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

They are thus clearly all forms of credit if we were

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

Ask a homework question - tutors are online