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Unformatted text preview: , the hierarchy is not something
imposed from the top down, e.g. by the government or the central bank. Monetary systems are
naturally hierarchical, from the ground up. This is probably a controversial point of view, so I
had best be careful to explain what I mean. (I do not mean to suggest that the monetary system
is self-organizing in the sense meant by some Austrian thinkers, as Menger).
Rather I think of the institutional organization of the monetary system as inherently involving a
system of market makers at different levels of the natural hierarchy. The term “market-maker”
may be familiar to you from finance since a security dealer is a kind of market maker. A security
dealer stands ready to buy or sell a security at a given price (actually two prices, the buy-sell
spread) in terms of money. He does this by holding an inventory of both securities and money
(actually an inventory of credit instruments that provide access to inventories of securities and
deposits held elsewhere, i.e. repos and reverse repos).
I propose to think of banks as a special kind of security dealer that stands ready to buy or sell a
deposit at a given price (now only one price) in terms of currency. And I propose to extend the
idea also to the central bank which, under a gold standard, stands ready to buy or sell currency in
terms of gold. Both banks and central banks are thus like specialized types of security dealers.
We’ll develop this point in much more detail later on in the course.
For now, thinking of our simple hierarchy of money, the point is that there is a simple hierarchy
of market makers to go along with the hierarchy of instruments. And for each market maker,
there is an associated price of money. The prices in the simple hierarchy are three: the exchange
rate (the price of currency in terms of gold), par (the price of deposits in terms of currency), and
the rate of interest (the price of securities in terms of deposits or currency, assuming par). These
prices are the q...
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This document was uploaded on 02/16/2014.
- Fall '14