Do you think that in recent years, as a result of the global economic crisis, the whole discussion about public policy has become increasingly focussed on economics? And that much of the policy discussion is based on core concepts that are quite poorly understood, including by many policy-makers? If your answer to these question is yes you are not alone.
At the root of much confusion about financial economics and how it works in reality is, in my view, the (not so) simple question of “what is money?” and closely related to this the question of “what is credit?”
Do you think that savers need to bring their money to the bank so you can take out a mortgage to buy a property? Think again. This is what you are often being told but this is not how it actually works. Do you think that banks predominately give out loans to finance productive investment? Also not true.
If you are now even more confused let me introduce you to some great new material published online that can really help you getting a grip on the subject. Some of it is not easy and some economics background certainly helps, but this should be also instructive for anybody interested in what money is, how it is created and how the credit system really works. If you work through the material it will take a few hours but it will certainly help your understanding. So here we go!
What Is Money?
The Bank of England (BoE) has recently published two papers that will help your understanding of money. The first one entitled “Money in the Modern Economy: An Introduction” does just that: it gives you an introduction to money in 10 pages. The principal author also explained some of the key arguments in a YouTube video, fittingly filmed in the BoE’s gold vault.
How Is Money Created?
If you know what money is you can move on to the second paper. Entitled “Money Creation in the Modern Economy” it shows how commercial banks do not simply act as financial intermediaries but create most money themselves in the form of credits and loans. Again, the BoE provides a video introduction from the gold vault.
Money, Credit and Prices
The final really great educational resource I would like to introduce in this post is a lecture by Lord Adair Turner, the former chairman of the UK Financial Services Authority, on the topic of money, credit and prices held at the Stockholm School of Economics (it also comes with a set of slides). The lecture gives a great overview over some of the discrepancies of theory and real life and looks at different forms of credit and what separate challenges they pose. The lecture comes in three parts:
Here are the corresponding slides. If you want, you can also download a transcript of the lecture as well as the slides.
There you go. This is no easy subject but if you are interested in this and want to spend some of your summer time educating yourself about money and credit you could do worse than start here. By the way, these resources are useful wherever you live and whatever currency you use.
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