An IOU can also be a promise of value that will be created and produced in the future. It’s a subtle, but important difference when it comes to money systems, and the common frame of commodity, commodity-backed and fiat ignores this important difference. Civilizations throughout time have monetized both kinds of IOUs – receipt and promise.

IOU receipt money represents value that exists and is available now. This IOU is for:

…your stud ram I will board for you.

…10 bushels of wheat I will store for you in my silo.

…an ounce of gold I will store for you in my vault.

IOU future value money is a promise to produce value in the future. This IOU is for:

…one of my new lambs in the spring.

…10 bushels of wheat next fall.

…an ounce of gold I plan to have in my possession in the future.

…a credit on your taxes due.

…an hour of my service

The moment any of these IOUs for value to be produced in the future begins circulating broadly in the community to be redeemed by anyone, it becomes money.

Two sides to an IOU

An IOU is a statement of relationship: one party is in debt, and the other party has a credit. Some books about money focus on money as debt and some focus on money as credit. In fact, there must be a credit for every debt, and a debt for every credit. Curiously, how people perceive money – as debt or as credit – affects their view of IOU-future-value money. Issuing a credit conveys a position of power. So, those who see this money as a credit often think well of credit- money (as long as they like and trust those who have the power to create it). Being in debt conveys a loss of power. Those who see this money as a debt, often think poorly of this money system.

Accounting and settlement

An IOU for future value needs a point of settlement or some form of clearinghouse. If I have promised I will produce 10 bushels of wheat next fall (my debt), and my promise of 10 bushels of wheat (a wheat credit) is moving around in the community as money, then when the wheat is gathered, someone must come and trade the IOU for the wheat produced. If a banker promises to juggle investments and pay you gold in the future (his debt), and the banker’s IOU is moving around in the community as money (a gold credit), then there must be some point in time and space for the banker to keep his promise and hand over the gold. If I have earned 10 units of a community currency by contributing 10 hours of service or 10 units worth of a product to someone in my community, I must have somewhere to spend it.

Think of the IOU as a hot potato. If the person holding the IOU in the fall does not want 10 bushels of wheat or does not want to take possession of the gold, now what? This issue of settlement has been dealt with in three major ways.


Generally, governments are the biggest single spenders in an economy, and they collect some form of taxes from everyone to make this spending possible. This makes government a good central settlement point. A government can create IOU money that is a credit for payment of future taxes. Tax credits are of value to anyone who must pay taxes, and consequently to anyone doing business with those who must pay taxes. This gives the tax credits nearly universal value. Since the government is generally the largest consumer of goods and services, it can spend these IOUs to pay for its expenses. These government IOUs circulate in the society and eventually are used to pay taxes, creating a continuous circulation loop and generating economic activity.

The token of government-created tax-credit money can be in the form of a coin – with or without a separate commodity value, or in the form of a written note. The Chinese Song Dynasty (960–1269) may have been the first to widely use paper credits. The Yuan Mongol emperor, Kublai Khan (1260–1294) is credited with making paper government notes the only legal currency under his reign. Marco Polo reported on this use of money in his book, The Travels of Marco Polo , published in 1300. His report pollinated emerging western ideas about money.5

Whether the token is made of clay, metal or paper, the concept is the same: the token represents the credit side of an IOU for future value (the payment of taxes), created by the state. The government is the debtor in this relationship and the money is a credit good for future payment of taxes.

Private merchants and bankers

Private parties have stepped in to serve as clearing houses for IOUs for future value.

Imagine if you, or I, or the small business on Main Street, need to borrow to buy something now. Let’s say we write up an IOU that says in 6 months the bearer of this IOU can come to us and we will give them a gold coin or a quilt we have made of equal value. We get the lumber store to accept this IOU for some wood we need to build a quilt frame. More than likely, that is as far as our IOU will go. The lumberyard will not be able to use our IOU to pay for something from someone else because we are not well enough known. Our IOU does not have the authority, trustworthiness or prestige to make it transferable in the community. Our IOU cannot become money on its own.

