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Unformatted text preview: and liabilities. They are thus clearly all forms of credit. If we were to
consolidate all three balance sheets in order to treat the economy as a single aggregate entity, all
forms of credit would appear as both assets and liabilities, and hence cancel. Only gold would
remain because only gold is an asset that is no one’s liability.
More generally, the difference between gold and other forms of money is the difference between
“outside” money and “inside” money, an analytical distinction first proposed by Gurley and
Shaw in their seminal 1960 Money in a Theory of Finance. Actually, Gurley and Shaw treated
currency as outside money and deposits as inside money because they aggregated only over the
private economy, not including the government sector. So from their point of view currency as
well as gold appears to be an asset that has no liability counterpart. In this course, by contrast,
we will typically be thinking about the entire economy, even the entire world economy, so all
financial assets will be inside, including currency. Once again, what counts as money and what
counts as credit depends on your point of view. In this course we are taking a global view.
To consolidate the idea of an “inside” asset, it may help to visualize the hierarchy as a symmetric
pyramid rising on a credit-to-money axis from a line centered on zero, so that net outstanding
credit at any level is zero. I place the peak of the pyramid at zero even though there is a positive
quantity of gold, simply to emphasize that that quantity is vanishingly small compared to the vast
edifice of credit below. From the point of view of the system as a whole, every liability is
someone else’s asset. These credit forms cancel if we consolidate, but such consolidation misses
the entire point. Macroeconomic variables like interest rates and GDP are affected not by the
outstanding gross quantity of inside credit, and also by who is issuing it, who is holding it, and
where that credit lies in the larger money-credit hierarchy. (Standard macro models simplify by
focusing entirely on some measure of the outstanding quantity of money, whic...
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- Fall '14