By Matthew Berg*
This paper argues that a monetary production credit economy must necessarily have a hierarchy of money (Foley 1983; Bell 2001) in which some IOUs are more liquid and more acceptable than others, and in which default on IOUs is possible. The imposition of a tax liability by the government is a sufficient condition not only to ensure that the government’s IOU is acceptable (Wray 2012), but also to ensure that at least some non-government IOUs will be acceptable to the degree that they can be converted into government IOUs – that is, to the degree that they are liquid.
Banks are institutions which exchange their own IOUs for the IOUs of borrowers who stand lower in the hierarchy of money than banks. Borrowers take out loans from banks for the purpose of buying goods, services, or financial asset from a third party. Banks (and central banks) act as the “ephors” of capitalism – and as the ephors of the hierarchy of money – by deciding which IOUs shall be “validated” and effectively converted into government IOUs, and by deciding when and for how long those IOUs shall be validated.