words, the IOU has value only in so far as it is redeemed... and redeemable. This is often called 'credit risk' or 'counter-party' risk... the IOU is not very rugged; it will become worthless if the IOU writer defaults. Real stuff has no counter-party risk.

The very same IOU that is an asset in your hand is my liability... after all, if you present me the IOU, I am obligated to return to you a pound of real sugar... and so extinguish the IOU. Indeed, once redeemed, the IOU becomes worthless; paid in full... but the pound of sugar is still a pound of sugar... certainly not worthless.