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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.
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
Currency Banking System
Deposits Private Sector
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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- Fall '14