Money, Trust, and Contemporary Banking Theory

Abstract

Lack of trust between transaction partners is a major market friction in monetary theory as argued in the preceding chapter. However, lack of trust between agents is also an important theme in contemporary banking theory. Still, contemporary monetary theory and banking theory have developed largely separated from each other. Because substantial achievements have been made in banking theory over the last decades the question arises which insights contemporary banking theory can provide for monetary theory. An informal exploration of this question is undertaken in this chapter. First, the relationship between money and banking is analyzed in section 3.1. In section 3.2 major approaches in contemporary banking theory are presented. Finally, in sections 3.3 and 3.4 conclusions are drawn for the development of an integrated theory of money and banking.