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I've found that the best starting point understanding money and banking is understanding that all money is very literally, nothing more, nothing less than debt.

I've found that the best starting point understanding money and banking is understanding that all money is very literally, nothing more, nothing less than debt. Your "money at bank account"? Very fundamentally, nothing but a credible statement from the bank that they owe you the amount of money. Obviously, you do not need to have any assets in the first place to make the statement. To make it credible is a bit more difficult trick.

funklute 4y ago
> all money is very literally, nothing more, nothing less than debt This doesn't seem to work for a dollar bill in my hand though?
- z3c0 4y ago
  A dollar in your hand is "redeemable debt". It's future value that you've been promised, presumably for having prior given up something of value, like your time or some tangible good.
  - omnicognate 4y ago
    So a train ticket is money?
    - scrollaway 4y ago
      Keyword is redeemable. A train ticket is not exchangeable. But yes, products can sometimes become accidental foreign currencies when they satisfy all the key properties, even if they’re not printed by a national bank. Casino chips for example. Disney dollars. Etc.
- scatters 4y ago
  A dollar bill is just a piece of paper. You can light a fire with it, or wipe your ...uh, nose with it. What gives it value is that society has agreed that it represents a redeemable obligation to receive one dollar's worth of goods or services. That obligation is debt.
- louloulou 4y ago
  That's just mostly debt, a hundred years ago it would have been a promise to pay you ~1/20 oz of gold. At the moment I think a $100 bill costs about 20 cents to produce, so it's 99.8% debt on the Fed's balance sheet.
  - mellavora 4y ago
    No, fully debt, by your own words. > a hundred years ago it would have been a promise to pay you ~1/20 oz of gold. so 100 years ago, it represented a debt of 1/20 oz of gold.
    - swores 4y ago
      Their point is that even if the debt went away you can technically prescribe a very small amount of value to the actual object that has been produced to represent that debt (what we call the "paper" note). Although that intrinsic value would arguably be lower than the cost to produce it in the case of the debt actually ceasing to be valid, but for that to happen society would have bigger problems than worrying about the material value of old bank notes.
- mellavora 4y ago
  Take a look at it, upper left corner "This bill is legal tender for all debts" Makes it pretty clear to me.
  - AnimalMuppet 4y ago
    "Legal to offer as payment of a debt" is not at all the same as "is itself debt".
- beefield 4y ago
  You get easily into quite deep questions with money... Anyway, there are good reasons to argue that dollar bills owned by central banks are not money - at least in any meaningful sense. To see why, let's assume a central bank prints a bill with value of a googol dollars, that is 10^100 dollars and puts it in the vault. Is there any meaningful way that amount of money has just exploded? Do we see e.g. monetary inflation? No. The moment when bills become money in meaningful sense is when they end up in circulation. And they end up in circulation, when - you guessed it - central bank lends them to banks. The bills are a liability of a central bank, thus they are a note which says that central bank owes that amount to holder, thus they are debt. Yep, I agree, this is confusing and requires very careful thinking.
- unyttigfjelltol 4y ago
  Sort of-- a dollar bill is an "IOU Nothing". Still an IOU as pointed out by the other comments, but in practice it's more like a promise of the Federal Reserve to empty it's chest of assets (mostly dollar-denominated debt instruments) to give your dollar bill value. Pre-1971 it was a claim on a defined amount of precious metals. Historically, precious metals and specifically gold were the sole non-debt currency, because it's a dense store of value whose custody you don't necessarily have to entrust to a 3d person.
jgilias 4y ago
A hundred times this! In programming lingo I like to think about money as something akin to promises or futures. Something that 'has value' strictly in its current context, and even then only as a 'promise' that will yield when exchanged. With the property that the longer you have it, the less it will yield. Which is a necessary condition for the currency underpinning your economy, to force people to move it around instead of holding. When you look at it this way, getting rid of any excess I don't immediately need by getting something else (stocks, ETFs, property, whatever) seems like a total no-brainer.
- veidelis 4y ago
  What exactly determines that steady inflation is a necessary condition? How is it proven?
  - jgilias 4y ago
    Look up pretty much any resource on deflation.
omnicognate 4y ago
