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.
Thus, money extinguishes debt; that is the hallmark of ‘real’ money. When (if!) I return your pound of sugar, the IOU is redeemed; the debt disappears, is extinguished by real ‘stuff’. We could even negotiate that instead of a pound of sugar, I give you ½ pound of salt; if you agree, then the IOU is also extinguished, again by real stuff. Substitute Silver and Gold for sugar and salt…
Suppose you decide to trade your IOU to Jane for the pound of sugar, rather than handing it back to me… if Jane agrees, you get your pound of sugar… but the debt is NOT extinguished; now Jane holds it, and I will have to give Jane the pound of sugar if she presents me with my IOU. The IOU served as medium of exchange; but NOT as extinguisher of debt. IOU plays (fake) monetary role, but is not money as it cannot extinguish debt.
Not only that; suppose I do not use the pound of sugar I borrowed, but instead lend it to Joe; in turn, Joe gives me an IOU for a pound of sugar… and magically, one pound of real sugar now has two IOU’s against it. Who would have thought! One pound of sugar, two IOU’s claiming the same pound of sugar. This process can proliferate with no end in sight; Joe could lend out the sugar again, etc… Endless IOU’s ‘backed’ by the same pound of sugar.
If you come to claim your pound of sugar, that I no longer hold, I cannot give you your sugar. Joe now has it; all I have is another IOU. Would you exchange the IOU that I gave you for the IOU Joe gave me? Mere exchange of debt notes… We start to see how real stuff is categorically different form IOU’s; debt notes masquerading as money cannot extinguish debt; they can only change the holder of the debt.
But it gets better, not just for silly debt like a pound of sugar IOU, but for debt in the real world. Let’s look at two companies; call them Co. ‘A’ and Co. ‘B’. Company ‘A’ makes grommets… and Company B buys grommets in order to incorporate them into its own product line of widgets. ‘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 IOU’s are two faced, assets and liabilities at the same time, depending on point of view.
Now suppose management of ‘A’ and ‘B’ decide to merge the two companies; ‘A’ and ‘B’ merge to become Company ‘Z’. So what happens? 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.