| Abstract: | We extend the concept of “hierarchy of money” to our current monetary and financial system based on fiat money, with monetary policy that is conducted through the sale and purchase of securities and credit intermediation by non-bank financial intermediaries. This exposes a feedback loop between the upper and lower level of the hierarchy, which allows for more than full use of otherwise dormant capital, but that also increases inherent instabilities manifested in asset booms and busts. From the perspective of hierarchical money, we find that the call to ban banks from creating money neglects the significant role of securities-based financing in the global financial markets at the lower level, as well as the money creation capacity of central banks at the highest level of the hierarchy. Moreover, the inherently expansive nature of the hierarchy of money contradicts the long-term feasibility of full-reserve banking. |