However, a merchant-banker, person of great wealth or even apparent wealth may be able to convince people he has the authority and trustworthiness to make his IOUs good for use as money in the community. He is able to create money out of nothing by issuing a promise, because enough people believe his promises can and will be fulfilled. (There is a reason why we associate banks with well-tailored suits and imposing skyscrapers. Perception matters in the short term, and wealth matters in the long run, when you are out to get a broad community to accept your IOUs as money.)

When someone has reached this level of authority and trustworthiness, when their IOUs are broadly accepted, transferred from person to person, and used as money, they can do us a service. You or I, or the small business on Main Street can go to this money- creator-banker and offer them our IOU. They will verify our ability to make good on our IOU, for which we will pay them fees and interest on our borrowing. In exchange for our IOU, they will give us their IOU, which is used as money in the community. New money is being created for us to use by the private banker.

For the risk a borrower may default on a large loan, lenders may require collateral worth a significant portion the loan. This anchors our promise of future value in a present, available and mortgaged asset.

The money-creator-banker is using their wealth and prestige to convert our IOU into an IOU that serves as money in the community. They are accepting a responsibility to keep all the IOUs trustworthy. Based on a portfolio of promises from common people, the banker issues its own future value IOUs, which become money. The banker’s job is to be sure the terms of payment and payout allow the bank to keep its promises. The banker charges interest on the loans he makes that create new money for you and for the economy. He makes money on this juggling of future claims. This is a significant step beyond providing basic banking services, and characterizes nearly all the private bankers in the world today.

The rise of wealthy global merchant money-creator bankers in the late middle ages provided a valuable service and accelerated activity in the global marketplace. These banks functioned as IOU intermediaries, turning the promises of local farmers and producers into a global trading currency. This gave these merchant bankers a power in the global marketplace that transcended national laws and boundaries. It gave them the power to challenge the divine right and previously unquestionable authority of monarchs, who had been monopolizing the power to create new money. This private sector power helped fuel the shift from despotic to democratic rule over the following centuries. The shift away from the divine rights of monarchs moved in practice to the divine rights of wealth and capital. It is unclear where the divine rights will go next. I hope we will recognize the value of a genuine government of, by and for the people, and put it into effective practice.

Mutual credit money systems

Cooperatively governed associations have stepped in to serve as clearing houses for IOUs for future value. A democratically elected governing board reviews and accepts IOUs for future value from a member, often requiring assets for collateral. In exchange, they create new money for the member to use within the exchange. The association’s future-value IOUs are the money supply.

In a mutual credit money system, the trustworthiness of the participants is critical because there may not be any guarantee for the value of the currency, such as a government or commonwealth backing it up. The strength of the currency is supported by the integrity and productivity of the participants. For this reason, they function best when the record and accounting is open and the trustworthiness of participants is widely known. Mutual credit money systems make excellent complementary systems, providing backup when primary currencies are experiencing difficulty. The Swiss WIR mention in Chapter 3.21 is an example of such a system. Whether a mutual credit money system could function on a very broad, national or global level has yet to be tested. New computer technologies may offer a way to establish trustworthiness and authority (Chapter 4.39).

The value of borrowing

An IOU for future earnings or services gets some of its trustworthiness from the fact that with adequate investment, we really can create greater value. If I have just one loom, I can only make so much fabric. It may take me decades to save enough to buy a second loom and increase my production. If I can borrow to buy a second loom now, I can immediately increase my production, pay off the second loom, and increase my profits. This is the value of debt-credit: having money to spend now, based on a promise to create value and return the loan in the future.

Historically, when it has been easy to borrow, and when the borrowed money has been invested in research, development and capital improvements, we have seen increases in innovation and production. For example, at the end of the 19th century, borrowed money was readily available. The nation was heading up the steep slope of the money expansion cycle curve – which would collapse with the Great Depression in 1929. The railroads, which were the boom industry of the times, introduced specialized departments for research and development (R&D). They invested in new product and service development. This concept of R&D departments became widespread and contributed to the bloom of innovation in the 20th century.

