Banks as Social Accountants and Screening Devices for the Allocation of Credit

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Summary

This paper presents and alternative perspective on the role of banks. We emphasize the ways in which banks act as social accountants and screening devices. In this view monetary disturbances have t...

This paper presents and alternative perspective on the role of banks. We emphasize the ways in which banks act as social accountants and screening devices. In this view monetary disturbances have their effects through the disturbances which they induce in society's accounting system and in the mechanisms by which it is ascertained who is credit worthy. Because of asymmetric information, giving rise to credit rationing, interest rates do not play the simple allocative role ascribed by the conventional paradigm, and as a result the equilibrating forces provided by market mechanisms may be weak or virtually absent. The paper provides a critique of the transactions based approach to monetary theory, and sketches a general equilibrium formulation of the theory. The paper traces out some of the policy implications of the theory. We show that certain financial innovations, such as allowing for the more rapid recording of transactions, may actually be welfare reducing.

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