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Gaffney on Money, Credit, and Crisis

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  • Mason Gaffney

Abstract

The financial crisis of 2008-2009 has antecedents in earlier crises, including the Great Depression. In order to understand how the current crisis arose, we must review the most fundamental principles of banking. Doing that, we find that the main service performed by banks is the creation of liquidity, a collective good that can be destroyed by the behavior of individual financial institutions. The key element in creating liquidity is the monetization of various types of collateral. When collateral takes the form of land or capital that turns over slowly, banks lose liquidity. That is why major banking crises have frequently been associated with real estate lending. The best way to restore health to the financial system is by restoring the principles of the "real bills" doctrine that requires loans to be self-liquidating. Copyright © 2009 American Journal of Economics and Sociology, Inc..

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  • Mason Gaffney, 2009. "Gaffney on Money, Credit, and Crisis," American Journal of Economics and Sociology, Wiley Blackwell, vol. 68(4), pages 983-1038, October.
  • Handle: RePEc:bla:ajecsc:v:68:y:2009:i:4:p:983-1038
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    Cited by:

    1. Janet Currie & Erdal Tekin, 2015. "Is There a Link between Foreclosure and Health?," American Economic Journal: Economic Policy, American Economic Association, vol. 7(1), pages 63-94, February.
    2. repec:rnd:arjebs:v:10:y:2018:i:4:p:165-173 is not listed on IDEAS
    3. Jorge Garcia-Arias & Eduardo Fernandez-Huerga & Ana Salvador, 2013. "European Periphery Crises, International Financial Markets, and Democracy," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(4), pages 826-850, October.

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