However, keep in mind that this borrowing advantage holds true in any money system. Loans can come from existing money savings or can serve to create new money in an IOU-future-value money system. How loans are issued in relation to the creation of money is a system choice. In other words: making a loan does not always create new money, but in an IOU-future-value money system, all new money is created by making a loan (a promise of future value to be delivered).

The issuer makes a difference

Does it make a difference whether a formal government, private bankers or a defined local or community of affinity creates the IOU-future-value money? Yes. A government or self-governing community can choose a stable, fixed value money. Private for-profit banker-money creators have never been known to do so, and by definition their for-profit business model may exclude a stable and fixed value money.


Governments can be for-profit or not-for-profit institutions. Despots, dictators, monarchs, and nearly all forms of rule by a privileged elite have generally governed as if they were profit-taking institutions. These privileged elites have lived in great luxury, building up hefty bank accounts by skimming off the national treasury and economy. This constant skimming off the top requires an ever-increasing supply of money to satisfy their greed, and satisfy the need for money in the general economy. An increasing supply of money results in a steadily decreasing value money system.

However, democratically elected governments, functioning as effective and true democracies can make wise choices and do their best to determine the right amount of money for a nation, state, bioregion or local community; they can do their best to keep the value of money stable and function as a non-profit institution working for society as a whole. That is a choice they can make. (It’s a struggle to get rid of cronyism and corruption, though. And, the choice of a money creation system has a determining impact on whether effective and truly democratic governance is even possible – a difficult, vicious circle to break.)

Private business

Private business is by definition a profit-making enterprise. It works to make a profit, to grow and expand its market share. Up until recently in US law a business with shareholders – a C-Corporation - had to make profit-taking for its shareholders its highest value and overriding goal. And, to date, all our major banks are C-Corps. Beginning around 2006, the B-Corp movement successfully made it legal for corporations to add social responsibility to their mandate. But, to date, no major banks have changed their corporate status. Making profits on business activity is a good thing; it drives hard work and innovation, and can certainly be done without compromising the common wealth or the common good – when we set that value and corresponding goal.

However, there is an important difference between making profits on doing business and making profits on the privilege of creating the money that will be used by all businesses. The privilege of creating new money is an advantage accorded no other business. Yet as a private C-Corp business, a bank must do its best to make a profit on its money creation. The bank will juggle the incoming repayments and outgoing promises with the intent of never being caught short – all while maximizing profits. It will charge fees, collect interest, and issue as many promises as it feels it can manage. It will make profits on its business enterprises and on every bit of money it creates. As a profit-making business it will do everything it can to expand its money-creation activities, whether or not that benefits the common good and general welfare. By definition and by law, a private business cannot serve the nation as a whole in its money creation, it must serve its own interests.

An IOU-future-value money system

Who Decides

Again, any kind of community government can decide to use an IOU-future-value money system. This decision may happen by the decree of a dictator or by the consensual agreement of community members. When an IOU for future-value is used broadly by a community as a medium of exchange, it has become monetized.

Authentic & Trustworthy

An IOU-future-value money gets its trustworthiness from the reputation of the person or entity making the promise to come up with value in the future. For a whole community to accept an IOU for producing future value as trustworthy, the issuer of the IOU has generally needed to be someone of great wealth and/or political power. It is impossible to get community wide confidence your Uncle Ernie will keep his promise. But kings, merchant-bankers, governments, and community networks with good reputations, or with armed or market force to demand their IOUs be accepted, can turn their future value IOUs into money. In rare instances, an open, full disclosure cooperative community has successfully maintained authority and trustworthiness for its money.