It's a commonly stated interpretation but it doesn't really make sense. How is "debt" defined if we're defining money as debt? * The dictionary gives me "debt (n): a sum of money that is owed or due". To define (or even describe) money in general as debt with this definition is obviously circular. * If you simply define "debt" as "money" then to define "money" as "debt" is obviously even more directly circular. The point being made isn't really wrong or unhelpful. As you say, a person's bank account is a liability of the bank, so to say "I have money in a bank acccount" really means "the bank has an obligation to me", and a lot of "money" is like this. Not all, though: cash and bank reserves can't (in the modern world) accurately be described as debt in the sense of "somebody owing somebody money" (and it's debatable whether even an individual bank account is fully describable that way). There is no easy, trivial definition of what money is. Probably the most general view is that it represents some sort of obligation or claim the person who "has the money" holds over others. That's a valid insight, but it's too general to be a definition as it's also satisfied by many things we don't generally think of as money, eg. train tickets or stocks. The "money is debt" notion is, I think, an attempt to express this useful-but-too-general "claim or obligation" idea, but given people usually think of "debt" in a much more specific sense as "money owed" I don't think it's terribly helpful for people who are struggling with what money "is". At best, I think it would have to come with a lot more explanation of exactly what is meant by "debt" in this context, and would need caveats to avoid being overly broad.
- beefield 4y ago
  I think the issue is more how "is" is defined. I like to think with following analogy: A knife can have lots of properties. A knife is sharp, long, dull, rusty etc. But fundamentally (Don't know if there is a better word for this) a knife is a piece of steel[1]. Similarly money has properties like being store of value, medium of exchange, unit of value, bits on a database of a bank etc. And fundamentally money is debt. Not all debt is money, though, but only debt with a set of specific properties. To add to the mess "what money is", if you go technical, you find there are many definitions for money, that is, many sets of properties that can be money (see e.g. M0, M1 etc.) [1] Obviously, there are knifes made not from steel, but I hope you get the point anyway.
NoboruWataya 4y ago
While this is an interesting factoid about money and can be useful in understanding some questions about money (eg, "what happens if my bank goes bankrupt") I'm not sure how helpful it actually is for gaining a clear understanding of how money works in practice. Trying to explain why a dollar bill is debt, for example, is not straightforward. I guess different people think differently, but when I find myself tied in knots trying to think about interest rates, inflation and the banking system, I find it helpful to remember that money is an asset, and is subject to the same basic principles (eg, supply and demand) as any other asset. Of course, it's really just the other side of the same coin - money is an asset to one person and a liability to another.
- HPsquared 4y ago
  Someone had to borrow to create that dollar. In other words, your money is someone else's debt.
Sin2x 4y ago
https://en.wikipedia.org/wiki/Standard_of_deferred_payment https://en.wikipedia.org/wiki/Standard_of_deferred_payment
sheepybloke 4y ago
I've been doing some accounting lately and double-entry bookkeeping helps you understand this and other monetary policy. Money has to flow from place to place. Understanding that it's all debt being used to pay other debt, whether that be the wages you owe employees or the purchases for widget materials, is incredibly eye opening.
AnimalMuppet 4y ago
> all money is very literally, nothing more, nothing less than debt. There was a time when a whole lot of money was literally in the form of gold and silver coins. Explain to me how a physical gold coin in my hand is literally debt? Explain to me how bitcoin is literally debt? And, you don't get to claim that those are exceptions. You said that all money is literally debt. I'm pretty sure that claim is simply false.
- flictonic 4y ago
  I think he probably should have said "all fiat currency".
  - AnimalMuppet 4y ago
    Even that is not true. One could argue that it's true in a system like the US, where the Federal Reserve is separate from the Treasury. I'm not sure it's true in a fiat currency situation where the Treasury can print money for free and then spend it. (Of course, that's the path to ruin through government fiscal irresponsibility destroying the currency...)
- imtringued 4y ago
  Gold and silver coins are hard to track tokens which effectively represent a balance sheet except in a physical form rather than written words. In theory nothing prevents you from cutting out parts of a balance sheet and glueing them on another balance sheet to emulate physical tokens. With Bitcoin it is quite obvious. The strange part is that these assets have no corresponding liabilities, nobody has to accept them. The best you can do is speculate that people will accept them in the future.
- Aunche 4y ago
  > Explain to me how bitcoin is literally debt? Bitcoin is a literally a distributed ledger, so it's very much debt. Gold and silver aren't strictly debt because they also happen to be commodities that were used for their aesthetic properties. However, it's use as money is a system of keeping track of credits and debts.
silent_cal 4y ago
You're right, but that's only in the past fifty years or so. It used to be that money was backed by hard assets like gold and silver, and a bank note represented a claim on the asset. Now banks don't have to back their money with anything, because they can just borrow from a bigger bank if they need more cash.

