The price of money

A security dealer is a market maker which buys stock from you and sells it to someone else. He has a bid-ask spread from which he profits. He is willing to go both ways - buy the security as well as sell the security. This is what determines the price of the security.

Similarly, it is nice to think of banks as market makers also. If you want money, they'll give you money (loan) and if you want to take a deposit, they'll go the other way and give you the deposit by taking your money. So here there is a bid-ask spread for money as well. The price that they maintain is par.

So all across the hierarchy of instruments, there is a price which quantitatively brings them to the same level. That is, securities in terms of deposits, deposits in terms of currency, currency in terms of, say, gold. However, that doesn't mean that these instruments are actually at the same level.

During times of ample liquidity and high valuation of securities, people tend to forget the hierarchy of instruments (and market makers). However, this hierarchy remains and shows up in times of financial crisis.

Along with the hierarchy of instruments, there is also a hierarchy of market makers. For each market maker, there is an associated price of money.

1. Exchange rate = the price of currency in terms of gold

2. Par = the price of deposits in terms of currency

3. Rate of interest = the price of securities in terms of deposits or currency, assuming par

So if a market maker is Long Deposits and Short Currency, and currency becomes scarce, that can cause trouble (as currency goes up in value viz deposits).

In a more realistic example, this qualitative/quantitative difference shows up when, say, a PD doesn't want to exchange his pristine collateral or when he doesn't want to make markets despite being given free reserves (by the Fed).

It is important to note that if market makers don't make the markets, then you cannot go from one level of hierarchy of instruments to the other, not for any price.

A narrowing of the hierarchy means an increased qualitative differentiation between credit and money, and in the course of that differentiation there is bound to be pressure on the quantitative price of credit in terms of money. - Perry Mehrling

We are looking at all of them as liquidity dealers. Security dealers, nevertheless, are somewhat better placed as compared to banks. In times of crisis, dealers can change the interest rate - but banks can't (they have to maintain par - currency and deposit should always exchange one for one).

References:
http://sites.bu.edu/perry/blog/current/

https://www.amazon.com/New-Lombard-Street-Became-Dealer/dp/0691143986

https://www.financialresearch.gov/working-papers/files/OFRwp2014-04_Pozsar_ShadowBankingTheMoneyView.pdf