In this article, we present a perspective on the role of the hippocampal system in generalization, instantiated in a computational model called REMERGE (recurrency and episodic memory results in generalization). We expose a fundamental, but neglected, tension between prevailing computational theories that emphasize the function of the hippocampus in pattern separation (Marr, 1971; McClelland, McNaughton, & O'Reilly, 1995), and empirical support for its role in generalization and flexible relational memory (Cohen & Eichenbaum, 1993; Eichenbaum, 1999). Our account provides a means by which to resolve this conflict, by demonstrating that the basic representational scheme envisioned by complementary learning systems theory (McClelland et al., 1995), which relies upon orthogonalized codes in the hippocampus, is compatible with efficient generalization--as long as there is recurrence rather than unidirectional flow within the hippocampal circuit or, more widely, between the hippocampus and neocortex. We propose that recurrent similarity computation, a process that facilitates the discovery of higher-order relationships between a set of related experiences, expands the scope of classical exemplar-based models of memory (e.g., Nosofsky, 1984) and allows the hippocampus to support generalization through interactions that unfold within a dynamically created memory space. (Contains 1 table and 18 figures.)