• Unit 2: The Hierarchy of Money

    This unit dives into the claims of Perry Mehrling's paper "The Inherent Hierarchy of Money" (2012). It demonstrates how monetary hierarchy evolved over eight centuries using gold as its origins. It examines the hierarchy of money and explains monetary hierarchies as dynamic systems. Mehrling's paper presents a three-layered monetary system where gold, currency, and deposits represent the first, second, and third layers of money. It explains how the monetary system is a hierarchy of monetary instruments, financial institutions, and balance sheets. This unit discusses the importance of counterparty risk, clearance, settlement, liquidity, and cash in examining monetary systems.

    Completing this unit should take you approximately 1 hour.

    • Upon successful completion of this unit, you will be able to:

      • identify the mathematical works that introduced modern accounting to Europe;
      • describe a two-layered monetary hierarchy between the gold florin and bills of exchange;
      • explain the importance of counterparty risk and default risk;
      • summarize how fractional reserve lending works;
      • explain the advantages and disadvantages of a layered money system; and
      • explain cash, clearance, and liquidity in monetary systems.

      • 2.1: Modern Accounting

        This subunit covers the mathematical works of Fibonacci and Pacioli. Europe discovered double-entry accounting and balance sheets from their work and developed a continental monetary system. This subunit discusses the Medici banking network and how bills of exchange became the first global credit instrument. It also further examines the concept of world reserve currency.

        • Modern Accounting Page

          Read this section about the mathematical origins of modern accounting.

      • 2.2: Layered Money

        This subunit examines "the hierarchy of money": how the monetary system consists of a hierarchy of monetary instruments, financial institutions, and balance sheets. It defines counterparty risk and explains how it affects monetary systems. Fractional reserve lending and the expansion and contraction of credit are also covered. The subunit introduces and explains disciplinary constraints. This subunit's reading gives the background of the layered money framework.

        • Layered Money Page

          Read this section about monetary hierarchies, risk, and fractional reserve lending.

      • 2.3: Traveling Between Layers of Money

        This subunit discusses the implications of monetary hierarchy on liquidity and cash. It covers the layers of money, bank runs, and financial crises. It also covers clearance and settlement as part of the evolution toward central banking.

      • Unit 2 Review and Assessment

        • Unit 2 Review Page

          This video walks through the major topics we covered in Unit 2. While you watch, consider the implications of monetary hierarchy.

        • Unit 2 Assessment Quiz
          Receive a grade

          Take this assessment to see how well you understood this unit.

          • This assessment does not count towards your grade. It is just for practice!
          • You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
          • You can take this assessment as many times as you want, whenever you want.