Graph representation of balance sheets: from exogenous to endogenous money

Abstract

The nature of monetary arrangements is often discussed without any reference to its detailed construction. We present a graph representation that allows for a clear understanding of modern monetary systems. First, we show that systems based on commodity money are incompatible with credit. We then study the current chartalist systems based on pure fiat money, and we discuss the consolidation of the central bank with the Treasury. We obtain a visual explanation about how commercial banks are responsible for endogenous money creation whereas the Treasury and the central bank are in charge of the total amount of net money. Finally we draw an analogy between systems based on gold convertibility and currency pegs to show that fixed exchange rates can never be maintained.