Course Review: Economics of Money and Banking

I recently got interested in economics and finance. A post on Hacker News was recommending to take Economics of Money and Banking on Coursera as an introduction. I really enjoyed the course and will give a brief review of it here.


From the course description:

The last three or four decades have seen a remarkable evolution in the institutions that comprise the modern monetary system. The financial crisis of 2007-2009 is a wakeup call that we need a similar evolution in the analytical apparatus and theories that we use to understand that system. Produced and sponsored by the Institute for New Economic Thinking, this course is an attempt to begin the process of new economic thinking by reviving and updating some forgotten traditions in monetary thought that have become newly relevant. Three features of the new system are central:

Most important, the intertwining of previously separate capital markets and money markets has produced a system with new dynamics as well as new vulnerabilities. The financial crisis revealed those vulnerabilities for all to see. The result was two years of desperate innovation by central banking authorities as they tried first this, and then that, in an effort to stem the collapse.

Second, the global character of the crisis has revealed the global character of the system, which is something new in postwar history but not at all new from a longer time perspective. Central bank cooperation was key to stemming the collapse, and the details of that cooperation hint at the outlines of an emerging new international monetary order.

Third, absolutely central to the crisis was the operation of key derivative contracts, most importantly credit default swaps and foreign exchange swaps. Modern money cannot be understood separately from modern finance, nor can modern monetary theory be constructed separately from modern financial theory. That’s the reason this course places dealers, in both capital markets and money markets, at the very center of the picture, as profit-seeking suppliers of market liquidity to the new system of market-based credit.

The course starts as a history of money and banking in America and Great Britain, from the time when there was no central banking system in the 1850s until their founding and the reasons why it was necessary. It explains the invention of money, balance sheets, how basic accounting works, how banks operate and how money transfer actually worked and now works.

It then leads over to modern finance, and “how it actually works which is how the the textbooks describe it”. Modern financial instruments are thoroughly explained, which are things like credit default swaps, repo market, currency reserves, futures and so on.

I found it really interesting how historical banking systems worked and how they developed, from the gold standard to fiat money. It helped my understanding tremendously, especially the explanation with balance sheet. The professor developed a system to describe and analyze most instruments via balance sheets and the Treynor–Black model. This makes it easy to understand the core concepts and compare them. I think I now have a much better grasp on economics and how banks work behind the scene. One reads a lot in the newspapers but the devil is always in the details, which I now know much more about.

Some things which I did not like the course are the extensive reading assignments. While they are interesting, they were really demanding, sometimes 50 pages for a week. They were mostly original texts from the time, while interesting, they could have been summarized in much less text.

The lectures about foreign currencies were difficult for me to understand and a little bit dry, the balance sheets had many actors and had a dimension of time. This part is the only that I disliked.

Finally, the course was free on Coursera. For the four first weeks, I could take the assignments and let them automatically be graded. But after that, I would have needed to pay. I would prefer either to never be able to grade or always, but not getting teased like that.

If you want to understand more about the behind-the-scenes of modern banking or want a basic introduction into money theory and finance, then I strongly recommend taking this course. It is one of the best courses that I have taken on Coursera!

PhD Student Natural Language Processing

I am a computer science PhD student and Chinese learner.