The Transactions Bank — On the Missing Link Between Monetary Theory and Banking Theory

In chapter 2 it was argued that monetary theory and banking theory have developed separately although money and banking are closely related. It was suggested that much potential exists for cross-fertilization between these two research fields. In this chapter one key link between money and banking is analyzed: a rudimentary form of a bank focusing on transaction services. These services include the efficient creation of deposits which can be transferred between agents as a means of payment, the extension of trade credit, and monitoring services to deal with problems of asymmetric information. The institutional structure of the bank created to perform these services shares key features with the Diamond model of banking theory (see section 3.2.1) although the Diamond model ignores transaction services and focuses on financing and investment in an informationally opaque capital market. In this sense an analytical link between monetary theory and banking theory is established which has not been considered yet in existing formal research. This “missing link” is called “T-bank” (transactions bank). It bridges the gap between the transactions role of money and the store of value function. Most research in monetary economics explains only one of these functions.