ABSTRACT
Our world of uncontrolled banking, which is essentially a modification of Fischer Black's model, requires a number of assumptions. Money is assumed to exist in the form of currency, but, because of the additional assumption that banks pay interest on their deposits, both individuals and businesses will find it in their interests to minimise the amount of currency held. Banks are the only financial institutions and will remain so for as long as they are able to satisfy the financial demands of the community. We assume that banks may specify the conditions on which they will accept deposits and make loans and that they will hold some portion of their deposits in the form of reserves to minimise uncertainty. In this world uncertainty prevails and the acquisition of the information necessary to reduce or to minimise uncertainty can only be made at a cost. The aim of banks operating in this world is long-run profit maximisation from their business which is assumed to be the retailing of monetary services.
