There may be an aphorism that states “it isn’t getting the appropriate reply however asking the appropriate query” that’s essential. Readers of this web site are absolutely conscious of blurbs like ‘actual cash’, ‘trustworthy cash’, ‘Fiat’ cash, printed cash, borrowed cash… advert infinitum.
Certainly, Aristotle named the fascinating qualities of cash;
Cash should be sturdy
Cash should be moveable
Cash should be divisible
Cash will need to have intrinsic worth
What query had been Aristotle’s qualities the reply to? The query ‘what makes good vs not so good cash’. This query is essentially completely different from ‘what’s cash’. If we ask what cash is healthier/not so good, we assume that we already know what cash is, and what cash will not be… a giant assumption.
Throughout recorded historical past, many issues performed the function of ‘cash’ (primarily retailer of worth and medium of alternate); cattle (pecus… Roman origin of pecuniary) salt (origin of wage) cowry shells, cacao beans, even cigarettes in POW camps throughout WWII… and naturally Gold and Silver by way of the ages.
However earlier than desirous about what is healthier cash, we have to resolve what’s cash… unhealthy or good… and what’s not cash. One option to perceive this dichotomy is to check historical past; the historical past of cash… and the historical past of actual vs. faux cash.
Discover that cattle, salt, cowry shells, cacao beans, cigarettes, financial metals and so forth. are all some type of ‘stuff’… that’s they’re actual objects. Not a single ‘promise’ or ‘IOU’ within the bunch. Alternatively, paper ‘cash’ (financial institution notes) is nothing however a promise… of one thing.
To make this clear, let’s simplify; contemplate a pound of sugar because the ‘stuff’… and an ‘IOU a pound of sugar’ because the promise. I borrow a pound of sugar from you, and offer you an IOU for ‘one pound of sugar’; then the distinction turns into apparent; the ‘stuff’ (pound of sugar)… and the promise… the paper IOU.
So what, you say? Properly, you’ll be able to definitely use the sugar to sweeten your espresso… however not a lot the (paper) IOU. When you maintain the pound of sugar, nice; you may have possession, and may put it to make use of; however the IOU, no method. Provided that you redeem the IOU will you maintain any actual worth.
Discover that the pound of sugar is an asset… irrespective of who holds it. Alternatively, the IOU is an asset whereas it’s in your hand; a declare on a pound of actual sugar. Crucially, from my perspective the exact same IOU is a legal responsibility; in spite of everything, it’s a declare on me for an actual merchandise, a pound of sugar that I’ve to present again to you on being offered with the IOU.
The IOU is both an asset or a legal responsibility, relying on the perspective; the author of the IOU vs. the holder. Alternatively, sugar is a ‘pure’ or ‘actual’ asset; useful irrespective of in whose hand it occurs to reside.
That is what Aristotle thought of ‘intrinsic worth’… sugar has ‘intrinsic’ worth, somewhat than the ‘derived’ worth the IOU has. In easy phrases, the IOU has worth solely in as far as it’s redeemed… and redeemable. That is typically known as ‘credit score danger’ or ‘counter-party’ danger… the IOU will not be very rugged; it’ll turn into nugatory if the IOU author defaults. Actual stuff has no counter-party danger.
The exact same IOU that’s an asset in your hand is my legal responsibility… in spite of everything, if you happen to current me the IOU, I’m obligated to return to you a pound of actual sugar… and so extinguish the IOU. Certainly, as soon as redeemed, the IOU turns into nugatory; paid in full… however the pound of sugar remains to be a pound of sugar… definitely not nugatory.
Thus, cash extinguishes debt; that’s the hallmark of ‘actual’ cash. When (if!) I return your pound of sugar, the IOU is redeemed; the debt disappears, is extinguished by actual ‘stuff’. We may even negotiate that as a substitute of a pound of sugar, I offer you ½ pound of salt; if you happen to agree, then the IOU can also be extinguished, once more by actual stuff. Substitute Silver and Gold for sugar and salt…
Suppose you resolve to commerce your IOU to Jane for the pound of sugar, somewhat than handing it again to me… if Jane agrees, you get your pound of sugar… however the debt is NOT extinguished; now Jane holds it, and I must give Jane the pound of sugar if she presents me with my IOU. The IOU served as medium of alternate; however NOT as extinguisher of debt. IOU performs (faux) financial function, however will not be cash because it can’t extinguish debt.
