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.
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…
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