# What is an IOU (and what isn't)

An IOU is a document with this general form:

<figure><img src="/files/oU6geUO4sPrHZFPSmfzw" alt=""><figcaption><p>A generic IOU</p></figcaption></figure>

There is always, a person (or organisation) Y, that created the IOU and there is always an X, an object or a service that Y promises to give to the holder of the IOU upon redemption. There may be additional caveats added, but at a minimum there will always be an X and a Y. If there is ever any doubt as to whether a document constitutes an IOU, you should ask yourself "what is X and who is Y?" If either of these questions can not be answered then it can not really be an IOU.

As an exercise, let us consider a few different items:&#x20;

**Demand deposits:** First of all, what about a demand deposit of $100 you have at your bank, say your bank is HSBC. Is that an IOU? In this case Y is "HSBC" and X is "$100 of everlasting tokens, i.e. physical banknotes". You can say to your bank, please take these demand deposits and give me banknotes and the bank is obliged to give you them. Some people may suspect that you have just exchanged like for like and so nothing has really happened, but actually the demand deposit only has value so long as the bank is solvent whereas the banknotes will have value regardless. So a demand deposit is essentially an IOU.

**Physical banknotes:** In times gone by, physical banknotes have been an IOU for gold but in modern times banknotes are not redeemable for anything other than perhaps a newer bank note which can scarcely be considered redemption at all. So today banknotes are not IOUs.

**A piece of gold:** you may observe someone exchanging a piece of gold for something else of value perhaps a car. Does that mean that the gold was acting as an IOU? It should be noted that before the transaction the car owner did not actually *owe* the gold owner anything. The car owner was completely at liberty to refuse the exchange. So a piece of gold is not, in and of itself, an IOU.


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