Click for a larger view “...the paper tries to document and discuss some of the history of banking that economists ought to know better, and this seems clearly useful”

Monetary institutions—including banking—are clearly of central importance to the operation of the economy. Trying to understand how they work is an age-old problem for economists, but, believe it or not, only recently have formal, rigorous, theoretical models of monetary exchange been developed. Introducing banking into this class of models seems potentially a big step in making the theories more realistic and relevant. This may be why it is a popular paper.

We certainly hope the answer is yes. There are some new developments included in the paper and they would seem to be applicable to other problems. At the very least, the paper tries to document and discuss some of the history of banking that economists ought to know better, and this seems clearly useful.

As mentioned above, only recently have formal models of monetary exchange been developed and analyzed. We think this theoretical approach is the right way to think about monetary institutions and policy issues. Most papers on this topic do not explicitly discuss banks, however, but talk about money in isolation. We introduce a role for banks that is consistent with the historical evidence and which yields new insights about the interactions between money and banking.

Extending monetary theory to have a more explicit role for banks makes the theory more realistic and policy-relevant. This was our motivation. We also wanted to learn more about the history of banking.