Creating an IOU for the production of some future value is in a sense creating money out of thin air. The promises may be guaranteed by wealth and an ability to manage credits and promises successfully. However, a promise to produce value in the future is inherently risky. Life happens. Banks and governments may make promises about the future, but they cannot prevent natural and man-made disasters. And monarchs, great merchant-bankers and ruling elites have a well- deserved reputation for making too many promises they cannot keep. IOU-future-value money is risky. In just the past 40 years, we had the 1987 market crash, 1989 junk bond crash, 1994 Mexico-US crash, 1997–98 Asia crisis, 1999–2000 Dotcom bubble, and the 2007–2008 global financial crisis.


People and their governments have demanded a form of IOU-future- value money with a partial collateral guarantee. Whoever is issuing IOUs for future value must set aside a proportional value of real assets to back up their promises. This might mean their promises had to be guaranteed by land they owned, or property, or precious metals, or other assets that could be converted in the marketplace, should they over promise. The most common form of this partially collateralized IOU-future value money is called fractional reserve (See Chapter 4.32). Collateralizing strategies shift the money system to a hybrid of commodity-backed and future value money.

Note: this form of guarantee was not a product of a free market. Markets have shown no inclination to tie up assets in the interest of the general welfare or the stability of a monetary system. Markets tend toward whatever minimal guarantees they can get away with while maximizing personal profits in the short-term. Free market advocates want you to accept on faith that if everyone pursues their short-term selfish interests, magically, the marketplace will be most efficient and money will flow to its best and highest uses. There is absolutely no evidence this is true, but it is a matter of faith for many.

Creation & Destruction

IOU-future-value money is created when a promise is made. Anyone can make a promise to produce value in the future and to convey it to others upon their demand. However, to become money, this promise must be transferable to other people, and must be considered valuable by enough people to make its use widespread. Again, historically, that has limited this kind of money to the promises of governments and people of great wealth and power – the bankers or global merchants. A government decree has often been made to turn these IOUs into community-wide money. Nearly every single unit of money in circulation today was created by private bankers, given authority and guarantees by their national governments.

IOU-future-value money is extinguished when the promise is fulfilled and the IOU exchanged for whatever value was promised. Between creation and destruction, this IOU money can circulate for any length of time in the marketplace. For example, let’s say a farmer issues a wheat credit – an IOU for 10 bushels of wheat. The wheat credit may circulate for any amount of time, buying and selling many times the value of the 10 bushels of wheat. But, when someone takes the IOU to the farmer and exchanges it for 10 bushels of wheat, the IOU is marked paid, and its use as money is over. However, the farmer may turn right around and create a new wheat credit that will keep the supply of money even.

The same principle applies when a bank issues an IOU to produce a certain amount of gold in the future, and those bank promises are in use as money. This IOU-gold certificate, in use as money, may circulate for any length of time. But, when someone takes it to the bank and exchanges it for the gold, the IOU is marked paid, and that IOU-gold certificate is no longer part of the money supply. However, it is difficult to make counterfeit-proof IOU money, especially when the money token is a piece of paper. So, instead of tearing up or destroying the note (e.g. cash bills), when the promise is fulfilled, IOU-future value money tokens are generally re-used by the bank to make another promise, and the note swings back into circulation as part of the money supply. If the bank’s IOU is an accounting entry, then that particular issuance of money, vanishes with the stroke of a key.

Measure of Value

An IOU-future value money system can be an elastic measure or fixed measure system, depending on how and who creates the new money. Nearly all current systems that give the privilege of creating money to the private banks, are elastic measure systems with an expanding supply and shrinking value.

Store of Value

An IOU for future earnings is a conditional promise: if there are no natural disasters, manmade catastrophes, wars, or famines; if the person making the promises continues to be healthy and powerful; if the banks making the promises are prudent and wise; if the national economy remains healthy and productive, then the promises will be kept. So, money that is an IOU for value produced in the future, may or may not maintain its value. The value of IOU future value money will reflect the confidence of its users in the ability of the issuer to keep their promises.

who rules?

There are significant differences between the various IOU-future value money systems; but the main differences lie in a society’s choice of values, which determines who wields the power to create new money for everyone. As we know, whoever gets to create new money, will be in power.

 PrevMoney Systems 4.31