ON THE SOCIAL VALUE OF BANKS

I compare the utility of individuals in an economywith and without banks. To make the comparisoninteresting, the economy without banks has cashin-advance money that the individuals use forconsumption and for precautionary (emergency)purposes and that firms use to pay their wage bill. Inthe economy with banks, the precautionary funds aredeposited in banks, which lend this money to firmsfor working capital. In these economies output isgenerally higher, people have higher utility and livelonger. Also, the price level is usually higher.