funklute 4y ago

> all money is very literally, nothing more, nothing less than debt This doesn't seem to work for a dollar bill in my hand though?

z3c0 4y ago
A dollar in your hand is "redeemable debt". It's future value that you've been promised, presumably for having prior given up something of value, like your time or some tangible good.
- omnicognate 4y ago
  So a train ticket is money?
  - scrollaway 4y ago
    Keyword is redeemable. A train ticket is not exchangeable. But yes, products can sometimes become accidental foreign currencies when they satisfy all the key properties, even if they’re not printed by a national bank. Casino chips for example. Disney dollars. Etc.
scatters 4y ago
A dollar bill is just a piece of paper. You can light a fire with it, or wipe your ...uh, nose with it. What gives it value is that society has agreed that it represents a redeemable obligation to receive one dollar's worth of goods or services. That obligation is debt.
louloulou 4y ago
That's just mostly debt, a hundred years ago it would have been a promise to pay you ~1/20 oz of gold. At the moment I think a $100 bill costs about 20 cents to produce, so it's 99.8% debt on the Fed's balance sheet.
- mellavora 4y ago
  No, fully debt, by your own words. > a hundred years ago it would have been a promise to pay you ~1/20 oz of gold. so 100 years ago, it represented a debt of 1/20 oz of gold.
  - swores 4y ago
    Their point is that even if the debt went away you can technically prescribe a very small amount of value to the actual object that has been produced to represent that debt (what we call the "paper" note). Although that intrinsic value would arguably be lower than the cost to produce it in the case of the debt actually ceasing to be valid, but for that to happen society would have bigger problems than worrying about the material value of old bank notes.
mellavora 4y ago
Take a look at it, upper left corner "This bill is legal tender for all debts" Makes it pretty clear to me.
- AnimalMuppet 4y ago
  "Legal to offer as payment of a debt" is not at all the same as "is itself debt".
beefield 4y ago
You get easily into quite deep questions with money... Anyway, there are good reasons to argue that dollar bills owned by central banks are not money - at least in any meaningful sense. To see why, let's assume a central bank prints a bill with value of a googol dollars, that is 10^100 dollars and puts it in the vault. Is there any meaningful way that amount of money has just exploded? Do we see e.g. monetary inflation? No. The moment when bills become money in meaningful sense is when they end up in circulation. And they end up in circulation, when - you guessed it - central bank lends them to banks. The bills are a liability of a central bank, thus they are a note which says that central bank owes that amount to holder, thus they are debt. Yep, I agree, this is confusing and requires very careful thinking.
unyttigfjelltol 4y ago
Sort of-- a dollar bill is an "IOU Nothing". Still an IOU as pointed out by the other comments, but in practice it's more like a promise of the Federal Reserve to empty it's chest of assets (mostly dollar-denominated debt instruments) to give your dollar bill value. Pre-1971 it was a claim on a defined amount of precious metals. Historically, precious metals and specifically gold were the sole non-debt currency, because it's a dense store of value whose custody you don't necessarily have to entrust to a 3d person.

jgilias 4y ago

A hundred times this! In programming lingo I like to think about money as something akin to promises or futures. Something that 'has value' strictly in its current context, and even then only as a 'promise' that will yield when exchanged. With the property that the longer you have it, the less it will yield. Which is a necessary condition for the currency underpinning your economy, to force people to move it around instead of holding. When you look at it this way, getting rid of any excess I don't immediately need by getting something else (stocks, ETFs, property, whatever) seems like a total no-brainer.

veidelis 4y ago
What exactly determines that steady inflation is a necessary condition? How is it proven?
- jgilias 4y ago
  Look up pretty much any resource on deflation.

