ABSTRACT
In this chapter, the author connects the historical debt nature of money to financial crisis. He argues that money is a form of debt; that debt can be categorized as productive and unproductive debt; and that, while not the exclusive explanation for crisis, the rise of unproductive debt is always an element, and often the element, in understanding crisis. Credit and debt is neither, and fits uneasily into general equilibrium models, the ultimate market-based view of how economies work. C. Goodhart discusses two broad theories on how money historically emerged: the transactions-based account and the credit-based account. The two uses of credit broadly reflect, respectively, real-sector investment typical of commercial banking on one hand, and financial investment as done by, for instance, merchant banks and securities traders on the other. Mortgages, stocks, and derivatives have their uses, but when economies become over-leveraged to finance investment in assets and land, crisis risk increases.
