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3. Money, Credit, and Crisis


  • Mason Gaffney

    1. University of California
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      Mason Gaffney has been a Professor of Economics at the University of California, Riverside for 33 years; e-mail: He is the author of The Corruption of Economics, an explanation of how land became excluded from neoclassical economic models. He has also written extensively on various aspects of resource economics, urban economics, tax policy, and capital theory.


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.