Money is usually thought of as one simple entity. In reality though, there is an architecture of money where money can be divided up into different layers with different characteristics and functions.
Interest in monetary theory is picking up lately. But it seems that there is not one monetary theory. Ask two monetary theorists and you receive three opinions. For one of them, money is credit. For another money is no credit. And for yet another one, only gold is money and everything else is credit. Although money is an active component of our everyday life, different schools of economics meet head-on in its description and analysis.
As a realistic perspective suggests, different monetary theorists are both right and wrong at the same time: the different views all revolve around one true point. In themselves, however, none of the approaches is in itself completely correct. In order to understand the complex phenomenon of money as it exists in our complex world today, it is necessary to take a holistic perspective. In order to get this view one has to gain the understanding that money follows a hierarchy and, to a certain extent, is always to be understood in terms of a multi-layered architecture.
The hierarchy of money means that money is not a monolithic unit, but a whole to be divided into different layers. At the bottom is so-called base money. Depending on the monetary system, this is a different type of base money (more on this later). Based on the respective base money, mostly more abstract forms of money follow, which almost always take the form of credit. In monetary theory, this is referred to as circulating funds. Directly above the base money is what is today called legal tender money, which is the national currency bill (banknote). What few people know, however, is that legal tender is also a form of credit; usually a liability from the central bank or the government's treasury. While national currencies today exist as banknotes (cash) or bank deposits, other monetary forms of credit are used via even more efficient and simple services such as credit cards or mobile phones.
A narrow view of money regards base money as actual money, since it is the foundation, while everything else in one form of credit or another built on it. This is the perspective of the metalists, Austrians or Bitcoiners, all of whom are so-called hard money advocates. This perspective is opposed by the fact that today most diverse credit instruments function very well as money. Depending on the layer, the underlying monetary layer de facto functions as money. Also, in certain contexts and circumstances, monetary credit instruments such as bank deposits or financial derivatives appear as liquid funds that enable payment or settlement and thus serve as "actual" money.
Which forms and instruments function as money today is therefore always context-dependent. Higher forms of credit turn out to function less as money if there is a so-called "flight for safety". Then the demand for base money increases abruptly, as this form of money turns out to be indeed the fundamental form of money and thus enables ultimate settlement. In a liquidity crisis, also known as a "deleveraging event", forms of credit that used to be perfectly money-like just a moment ago, can quickly prove to be money no more. In the context of today's financial system, such scenarios are often referred to as risk-off and risk-on. In a risk-on environment, forms of credit very well serve as liquid funds. Not so in a risk-off moment, where everything flees into base money. If one is aware of this hierarchy of money, money and the monetary system should be easier to classify and interpret.
With the understanding of money as a hierarchical structure, individual forms of money can also be more easily put in relation to each other in order to avoid comparing apples to oranges. Anyone who compares money and thus also monetary systems with one another must always make it clear that equal layers are compared with each other. Because only in this way can reasonable statements be made. Especially today a wrong comparison is overexaggerated. Bitcoin in its current form is all too often compared with the Visa. The payment processor is a scaling solution to increase the efficiency of cash (currency), which in turn is a scaling of central bank reserves or government bonds. Correctly, Visa should rather be compared with a higher level in the Bitcoin network, for example, the Lightning network.
A monetary system is thus based on inherent conflicts of objectives. In economics, there is talk of so-called tradeoffs. In all its complexity, money in the form of base money can never fulfill all the business, transactions and functions that are needed to run a full-functioning diverse economy. Scaling across different layers, with each layer specializing in a specific function, is proving to be indispensable and the way to go.