This morning, a typical American college student bought coffee at the local café, paying for it with an ATM card. Then she jumped into her car, on which she carries accident insurance, and drove to the university, which she can afford to attend thanks to her student loan. She may have left her parents' home, which is mortgaged, a few minutes early to avoid construction work on a new dormitory, paid for by bonds issued by the university. Or perhaps she needed to stop at the bookstore to purchase this book, using her credit card, before her first money and banking class began.

Beneath the surface, each financial transaction mentioned in this story—even the seemingly simple ones—is quite complicated. If the café owner and the student use different banks, paying for the coffee will require an interbank funds transfer. The company that insures the student's car has to invest the premiums she pays until they are needed to pay off claims. The student's parents almost surely obtained their home mortgage through a mortgage broker, whose job was to find the mortgage that offered the best interest rate. And the bonds the university issued to finance construction of the new dormitory were created with the aid of an investment bank.

This brief example hints at the complex web of interdependent institutions and markets that underlies the financial transactions we engage in every day. The system is so large, so efficient, and generally speaking so well run that most of us rarely take note of it. But a financial system is like air to an economy: If it disappeared suddenly, everything would grind to a halt. Let's take a closer look at this system.