Money, Banking & Alchemy

In our preliminary discussions about banks and balance sheets we shall learn something new about money. Trust remains central, not least our trust, as bank customers, that electronic deposits are safe. And yet you may well feel that something fishy is going on. Banks appear to create money out of nothing. In a sense, because balance sheets balance, deposits (money) – liabilities of a commercial bank – are backed by assets, notably the loans that commercial banks make. But then those loans can be risky and banks are often locked into contracts that mean they cannot necessarily call in those loans at a moment’s notice. In contrast depositors can shift or withdraw their deposits very quickly. Deposits are meant to be safe and liquid. Loans are typically much less safe and illiquid. It makes money and banking seem like a form of medieval alchemy: a magical transformation of base metals into gold.

Well, you are right to feel uncomfortable. Money and banking is a form of alchemy except textbooks like to give it more “scientific” descriptions such as risk and maturity transformation. In fact, the former Governor of the Bank of England, Mervyn King, has written a book on the issue called “The End of Alchemy: Money, Banking and the Future of the Global Economy“. It is an excellent book and I highly recommend it. Your textbook authors, Cecchetti and Schoenholtz, also give the book high praise in their blog article, Making Banking Safe.

15 Feb 2019

Money Matters

Our introductory session on money highlights a number of points, including

  • money as symbolic of civilisation: the dominance of voluntary, commercial exchange over violence; the emergence of respect for the rule of law and property rights
  • the State (democratic or autocratic) has always played a huge role in supporting the “moneyness” of money
  • money is typically an IOU (though there are exceptions) and so fundamentally depends on trust

By way of illustration, a little-known ceremony in London – dating back to the 13th century – takes place each year. So, in addition to taking a look at the above video, check out the following references if you’re still not convinced that money is steeped in history and politics.

History of the Trial of the Pyx Royal Mint website
Have you ever seen a £1,000 coin? BBC News, 1 Feb 2017
Sampling Inspection and Quality Control: The Trial of the Pyx University of Wisconsin, Feb 1976

Needless to say, the lecture will cover more contemporary examples of how the State uses money and its supporting infrastructure not just to achieve core objectives such as financial and monetary stability but also to help enforce the law and pursue foreign policy.

Money comes in many shapes and sizes: physical or digital, privately or publicly issued; widely or narrowly available; and with transfer systems that can be centralised (“traceable” bank deposits) or decentralised (“anonymous” peer-to-peer bitcoins). Textbooks generally focus on money that is an asset for the holder with a corresponding liability somewhere else in the system (a central bank if it is dollar bills or a commercial bank if it is an electronic bank deposit).

However, popular interest – but not participation – is currently engaged by new, disruptive, quasi-money. Bitcoins, like many of their cryptocurrency rivals and other commodity-style moneys, are not the liability of anyone else. It can all get rather confusing. As such, I highly recommend you read a recently published article from the BIS (Bank for International Settlements) which contains some illuminating “flower” visualisations.

Money Flower: Taxonomy
Money Flower: Taxonomy
Money Flower: Examples
Money Flower: Examples

The article also discusses

  • issues that central banks need to consider, should they decide to introduce their own cryptocurrencies
  • some key technical drawbacks with the blockchain system (which is just one type of distributed ledger technology)


Like any product, money has its price. Indeed we shall unveil four prices to choose from. One is the exchange rate and we shall take the opportunity to review currency markets and how not to get confused by foreign exchange quotations. As we look at the grand historical sweep of global currencies over millennia we shall see once more that power, politics and money are inextricably linked.

7 Feb 2019


Welcome to London – still a top global financial centre, despite Brexit uncertainties. I look forward to meeting you all next week.

The world of Money & Banking remains as controversial, disruptive and surprising as ever. We are just over ten years on from the Lehman Bros bankruptcy; a defining moment in a defining period of 21st century history – the so-called Great Financial Crisis (GFC for short). As we shall discover, the impact on day-to-day finance is still very much with us and there are plausible concerns that another major shock could be around the corner.

Many Money & Banking themes have captured the headlines in recent months: fallouts in emerging markets; challenges to the Fed’s independence; “fake” accounts and audits;  fintech unicorns on the rampage; crypto-crunches and blockchain bonds; the slow death of public equity markets.

