Banks are financial intermediaries that issue deposits and use the proceeds to purchase securities. This paper argues that when banking is competitive, these portfolio management activities in principle fall under. the Modigliani-.Miller theorem on the irrelevance of pure financing decisions. It follows that there is no need to control the deposit creation or security purchasing activities of banks to obtain a stable general equilibrium with respect to prices and real activity. In practice, however, banks are forcibly involved in the process by which a pure nominal commodity or unit of account is made to play the role of numeraire in a monetary system.The paper examines the nature of such a nominal commodity and how, through reserve requirements, banks get involved in making it a real economic good.
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