Why, according to the Banking School, is central-bank money better than bank money? What is its account of the hierarchy of money? This chapter will illustrate that the answer is paradoxically Chartalist, albeit in a residual manner. ‘Outside money’ is rendered by several stalwarts of the Banking School as ‘fiat’, defined by legal tender laws and/or monopoly grants to an issuing bank. A political theory of money, by contrast, bases the superior quality of central-bank money in its robust (political) mutualisation at scale.

The Banking School oddly agrees with Chartalism that legal tender laws drive hierarchy in money. We interpret this as being anchored in the former's argument that a qualitatively superior, ‘outside’ instrument is required to settle debts. For the Banking School, the law is not the ultimate source of the distinction between money and credit because the logic of debt settlement itself implies such a distinction. ‘Promises precede deliveries’ (Hicks, 1989), so transactions inherently proliferate chains of credit that only a qualitatively better ‘money’ can stop. The logic of hierarchy is inherent in debt which, in turn, is inherent in the economy itself.

This generates unstable dynamics that again requires hierarchy to manage. Ralph Hawtrey identified a constitutive tension between value and liquidity. Transactions proliferate credit, but the ‘inherent instability of credit’ pulls against a stable value of money. This incoherence can be managed ‘on banking principles’ – that is, through the hierarchy, by modulating banks’ survival constraint.

Reading the Banking School somewhat against its own grain, we can also see the more political elements of money—namely how political settlements are expressed in the configuration of the credit system (Bagehot, 1920 [1873]) and how money is linked to value (Hawtrey, 1919).

For a tradition of thought that emerged in eighteenth-century Britain out of real banking practice, this school of thought naturally considers the fact of outside or Chartal money as only the very beginning of the story (Arnon, 2011). For the Banking School, the credit system has its own sui generis dynamics built out of interlocking claims on outside money—dynamics that must be understood in all their interactive complexity if the system is to be managed.