Our course will touch on these and many other contemporary issues; placing them in historical and political context.  I make no apologies in revisiting medieval, even earlier, periods to illustrate core concepts that remain deeply relevant. Politics also figure largely since governments, autocratic and democratic, work hand-in-hand with finance to maintain order and preserve power. As both Lenin and Keynes preached, debauching the currency is the quickest route to social revolution.  While the media gets excited about Russian influence on election results, consider whether it matters compared with the power of the finance lobby.

Romance, popular culture and finance are similarly embraced.  Renaissance Italy’s Monte delle doti, Shakespeare, Hamilton and his hip-hop sidekick, Wizard of Oz ,the return of Mary Poppins,  plus numerous Hollywood renditions of the GFC; all Money & Banking at heart.

Of course, I would be remiss not to balance the Arts with the Sciences. So there will also be some maths, psychology, statistics, and other technical analysis to help unravel underlying themes.

Do not worry if you have limited academic experience of finance and associated disciplines. It is not required as the course begins with basic principles before gearing up. Like a rollercoaster ride, the trip starts slow… teasing you for the fun to follow. So just keep riding, hold on to your seats and, above all, enjoy!

We start our first session with administrative issues which should take about 30-40 minutes:

  • course overview and syllabus
  • textbook and online resources
  • attendance, registers & class etiquette
  • office hours
  • session formats & student presentations
  • assessment and grading

The remainder of Session 1 will focus on the Financial System and its three key components: Institutions, Instruments and Markets.

Finance offers indispensable contributions to society and the economy:

  1. running the payments system
  2. matching lenders and borrowers
  3. lifetime wealth management
  4. dealing with risk

For these reasons, money, other forms of debt, banks and financial markets have been essential building blocks of civilisation for millennia. Finance, including derivatives, go back to pre-Christian times and plays a central role in the wealth of nations and the rise in living standards. Financial revolutions generally preceded Europe’s industrial revolutions over two centuries ago. It was finance that built, and destroyed, great Empires. Just over a decade ago, a bank won the Nobel peace prize just before the global financial system started plunging into meltdown.

Finance is ingrained in human culture – art, drama, literature, old and new. Are we impressed that “A Lannister always pays his debts“? And what are your thoughts about Gordon Gekko, 1980s Hollywood villain, who infamously preached that greed is good?

Modern society needs finance; we cannot exist without it. But we have to take the rough with the smooth. Finance can go horribly wrong; history is littered with systemic crises. The GFC is just the latest, but surely not the last, example of catastrophic global underperformance.

The main conceptual learning objectives for this session are to flag several key themes that will be examined more deeply in future meetings:

  • Finance is a mirror of the human condition; joyful and productive moments tainted by cheats, irrationality, instability and illusions
  • Crises are irregular, tough to predict and, all too often, chaotic – displaying unnerving, amplifying doom loops
  • Risk is omnipresent and is aggravated by globalisation and innovation; it takes on many guises. Risk is generally disliked and, even if recognised, is not always properly managed
  • Wall Street is Main Street and vice versa;  the worlds of finance and the “real” economy are inseparable, especially when it comes to real estate
  • Finance is a force for both good and evil. Society needs finance but, too often, we overindulge and succumb to financialisation
  • Banks (and related financial companies) do not always add value; sometimes they just reshuffle existing assets and, in so doing, can actually destroy value
  • Modern finance reflects the Jeckyll & Hyde impacts of globalisation, regulatory overhauls and technological innovation; in our digital age, value is even harder to establish, exacerbating volatility and risk
  • Banks (and money) can take many different forms; simple or complex, transparent or “shadowy”
  • Finance, old and modern, involves a mutually beneficial public-private partnership that can sometimes backfire

No specific technical skills will be introduced at this stage although students will be expected to have a rough idea of so-called “safe” assets, the role of banks as producers (not simply intermediaries) and the nature of principal-agent problems.

For class prep, in addition to looking at the above video, I recommend this introduction from the Association for Financial Markets in Europe (AFME). Also take a look at this blog article about the connection between banks and nuclear reactors.

28 Jan 2019