# The Hierarchy of Money > Villagers build a money hierarchy where stones, banknotes, and reserves each serve different roles in trade and crisis. - Title: The Hierarchy of Money · Gregorygundersen | Shortify - Summary: Villagers build a money hierarchy where stones, banknotes, and reserves each serve different roles in trade and crisis. Villagers create a money hierarchy… - Keywords: villagers, stones, banknotes, reserves, interbank, currency, devaluation, reserve currency, central bank, currency peg, technology, startups - Source: Gregorygundersen — https://gregorygundersen.com/blog/2026/09/20/hierarchy-of-money - Author: Gregory Gundersen - Read time: 1 min - Topics: villagers, stones, banknotes, reserves, interbank, currency, devaluation, reserve currency, central bank, currency peg, technology, startups ## Money Villagers use gray stones as money to trade without bartering. > The villagers have abstracted value. ## Supply Stones are hard to collect, so their value adjusts with demand. > The only way to get them was to walk an hour outside of town and spend all day sifting through the riverbed. ## Debt People can pay for goods later, creating credit and debt. > The person who owes money is said to have debt, while the person who is owed money is said to have credit. ## Interest Borrowing costs extra stones to account for time value. > The extra five stones are for the lost value of not having money sooner. ## Bank A bank lends stones with interest to those who need credit. > The entrepreneur calls his business a bank. ## Balance Banks track assets and liabilities to manage debt. > The banker begins to track two lists: assets and liabilities. ## Illiquidity Banks panic when depositors withdraw money suddenly. > The banker panics. He dutifully gives out all the stones that he can. ## Speculation Depositing money is a speculative investment with risk. > The villagers realize that depositing money at the bank is a kind of speculative investment. ## Payment Banks issue banknotes for easier transactions. > The bankers called these banknotes. ## Settlement Banks settle debts between themselves to avoid stone transfers. > The banks call this scheme gross settlement. ## Residual Nightly netting reduces the number of stones transferred. > The banks agree: at the end of each day, the bankers will convene and settle all debts by netting. ## Deferral Banks can defer settlement to the next day for liquidity. > The banks agreed that while eventually settling was critical to the system, banks could borrow from each other for one night at a special interest rate. ## Acceptance Banknotes become money when accepted as debt settlement. > The villagers begin to wonder if maybe all the things they thought mattered about special gray stones were not the real reason people were willing to accept them as money. ## Creation Banks create money without physical stones. > She takes out her balance sheet and simply writes down a new line: a liability in the form of new deposits for the businessman and an asset in the form of this man’s debt to the bank. ## Squeeze Harvest season drains bank stones for workers. > Every autumn, all the farmers in town withdraw their stones from their banks to pay the agricultural workers. ## Gridlock Banks can’t settle debts during harvest crisis. > Athena Bank owes Poseidon Bank a large residual payment of one hundred thousand stones, but Athena’s vault is empty because its customers had to pay workers’ wages. ## Backstop A clearinghouse resolves interbank debt crises. > Zeus calls this a clearinghouse. The clearinghouse could inspect any member bank’s balance sheet and issue paper certificates against the bank’s assets. ## Centralization The central bank becomes the official bank-of-banks. > The village elders stepped in and decided that the village needed an official bank-of-banks, which they called the central bank. ## Reserves Central banks issue reserves to manage interbank debt. > The central bank said that certificates were ad hoc emergency money, issued as part of a voluntary system of member banks, while reserves would be official bank money, issued by the central bank. ## Inflation More money creates higher prices in the village. > The villagers called this increase in prices over time inflation. ## Key takeaway Villagers create a money hierarchy: stones for direct transactions, banknotes for village payments, and reserves for interbank settlements.