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The Money ProblemRethinking Financial Regulation$
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Morgan Ricks

Print publication date: 2016

Print ISBN-13: 9780226330327

Published to Chicago Scholarship Online: September 2016

DOI: 10.7208/chicago/9780226330464.001.0001

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(p.52) Chapter Two Money Creation and Market Failure

(p.52) Chapter Two Money Creation and Market Failure

Chapter:
(p.52) Chapter Two Money Creation and Market Failure
Source:
The Money Problem
Author(s):

Morgan Ricks

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226330464.003.0003

This chapter examines the issuers of monetary instruments. The goal here is to shed light on the business model of money creation, which for our purposes is synonymous with “banking” (or shadow banking, as the case may be). The chapter begins with a stylized account of the emergence of this business model. The account departs from the conventional textbook story in important ways. In particular, rather than depicting fractional-reserve banks as institutions that “take funds” from depositors and then “lend them out,” the account depicts banks more realistically as issuers of monetary instruments. (In this respect, John Maynard Keynes was an important precursor; it turns out that his insights on banking have not been absorbed by the mainstream academic literature.) The chapter then illustrates the instability of the banking business model through a simple (and novel) game-theoretic analysis. It argues that existing “toy game” accounts of banking and bank runs have chosen the wrong toy game—and that, from a conceptual standpoint, this mistake matters. The chapter concludes that it is doubtful that there is a market solution to the coordination problem that is inherent in the banking business model.

Keywords:   banking, shadow banking, money creation, fractional-reserve banking, John Maynard Keynes, coordination problem, bank runs

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