Introduction

Abstract

The goal of this monograph is to provide a formal theoretical outline for an integrated approach to monetary theory and banking theory. Since the early days of Wicksell the role of debt in facilitating exchange has received much attention in monetary economics. Debt claims which are transferable between economic agents allow conducting transactions smoothly without having to engage in burdensome barter. Although contemporary banking theory provides sophisticated analyses of systems of debt claims, research has concentrated on financing and investment problems rather than transaction problems. Also monetary theory has not yet established the analytical linkage between money and the most famous contemporary banking model analyzing debt contracts: the model of banking as delegated monitoring in an information sensitive capital market by Douglas Diamond (1984). Building upon the Diamond model this monograph undertakes to develop an integrated view of money and banking by analyzing contemporary banking theory from a monetary perspective. In the search for efficient solutions to transactions problems the joint microeconomic foundations of money and banking are explored such that more solid ground can be provided for the analysis of money in the economy. The currently existing gap between monetary theory and contemporary banking theory should get narrowed. As suggested by Sir John Hicks the problem of trust between economic transaction partners has a major role in developing such an integrated approach to money and banking.

“Money as means of payment is just a debt. The payment of debt is an exchange of debts. We regard it as payment because the debts have different quality. It is quality from the point of view of the creditor that matters. I pay my creditor with a cheque on a bank: He accepts it because he has more confidence in a debt from the bank than in a debt from me. […] If I had drawn my cheque on a bank of which he had never heard and which (so far he could tell) might be purely imaginary, he would not have accepted it as a payment.”

Sir John Hicks, A Market Theory of Money (1989, p. 104).