ABSTRACT
This chapter describes the basic mechanisms at work in financial systems, mechanisms which enable the emergence of crises. In order to understand properly how the financial system of our time works, we need to know how it emerged. The inter-war period is difficult to locate in the framework with endogenous money supply, or the regime of regulated banking and exogenous money supply. The chapter defines the functioning of financial systems fewer than three regimes: the Regime of Undeveloped Banking and Exogenous Money Supply, the Regime of Financial Innovation and Endogenous Money Supply, and the Regime of Regulated Banking under which money supply become exogenous again. In the system that is most relevant for understanding the emergence of financial crises, the Regime of Financial Innovation and Endogenous Money Supply, money is supplied inside the economy's financial sector without the backing of the gold or currency reserves of either the central bank or the credit-supplying commercial banks.
