was excerpted, with some editing, from a paper of the same title by
Bell, written for The Jerome Levy Economics Institute.
on Money," Keynes defines money of account
as the description
and money as
that answers to the description. He goes on to say "if the same
always answered to the same description, the distinction would have no
practical interest. But if the thing can change, whilst the
remains the same, then the distinction can be highly significant."
Why a Hierarchy
different things do answer to the description of money that there
a hierarchy of moneys. The description or title referred to by
is the unit in which all money in the hierarchy is denominated.
the US the unit of account is the dollar. Thus all money in the
hierarchy is denominated in the dollar.
Because the government's currency is the only legal means of
tax liabilities. Since taxes are recurring liabilities, the
sector will continuously need dollars. Nearly every household in
the US has dollar-denominated tax liabilities. That makes the
the standard unit of account for all money in the hierarchy.
the private sector will always be indebted to the government in
they will prefer to write all money contracts (make all promises) in
IOUs as Money
of money involves accepting another's debt, an IOU. The key to
an IOU into money is getting other individuals or institutions to
it. Thus the hierarchy of money can be thought of as a
pyramid where the tiers represent IOUs (promises) with differing
of acceptability. At the apex is the most acceptable, the State's
IOU, i.e. the dollar. Every plane ticket, pre-paid phone card,
ticket, subway token, etc. is a form of money. The list is
so we will focus on the most important groups of promise makers - the
banks, non-bank firms, and households.
of Multi-Layered Promises
a firm issues
a promise, e.g. commercial paper, it promises to convert that promise
some specified date into a bank's promise, namely a demand
Likewise when a household makes a promise, e.g. issues debt to a credit
card company, it promises to convert its promise to a bank's
The secret to getting household and business debts accepted is an
that they are convertible into the promise of someone higher in the
bonds, and credit card debt will be discharged by delivering the
of the bank. However unlike households and firms, State promises
and certain bank promises would be accepted even if they were not
into anything else.
is easy to
see why the State's liabilities have come to serve as the means of
and as a medium of exchange in private transactions. It is not
status as legal tender per se, but their acceptance in payment of taxes
and other debts to the State that makes them the most acceptable and
money in the hierarchy.
Unique Status of Bank Promises
make their promises (demand deposits) convertible on demand into the
promises (State money), that is not the reason they are accepted.
It is because bank money is accepted at State pay-offices that it,
with State currency, is treated as the definitive money of the
The State does not pay its liabilities by converting to something
It has in effect already paid for them as tax credits in the form of
at banks have attained a special status in our economy because of the
role commercial banks have come to play. Since the central bank
that demand deposits will trade at par with State currency, and because
they are accepted in payment of taxes, bank deposits are nearly as
as State money and therefore occupy the second tier in the pyramid.
and households occupy the third and fourth tiers, respectively.
is because there is at least some chance that they will not trade at
with State money. Promises of firms stand ahead because they can
usually be traded in secondary markets and are therefore more readily
and hierarchy of money can only be understood in the context of money
promises of varying acceptability, with State money at the apex.