ABSTRACT
This chapter introduces the notion of the hierarchy of money. While the hierarchy of money emphasizes the qualitative difference in instruments, the existence of different types of money does provide a great deal of elasticity in the system. During good times, when business and expectations about the future are positive, all instruments seem almost as good as each other. The element of discipline enforced by the hierarchy of money sets in and the qualitative difference between monetary instruments is exposed. There also exists a hierarchy of monetary institutions corresponding to the hierarchy of instruments. The money at the top of the pyramid, state money, in reality consists not only of cash/currency held by the public and in bank vaults but also ‘reserve money’. It is truly astonishing, to say the least, how mainstream macroeconomics fails to consider the hierarchy of money, monetary institutions and instruments as relevant in the modern world.
