Abstract
If fractional-reserve demand deposits are common, and illegitimate, an obvious flaw in the banking system is exposed. However, this article maintains that the only reason why demand deposits may be considered illegitimate is because of a way of defining them that renders them almost irrelevant. This article provides a response to Bagus et al. (J Bus Ethics, Forthcoming, 2014), and identifies examples of how they misrepresent Evans (J Bus Ethics, Forthcoming, 2013). It also provides further considerations on the tradeoffs relating to the availability of a deposit; methodological subjectivism; and the potential for hybrid contracts. Deposit and loan contracts may be hard to mix, but the actual results of doing so should not be ignored.
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Notes
Throughout this article I will use the term “demand deposit” to refer to fractionally reserve demand deposits.
See Merriam-Webster dictionary, http://www.merriam-webster.com/dictionary Date accessed April 7, 14.
See Merriam-Webster dictionary, http://www.merriam-webster.com/dictionary Date accessed April 7, 14.
Indeed elsewhere in their article they use examples of leaving a Rembrandt painting or an engagement ring in a safety deposit box and them being appropriated by the bank (p. 3). The notion that this is “almost completely analogous to the conditions of modern deposit banking” (p. 3) is somewhat of a stretch. Ironically, BHG accuse Evans of not being aware of the distinction between regular and irregular deposits, pointing out that “most monetary deposits are irregular even though regular money deposits such as coins in sealed bags also exist” (p. 2). They go on to cite Heurta de Soto (2009, p. 6). In fact, their example was used by Evans, “coins can be kept in sealed bags” (p. 6) who also provided a citation to the exact same Heurta de Soto book (p. 5).
As an anonymous reviewer has pointed out, for individual players their racket need to be perfectly substitutable in case one of them breaks during a match!.
I am grateful to an anonymous reviewer for clarifying that whilst BHG are concerned about the possibility of bank runs, their main concern with fractional-reserve banking is that it generates an Austrian boom bust cycle.
The example is, “When I leave my car with an airport valet for 2 weeks it is precisely because I don’t want to use it for a certain period of time” (Evans 2013).
They say, “As in such constructs with a withdrawal clause, the depositor does not want to transfer availability and to him it functions as a demand deposit contract the same legal principles apply; to wit, the depositary’s obligation to keep a 100-percent cash reserve”. (BHG 2014). In other words, they say that a time deposit with a withdrawal clause, that operates as a demand deposit, suffers from the same illegitimacy as an actual demand deposit. But this de facto/de journo distinction isn’t clear cut.
Perhaps this is why they completely ignored the empirical evidence that Evans (2013) draws upon to show that (i) some customers understand that banks keep fractional reserves; and (ii) banks don’t pretend that they do.
References
Bagus, Philipp, & Howden, D. (2009). The legitimacy of loan maturity mismatching: A risky, but not fraudulent undertaking. Journal of Business Ethics, 90(3), 399–406.
Bagus, P., & Howden, D. (2012). The continuing continuum problem of deposits and loans. Journal of Business Ethics, 106, 295–300.
Bagus, P., Howden, D., & Gabriel, A. (2014). Oil and water do not mix, or: aliud est credere, aliud deponere. Journal of Business Ethics (Forthcoming).
Cachanosky, N. (2011). A comment on Barnett and Block on time deposit and Bagus and Howden on loan maturity mismatching. Journal of Business Ethics, 104, 219–221.
Evans, A. J. (2013). In Defence of ‘Demand’ Deposits: Contractual Solutions to the Barnett and Block, and Bagus and Howden Debate. Journal of Business Ethics (Forthcoming).
White, L. H. (2007, January 8). Heurta De Soto’s case against fractional reserves, Free Market News Network.
Yeager, L. B. (2010). Bank reserves: A dispute over words and classification. The Review of Austrian Economics, 23(2), 183–191.
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Evans, A.J. What is the Latin for ‘Mayonnaise’? A Response to Bagus, Howden and Gabriel. J Bus Ethics 131, 619–623 (2015). https://doi.org/10.1007/s10551-014-2299-0
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DOI: https://doi.org/10.1007/s10551-014-2299-0