Free Radical — Is Fiat Money an IOU?

An argument that money being someone's IOU, the debt involved drives demand for the credit to pay down the debt. Debt chartalism, so to speak.

The actual explanation for the value of fiat currency, which I have been trying to argue, (also here) I think is actually fairly simple but seems to be absent from all discussion of the topic. One dollar is precisely what is required to extinguish one dollar worth of debt. When money is created, there is always a corresponding debt created. The central bank creates base money by buying government debt or MBS or lending to banks. Banks then “multiply” this money (create additional money) by making loans to businesses and consumers. But these loans eventually need to be paid back....

In this way a dollar can be said to represent an IOU but I see it as exactly the opposite. Rather than an IOU from the bank, it is a means of extinguishing an IOU to the bank. It can be seen either way because the two look the same on the bank’s balance sheet. If the bank takes in gold and hands you an IOU redeemable in gold the gold goes on its balance sheet as an asset and the IOU as a liability. If you take out a loan, you are essentially writing an IOU to the bank for a quantity of dollars and the bank hands you the dollars. In this case, the loan goes on as an asset (account receivable) and the dollars go on as a liability to balance out the new asset. The gold IOU in the first case is a liability because it can be brought back and redeemed for the asset (gold). In the second case, the dollar is a liability because it can be brought back and redeemed for the asset (debt). In both cases the rate at which this redemption occurs is fixed and not subject to market fluctuations. The accounting is the same but the meaning is somewhat different and this seems to me to be why people have difficulty seeing dollars as an IOU.

Free Radical
Is Fiat Money an IOU?
Mike Freimuth

(h/t JP Koning)

See also the follow up, On the Convertibility of Fiat Money

Also, an excellent critique of Austrian economists by a self-professed Libertarian who admits it is a normative (moral) stance rather than a positive (scientific) one. Why Austrian Economics is Devastating to Libertarians