omnicognate 4y ago

It's a commonly stated interpretation but it doesn't really make sense. How is "debt" defined if we're defining money as debt? * The dictionary gives me "debt (n): a sum of money that is owed or due". To define (or even describe) money in general as debt with this definition is obviously circular. * If you simply define "debt" as "money" then to define "money" as "debt" is obviously even more directly circular. The point being made isn't really wrong or unhelpful. As you say, a person's bank account is a liability of the bank, so to say "I have money in a bank acccount" really means "the bank has an obligation to me", and a lot of "money" is like this. Not all, though: cash and bank reserves can't (in the modern world) accurately be described as debt in the sense of "somebody owing somebody money" (and it's debatable whether even an individual bank account is fully describable that way). There is no easy, trivial definition of what money is. Probably the most general view is that it represents some sort of obligation or claim the person who "has the money" holds over others. That's a valid insight, but it's too general to be a definition as it's also satisfied by many things we don't generally think of as money, eg. train tickets or stocks. The "money is debt" notion is, I think, an attempt to express this useful-but-too-general "claim or obligation" idea, but given people usually think of "debt" in a much more specific sense as "money owed" I don't think it's terribly helpful for people who are struggling with what money "is". At best, I think it would have to come with a lot more explanation of exactly what is meant by "debt" in this context, and would need caveats to avoid being overly broad.

beefield 4y ago
I think the issue is more how "is" is defined. I like to think with following analogy: A knife can have lots of properties. A knife is sharp, long, dull, rusty etc. But fundamentally (Don't know if there is a better word for this) a knife is a piece of steel[1]. Similarly money has properties like being store of value, medium of exchange, unit of value, bits on a database of a bank etc. And fundamentally money is debt. Not all debt is money, though, but only debt with a set of specific properties. To add to the mess "what money is", if you go technical, you find there are many definitions for money, that is, many sets of properties that can be money (see e.g. M0, M1 etc.) [1] Obviously, there are knifes made not from steel, but I hope you get the point anyway.

NoboruWataya 4y ago

While this is an interesting factoid about money and can be useful in understanding some questions about money (eg, "what happens if my bank goes bankrupt") I'm not sure how helpful it actually is for gaining a clear understanding of how money works in practice. Trying to explain why a dollar bill is debt, for example, is not straightforward. I guess different people think differently, but when I find myself tied in knots trying to think about interest rates, inflation and the banking system, I find it helpful to remember that money is an asset, and is subject to the same basic principles (eg, supply and demand) as any other asset. Of course, it's really just the other side of the same coin - money is an asset to one person and a liability to another.

HPsquared 4y ago
Someone had to borrow to create that dollar. In other words, your money is someone else's debt.

Sin2x 4y ago

https://en.wikipedia.org/wiki/Standard_of_deferred_payment https://en.wikipedia.org/wiki/Standard_of_deferred_payment

sheepybloke 4y ago

I've been doing some accounting lately and double-entry bookkeeping helps you understand this and other monetary policy. Money has to flow from place to place. Understanding that it's all debt being used to pay other debt, whether that be the wages you owe employees or the purchases for widget materials, is incredibly eye opening.

AnimalMuppet 4y ago

> all money is very literally, nothing more, nothing less than debt. There was a time when a whole lot of money was literally in the form of gold and silver coins. Explain to me how a physical gold coin in my hand is literally debt? Explain to me how bitcoin is literally debt? And, you don't get to claim that those are exceptions. You said that all money is literally debt. I'm pretty sure that claim is simply false.

flictonic 4y ago
I think he probably should have said "all fiat currency".
- AnimalMuppet 4y ago
  Even that is not true. One could argue that it's true in a system like the US, where the Federal Reserve is separate from the Treasury. I'm not sure it's true in a fiat currency situation where the Treasury can print money for free and then spend it. (Of course, that's the path to ruin through government fiscal irresponsibility destroying the currency...)
imtringued 4y ago
Gold and silver coins are hard to track tokens which effectively represent a balance sheet except in a physical form rather than written words. In theory nothing prevents you from cutting out parts of a balance sheet and glueing them on another balance sheet to emulate physical tokens. With Bitcoin it is quite obvious. The strange part is that these assets have no corresponding liabilities, nobody has to accept them. The best you can do is speculate that people will accept them in the future.
Aunche 4y ago
> Explain to me how bitcoin is literally debt? Bitcoin is a literally a distributed ledger, so it's very much debt. Gold and silver aren't strictly debt because they also happen to be commodities that were used for their aesthetic properties. However, it's use as money is a system of keeping track of credits and debts.

silent_cal 4y ago

You're right, but that's only in the past fifty years or so. It used to be that money was backed by hard assets like gold and silver, and a bank note represented a claim on the asset. Now banks don't have to back their money with anything, because they can just borrow from a bigger bank if they need more cash.