IOUs are not General Currencies of Exchange
But this Uf money has no value to Brad, because Brad himself issued the money as a promise to do a favor for the holder of his note. Brad now holds his own note, and it is absurd to think that Brad now owes himself a favor and will pay himself the Uf when he actually performs the favor to himself. Brad can only issue a new Uf, or reissue the original Uf, as a new debt that he owes to somebody else.
Their Uf money only has purchasing power within their two man monetary system. When the Uf issuer holds his own note, that note has no value. It only has value when it has been signed over to a creditor as an admission of debt and a promise to make good on the debt. Brad can print up all the Ufs he wants, but they will only have value if Brad can get anyone to do him favors in exchange for his Ufs. Brad gets immediate value, his creditor gets Brad’s promise of future value represented by the ‘money’.
And even then the only value the notes have is Brad’s own future favors done in return. If Brad turns out to be a deadbeat then Godfrey is better off throwing away the Uf and doing his own work for himself rather than wasting his efforts trying to get Brad off his worthless a__. The favor he did for Brad is a sunk cost and Godfrey can save himself time, expense and grief by writing off Brad’s defaulted debt and moving on with his life.
Domain of a Currency
If you sell me your used car that we agree is worth 3000 US dollars, will you accept 9000 zloties in payment? I didn’t think so. But the zloty is real Polish money currently worth 33 US cents, so 9000 of my zloties is “worth” 3000 of your dollars. Except you have to go to Poland to spend the money. NOBODY on this planet is going to accept Brad’s Uf as payment for anything, except Godfrey. Aside from US dollars which are the global payments currency, most nation’s currencies are ONLY accepted as payment within their national borders where their national monetary system is in effect.
A Polish used car salesman would probably accept either 9000 zloties or 3000 US dollars, but he wouldn’t accept 3 million won, which is $3000 “worth of” South Korea’s money. Even “real” money has very limited fungibility outside the nation that issues that kind of money.
Personal IOUs have zero fungibility, except within the two man currency zone where “everybody” has agreed to treat the Ufs as ‘money’. In the case of Brad and Godfrey, they are “everybody” within their currency system, and their ‘money’ has no value at all outside their own system. The Ufs in the example have a very small domain.
Fungibility of Trade Goods
Trade goods, which are the “money” in a barter economy, also have very limited fungibility. You can’t “spend” a truckload of logs because pretty much nobody has any use for it. And if they do, odds are you don’t want what they offer you in exchange.
There have never actually been barter economies in the world because they are utterly impractical. Sometimes people temporarily resort to barter after their monetary currency has collapsed, but their diverse labor specialized economy was never built up via barter and it will eventually return to a money economy once currency stability is restored. If we’re all peasant farmers and craftsmen and tradesmen, then I produce my own goods for my own family’s use, and so does everybody else. We don’t want somebody coming around trying to peddle their excess junk in exchange for perfectly good stuff that we produced for ourselves because we planned to eat it or wear it or live in it or use it as a tool.
The Barter Economy Myth
There has always been some more or less limited amount of “payment in kind” alongside the mainstream money economy. But the good old days of pure barter economies is nothing but a myth. Fur traders traded beads and metal goods for Indians’ beaver pelts, but the traders’ only purpose for making these exchanges was so they could “sell” the pelts for “money”. Indian tribes had “gift” economies, where hunters were paid with appreciation and honor, not with trade goods produced by the meat consumers in the tribe.
Tustain and Ash acknowledge that personal IOUs such as Ufs are not accepted by anyone other than the parties directly involved in the credit-debt deal. Tustain solves this problem by claiming that Godfrey can take Brad’s Uf to a bank and the bank will accept it as a credit deposit in Godfrey’s account. This is the beginning of confusion.
Bank Transactions Must Use Money
A bank will no more take Brad’s Uf as a deposit than the truckload of timber, because neither of these are money. If instead of an Uf Brad writes a “check” to Godfrey, Godfrey’s bank will accept the check as a deposit in Godfrey’s bank account, because the check is just an order, issued by Brad to his bank, to transfer money from Brad’s bank account to Godfrey’s bank account. As long as Brad actually has a bank account, and has previously deposited enough money in it to cover his check, then Brad’s check is “good”, and Brad’s bank will honor his request to transfer the amount of the check to Godfrey’s bank account.
This is called “checkbook money”, which is completely different than depositing a personal IOU in a bank. Checks are drawn against “checkable deposits” in bank accounts. The checkable bank deposits are “money”. The money only exists in the form of numbers in bank accounting ledgers or computers, but everyone accepts bank deposit money as money so it is money.
People who try to define “money” disagree with each other about how it should be defined. Yet all these belligerent logicians continue to “use” the forms of money that are currently in use. Money is as money does. If it functions as money, it “is” money.
Maybe Brad doesn’t have enough money in his checking account to cover the check he wants to write, but he also has a savings account at his bank. So first he goes to the bank and asks them to transfer the money to his checking account, then he pays the check to Godfrey, then Godfrey deposits Brad’s check in his bank account, and Godfrey’s bank records a credit to his account, and after Brad’s check works its way through the banking system’s payments system the check “clears” when Brad’s account is debited for the amount of the check, and Godfrey’s bank will now relax its “hold” on his deposit of Brad’s check, and allow Godfrey to withdraw the money in cash. Or the bank will honor Godfrey’s check drawn against his new deposit balance.
Electronic Money and Currency
Except for the cash withdrawal, which involves converting some of your bank deposit money into banknotes, all of this was done by changing numbers in bank accounts. Brad issued an order for his bank to debit his account and credit Godfrey’s account, and their banks handled the accounting. If Godfrey withdraws cash, then his bank debits his bank account for an amount equal to the amount of cash he withdraws. Godfrey has converted a number in a bank ledger into paper banknotes.
In the old days he might have converted his deposit balance into silver or gold coin. But now paper banknotes function as the final form of “money”. Central banks lend banknotes to commercial banks against collateral put up by the commercial bank. The collateral is usually a government bond.
Many money transactions today use electronic transfers, avoiding the use of currency altogether.
