Banking and Interest Rates in a World Without Money: The Effects of Uncontrolled Banking

Abstract

This chapter presents a world in which commercial banks and other financial institutions are free to offer checking accounts on any terms they might want to set, and in which there are no reserve requirements. In such a world, it would not be possible to give any reasonable definition of the quantity of money. The payments mechanism would be very efficient, but money in the usual sense would not exist. Thus, neither the quantity theory of money nor the liquidity preference theory of money would be applicable. This chapter illustrates a condition where bank will be happy to bid a customer with positive balances away from another bank, even if it simply redeposits the customer's money with the original bank, because it gets that customer's transactions business. In a world where transactions take place by the transfer of loans, deposits, and notes, the liquidity preference theory is just as inappropriate as the quantity theory. This is true whether one has competitive banking or monopoly banking, and whether banks are regulated by a central bank or are completely unregulated.

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