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Unformatted text preview: h they usually
treat as an outside asset.) Mehrling 9/14/2009 4 III.
If we focus our attention on the hierarchy for any period of time, one thing becomes immediately
clear, which is that the hierarchy is dynamic. At almost any time scale you care to examine, it is
a system in motion. Focus your attention on daily clearing and settlement, on the business cycle
frequency, or on the longer term secular scale, and you’ll see constant flux: daylight overdrafts,
credit cycles, wars and depressions. At every time scale, we see expansion and contraction of
the hierarchy. As it expands, the hierarchy flattens and the qualitative difference between credit
and money becomes attenuated, but then the system contracts and the hierarchy reasserts itself.
At the business cycle frequency, the phenomena surrounding this contraction and reassertion are
grouped under the headings “irrational exuberance” in the expansion phase and “financial crisis”
in the contraction phase.
We can distinguish two sources of this fluctuation. First, and most simple, is the expansion and
contraction of the quantity of credit, which takes place at all levels of the system. Second, and
more subtle, is the fluctuation of the “moneyness” of any given type of credit. In this respect, the
quality of credit tends to increase during an expansion, and to decrease during a contraction. To
some extent we can observe this qualitative fluctuation directly as fluctuation in the availability
of credit to marginal borrowers. (More generally we observe fluctuating credit spreads between
the rates charged to qualitatively different borrowers, i.e. price.) Mehrling 9/14/2009 5 Whatever the underlying cause of fluctuation, we can usefully think of it as involving a swing
from scarcity to elasticity and back again. At all times, the monetary system can be
characterized by the balance between these two dimensions.
The history of monetary theory is to a large extent comprised of a dialogue between two points
of view, often distinguished as the Currency School versus the Banking School, which
emphasize respectively the...
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This document was uploaded on 02/16/2014.
- Fall '14