Not solely that; suppose I don’t use the pound of sugar I borrowed, however as a substitute lend it to Joe; in flip, Joe offers me an IOU for a pound of sugar… and magically, one pound of actual sugar now has two IOU’s in opposition to it. Who would have thought! One pound of sugar, two IOU’s claiming the identical pound of sugar. This course of can proliferate for ever and ever; Joe may lend out the sugar once more, and so forth… Limitless IOU’s ‘backed’ by the identical pound of sugar.
When you come to say your pound of sugar, that I not maintain, I can’t offer you your sugar. Joe now has it; all I’ve is one other IOU. Would you alternate the IOU that I gave you for the IOU Joe gave me? Mere alternate of debt notes… We begin to see how actual stuff is categorically completely different kind IOU’s; debt notes masquerading as cash can’t extinguish debt; they’ll solely change the holder of the debt.
But it surely will get higher, not only for foolish debt like a pound of sugar IOU, however for debt in the true world. Let’s take a look at two corporations; name them Co. ‘A’ and Co. ‘B’. Firm ‘A’ makes grommets… and Firm B buys grommets with a view to incorporate them into its personal product line of widgets. ‘A’ sells 100 grommets to ‘B’; then on ‘A’s books, in Accounts Receivable, an entry is created for ‘100 grommets offered to ‘B’ for 100 financial models, payable in 30 days’.
Equally, in ‘B’s books, in Accounts Payable, an entry is created for ‘100 grommets purchased from ‘A’ for 100 financial models, payable in 30 days’. Up to now, nothing uncommon; in 30 days, ‘B’ pays ‘A’, and the accounts are settled… the IOU is redeemed. Discover the IOU (for 100 grommets) is an asset on ‘A’s books, however a legal responsibility on ‘B’s ebook… similar to the IOU pound of sugar. These IOU’s are two confronted, property and liabilities on the identical time, relying on perspective.
Now suppose administration of ‘A’ and ‘B’ resolve to merge the 2 corporations; ‘A’ and ‘B’ merge to turn into Firm ‘Z’. So what occurs? Properly, the books of ‘A’ and ‘B’ are consolidated; the overall property and whole liabilities are added, and seem within the books of the newly created Firm ‘Z’.
However wait; if ‘B’ owes ‘A’ (payable of ‘B’, receivable of ‘A’) and ‘A’ and ‘B’ not exist, will these numbers be transmitted to ‘Z’; that’s, ‘Z’ owes 100 financial models… to ‘Z’? Whoa. No method; the objects cancel one another… any money owed or funds attributable to different corporations will keep… however the ‘A-B’ transactions cancel out. The IOU is consolidated out of existence by the merger of two beforehand impartial corporations.
In the meantime, what in regards to the grommets that ‘B’ simply purchased? Clearly these at the moment are within the stock of ‘Z’; and ‘Z’ will incorporate them in its product line of widgets. The actual stuff stays; the IOU’s disappear. Actual stuff is probably cash; actual cash can’t simply disappear. IOU’s aren’t cash; they’ll and do disappear. It is that easy. Now substitute Treasury and Federal Reserve for ‘A’ and ‘B’, substitute treasury payments and Fed notes for grommets and widgets!
The underside line; actual stuff, ‘pure’ property will be ‘actual’ cash… good or not so good. IOU’s which are property/liabilities can’t. Sadly, the phrase asset is misused, utilized to each ‘pure’ property and to guarantees which are property in a single hand however liabilities in one other. That is the core purpose why the faux cash system we presently reside below is dying… and solely actual cash comprising actual property can save our economic system… and our civilization.