There are two ways finance can inflict disaster upon us. The first involves the collapse of a large, systemic institution: the Knickerbocker Trust at the start of the last century, Lehman Brothers at the start of this one. The second involves a convulsion in a particular market: tulips in 1637, various forms of “shadow banking” in 2008. The past three years have brought much debate and modest progress on regulating the megabanks, and the Libor scandal has added fresh impetus to these efforts. But shadow-bank reform has remained, well, shadowy. This is because nobody wants to grapple with the basic question of what money really is.

To understand the stakes, start with one pillar of the shadow banking world: asset-backed securities. Because these IOUs seemed safe before the crisis, they were treated effectively as money: for example, traders used them to make downpayments on derivatives positions and settle up if they made a wrong bet. Many asset-backed securities were sold to money market mutual funds, which enhanced their cash-equivalence further. The money market funds never lost value and you could write cheques against them. Or consider the enormous “repo” market. Anybody who owned securities – government bonds, corporate bonds or the aforementioned asset-backed ones – could use this market to swap them for cash. Indeed, in the run-up to the crisis, even synthetic collateralised debt obligations, consisting of nothing more substantial than a bunch of Wall Street promises, could be turned into money with few questions asked. Financiers were conjuring money out of nothing. By no means was this the exclusive province of central banks.

Of course, private money is an old phenomenon. Banks used to issue private banknotes; and even the humble current account is based on the audacious notion that a $100 entry on a statement from your friendly bank manager is as real and reliable as $100 worth of wheat or gold. But, however pedigreed, private money is susceptible to panics. And so, over the years, uncertain private promises have given way to solid public ones. Starting in 1863, the Feds replaced private banknotes with greenbacks. In 1934 they panic-proofed bank accounts by instituting deposit insurance.