Werner’s Typology of Banking Theories

This paper examines and critiques a highly illuminating typology of three banking theories. The typology was proposed by Richard A. Werner, and it identifies the financial intermediation theory, the fractional reserve theory and the credit creation theory. Two experiments testing them are reviewed, as well as the explanation offered by Werner for retaining only the credit creation theory. Werner’s research is unique in that it tracks actual bank records during a loan transaction. Yet, his conclusion—that banks individually can create credit—downplays the key role of the collectivity of banks in enabling borrowers to use their credit for making payments. Two neglected contexts for the three theories are proposed: one historical, involving monetary regimes, the other systemic, involving interbank clearing arrangements. It is found that the three theories are associated with different monetary regimes (relating to specie, reserves, and account money, respectively) and, despite Werner’s rejection of two of them, they all remain appropriate in proportion to the prevalence of the respective monies in the case at hand.