Partner$ in crime

By Emanuel Derman
April 4, 2012

I don’t understand money too well, the idea of it, what exactly it is. For a class I’m teaching I just read an enlightening British book on that subject, Where Does Money Come From?, recommended to me by Perry Mehrling, the author of a biography of Fischer Black. (Perry is giving a talk at Columbia on The Inherent Hierarchy of Money in a seminar I run next week.)

As I understand the money book, which focuses on Britain, money is at bottom created by commercial banks every time they make a loan. But the currency they loan in is created by the sovereign/state (or whatever passes for it) that gives the money practical legitimacy (for paying taxes, etc).  When states or sovereigns pass on, so, often, does their money. As John Kenneth Galbraith once said, “The process by which money is created is so simple that the mind is repelled.”

So, banks and states are cronies.  The state gives the banks (and credit unions, to a much smaller extent) the right to create new money. And the state borrows from banks, and bails them out when necessary.

It’s an incredible privilege to be able to loan people money you just created, and to profit from it. And it provides an incredible power. With great power should come great responsibility, and if it’s misused, the power should terminate post-haste. But states have too much to gain from banks. You’d think there’d be a better way to create and control money.

One of the things the book stresses is that, in the authors’ view, the key to avoiding bubbles is controlling credit creation. They seem to approve of creating credit for new ventures as opposed to buying up (speculating on) things that already exist (houses etc), and they speak somewhat approvingly of China’s policy of managing the uses of credit creation. (China’s premier is just beginning today to comment disapprovingly on monopoly held by The Bank of China).


On a different note, one of my pet peeves is naive claims of science, these days the fashion for naive neuroscientists and multiversers, who claim to understand more than they can from their theories and models. As a result I am pleased to see a rising backlash against the recurrent claims of science every couple of generations to explain everything from outside. Here’s the latest debunking: Beware the Fausts of Neuroscience



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A wonderful (and entertaining) book in this realm is “The Origin of Financial Crises” by George Cooper.

Posted by pburns_stat | Report as abusive

I agree, Pat — Cooper’s is a great book. I once read it on an airplane and got enthralled, and posted a blog about it at x.cfm/2008/11/28/A-Good-Book-on-Financia l-Crises

Posted by EmanuelDerman | Report as abusive

Thank you for that URL, about the reductionist aspect of *some* neuroscience. The first thought that crossed my mind was Jonah Lehrer. Sure enough, he was mentioned in the comment section! In general, those who are medical doctors with specialty credentials in neurology, and those who have undergraduate degrees in a scientific field, supplemented by a relevant graduate degree and related experience, are not the trouble makers, so to speak. But somehow, the Jonah Lehrer’s end up being much more visible and unfortunately, persuasive, I worry.

Here’s a link to a similarly amusing misapplication of science to comparative literature that I hope you enjoy. ience I’m not certain if it was written as a parody or sincerely. There are plenty of references to dialectical materialism, elite universities and network theory….

* Please be careful of those books about the meaning and history of money. They usually end up advocating gold standards, utopian collectives and no private ownership of property. Or the opposite: Absolute faith (of a non-theist variety) in market forces and efficiency, without a shred of compassion or loving kindness. The NYSSA website presents a more balanced point of view (ironically)!

Posted by EllieK | Report as abusive

An interesting read addressing some of these thoughts:”Debt : the first 5,000 years” by David Graeber.
Graeber provides an anthropologic take of money and debt. A basic premise: Do we have to pay our debts?

Posted by jimdor | Report as abusive