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.
Chicago Scholarship Online requires a subscription or purchase to access the full text of books within the service. Public users can however freely search the site and view the abstracts and keywords for each book and chapter.
If you think you should have access to this title, please contact your librarian.
To troubleshoot, please check our FAQs, and if you can't find the answer there, please contact us.