In Defence of ‘Demand’ Deposits: Contractual Solutions to the Barnett and Block, and Bagus and Howden Debate
- 245 Downloads
This article contributes to a recent debate between Barnett and Block (J Bus Ethics 88(4): 711–716, 2009), Bagus and Howden (J Bus Ethics 90(3): 399–406, 2009), Barnett and Block (J Bus Ethics 100: 299–238, 2011), Cachanosky (J Bus Ethics 104: 219–221, 2011) and Bagus and Howden (J Bus Ethics 106: 295–300, 2012a) regarding the conceptual distinction between demand deposits and time deposits. It is argued that from an economic perspective there is nothing inherently fraudulent or illegitimate about deposit accounts that are available ‘on demand’, but that this relies on certain contractual provisions. Particular attention is drawn to option clauses and withdrawal clauses, which “solve” the problems raised by Barnett and Block, and Bagus and Howden. Previous authors have also neglected the asset side of banks balance sheets, and this is shown to further justify the legitimacy of fractional reserve banking.
Keywords100 % Reserve requirement Banking Demand deposits Fractional reserve banking Fraud Maturity mismatching Time deposits
I gratefully acknowledge helpful comments from Steve Baker, Isaac DiIanni, Steven Horwitz, David Howden, Robert Sadler, James Tyler, Andrew Young, and especially Toby Baxendale, as well as comments from three anonymous referees; the usual disclaimer applies.
- Bagus, P., & Howden, D. (2011). Fractional reserve free banking: Some quibbles. Quarterly Journal of Austrian Economics, 13(4), 29–55.Google Scholar
- Checkland, S. G. (1975). Scottish banking: A history, 1695–1973. Glasgow: Collins.Google Scholar
- Congdon, T. (2009). Central banking in a free society, Institute of Economic Affairs, Hobart Paper No. 166Google Scholar
- Cowen, T., & Kroszner, R. (1990). Mutual fund banking: a market approach. Cato Journal, 10(1), 223–237.Google Scholar
- Diamond, D. W. (2007). Banks and liquidity creation: a simple exposition of the Diamond–Dybvig model. Economic Quarterly, 2(93), 189–200.Google Scholar
- Dowd, K. (1988b). Automatic stabilising mechanisms under free banking. Cato Journal, 7(3), 643–659.Google Scholar
- Dowd, K. (1991). Option clauses and bank suspension. Cato Journal, 10(3), 761–772.Google Scholar
- Dowd, K. (Ed.). (1992). The experience of free banking. London: Routledge.Google Scholar
- Evans, A. J. (2010a). Public attitudes to banking. A student consultancy project, ESCP Europe for the Cobden Centre.Google Scholar
- Evans, A. J. (2010b) Do banks mislead their customers? Coden Centre blog. Retrieved July 23, 2013, from http://www.cobdencentre.org/2010/10/do-banks-mislead-their-customers/.
- Fisher, I. (1935). 100% Money. New York: Adelphi Company.Google Scholar
- Flannery, M. J., & James, C. M. (1996). Market evidence on the effective maturity of bank assets and liabilities. Journal of Money, Credit and Banking, 16(4), 436–445.Google Scholar
- Friedman, M. (1960). A program for monetary stability. New York: Fordham University Press.Google Scholar
- Huerta de Soto, J. (2006). Money, bank credit and economic cycles. Auburn, AL: Mises Institute.Google Scholar
- Hulsmann, J. G. (2000). Banks cannot create money. The Independent Review, 5(1), 101–110.Google Scholar
- Long, R. T. (2006). Platonic bailments. Roderick T. Long’s Web Journal, 9th January 2006 http://praxeology.net/unblog01-06.htm#13.
- Rothbard, M. N. (1962/2005). The case for a 100% reserve dollar. Auburn, AL: Mises Institute.Google Scholar
- Rothbard, M. N. (1963/2005). What has government done to our money? Auburn, AL: Mises Institute.Google Scholar
- Schuler, K. (1992). A world history of free banking. In K. Dowd (Ed.), The experience of free banking. London: Routledge.Google Scholar
- Selgin, G. (1988). The theory of free banking: Money supply under competitive note issue. Totowa, NJ: Rowman & Littlefield.Google Scholar
- Selgin, G., & White, L. H. (1994). How would the invisible hand handle money? Journal of Economic Literature, XXXII, 1718–1749.Google Scholar
- Shostak, F. (2011). Money out of “thin air”. Cobden Centre blog, July 25th 2011. http://www.cobdencentre.org/2011/07/money-out-of-thin-air/.
- Simons, H. C. (1948). Economic policy for a free society. Chicago: University of Chicago Press.Google Scholar
- Stringham, E. P. (2010). Minimizing resource costs under a gold standard: From warehouse deposits to deposit banking. Journal of Economics and Finance Education, 9(2), 1–5.Google Scholar
- Yeager, L. B. (2010). Bank reserves: A dispute over words and classification. The Review of Austrian Economics, 23(2), 183–191.Google Scholar
- White, L. H. (2002). Free banking in Scotland before 1844. In K. Dowd (Ed.), The experience of free banking. London: Routledge.Google Scholar
- White, L. H. (2007). Huerta de Soto’s case against fractional reserves. Free Market News Network, 8th January 2007. Retrieved September 2, from http://www.lostsoulblog.com/2009/12/prof-lawrence-h-white-responds-to-jesus.html.
- White, L. H. (2009/1984). Free banking in Britain: Theory, experience, and debate, 1800–1845. London: Institute of Economic Affairs.Google Scholar
- White, L. H. (2009). Comment on “White and Horwitz on Hoppe. Mises Institute Blog, 22nd May 2009. Retrieved July 23, 2013, from http://blog.mises.org/archives/009973.asp#comment-547018.