money-lecture_notes-Lec 02--The Natural Hierarchy of Money

Best therefore not to reify the concepts of money and

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Unformatted text preview: il settlement, or what? Best therefore not to reify the concepts of money and credit, and to rest instead with the more general idea that the system is hierarchical in character. That point established, I need to remind you that, even with four layers, the hierarchy we’ve been talking about is much simpler than that in the real world. In the real world we see many more layers, and finer gradations in the hierarchy. Just so, a minute ago I used currency and highpowered money as synonyms (four paragraphs up), but they are not actually the same thing. (High powered money includes not only currency but also deposits at the central bank.) I also treated the category of bank deposits as homogeneous but it is not--there are different kinds of deposits, and also some deposit-like things (MMMF accounts) that are not the liability of any bank at all. The category of securities is, if anything, even more heterogeneous, encompassing promises of various maturities, credit quality, and so forth. All this just reinforces the point that we want to avoid sterile debates about what is money and what is credit, and stand instead on the point that the system is hierarchical in character. II. So far we have been thinking about the hierarchy as a matter of the qualitative difference between various financial instruments. It is illuminating to shift now and see the hierarchy from the standpoint of the various financial institutions that issue the instruments. Mehrling 9/14/2009 3 The Hierarchy in Balance Sheets Central Bank Assets Gold Liabilities Currency Banking System Assets Currency Liabilities Deposits Private Sector Assets Deposits Liabilities Securities To keep things simple, I have noted only the instruments we have already been talking about, so there are important entries missing: government debt as the most important asset of the central bank, loans as an asset of the banking system, and securities as an asset of the private sector. For present purposes, the important point to appreciate is that all of the instruments except gold appear as both assets...
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This document was uploaded on 02/16/2014.

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