Money, Intermediation and Banking
The business of monetary creation is conceptually distinct from that of intermediation. Yet, these two activities are frequently, but not always, combined together in the form of a banking system. The author develops a simple model to examine the question: When is banking essential? There is a role for money due to a lack of record-keeping and a role for intermediation due to the existence of private information: both money and intermediation are essential. When monitoring costs associated with intermediation are sufficiently low, the two activities can be separated from one another. However, when monitoring costs are sufficiently high, a banking system that combines these two activities is essential.