Layered Money
The minting of coins was revolutionary for money as it allowed wealth to scale with trust and act as a unit of account due to its standardized value and fungibility. However, governments issuing coins could not resist devaluing their coins for their own gain by decreasing the purity of gold and silver within those coins.
With the Floren (a standardized gold coin currency) offering a trusted and unchanging currency and unit of account, second entry accounting (the second layer of money) was able to develop. Bills issued by bankers served as liabilities for this trusted currency that opened the door for credit and cross-border payments via letters.
Second layer money was more flexible and better for actual transacting. The first layer is just for final settlement, but a second layer offered convenient ways to keep tabs (a ledger) for trade to easily function until that final settlement.
Increased use of deferred settlement increased the velocity of money, however, it lacked fungibility and thus limited liquidity or transition from credit to gold.
The bank of England was the first central bank to introduce a third layer of money by issuing bills that could be redeemed for the pound sterling rather than actual precious metals, which is what backed the pound sterling. The private sector was eventually relegated to the third layer and unable to issue second layer notes that promised to pay the bearers gold.
Third layer money like bank deposits can disappear in an instant with the failing of a bank. To bring peace of mind to depositors, the government created FDIC insurance in lieu of gold convertibility. This protected third layer bank deposits without leading to a run on the banks for second layer bank notes or precious metals.
After the initial Brenton woods meeting, the USD was redeemable for gold, but all other currencies were third layer forms of money only redeemable for USD.
QE is just second layer money creation to avoid liquidity crises in the financial system.
After 2017 when the treasury repo market lost liquidity and repo rates rose 8% higher than the the Fed funds rate, the Fed decided to become a lender of last resort for all treasury-collateralized lending, both domestically and abroad, to avoid a malfunction in the treasury market if/when treasury holders needed cash.
The federal reserve issues two kinds of money: wholesale reserves for private sector banks and retail cash for people. The Federal Reserve issues second layer reserves in hopes banks will use those reserves to issue third layer money through lending.
With a retail CBDC, the federal reserve could issue second layer money directly to individuals without going through the banking system. However, a wholesale reserve CBDC that would only be accessible to banks wouldn’t fundamentally change how people interact with money, it would only change how the federal reserve interacts with the banks.