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).

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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