In Defence of ‘Demand’ Deposits: Contractual Solutions to the Barnett and Block, and Bagus and Howden Debate
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.
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