Damnit! I thought I'd fixed that bug! I'm looking at the code right now and the relevant lines all point it at the right level. It's not even a relative variable that can be changed! I hard-coded the "New Game" button to point to "Level 1", so... small though this bug may be, it's going to bother me until I figure out what's causing it.
Anyhow, thank you for your feedback. I had intentions to make the difficulty settings actually affect the story, with cash being used on certain dialog options, but I realized by Sunday that I didn't have the time to write that in. Who knows, maybe when the jam blows over I'll take what I learned and make a new version with deeper storyline. And better controls. And more mechanics. And blackjack... and hookers...
Maybe... we'll see.