Advertisement

Journal of Business Ethics

, Volume 147, Issue 3, pp 669–678 | Cite as

On the Necessary and Sufficient Conditions for Legitimate Banking Contracts

  • Philipp Bagus
  • Amadeus Gabriel
  • David Howden
Article
  • 153 Downloads

Abstract

What role do demand deposits serve in the financial system? The answer to this simple question has great implications in keeping the legal terms of the contract consistent with the demands of the financial system. Demand deposits are a perfect monetary substitute. Since money is only held to hedge against perceived uncertainty in both the timing and magnitude of future expenditures, demand deposits are demanded for the same reason. From this we derive three main conclusions. First, a financial contract similar to a demand deposit (e.g., very short-term bonds, money market mutual funds, etc.) cannot substitute for money. Second, full agreement to a financial contract does not create a perfect substitute for money unless it provides money’s two key characteristics: on demand and par value redemption. Finally, the demand for fractional-reserve demand deposits is fostered by an exogenous source (deposit insurance) and that demand for a good or service is not a sufficient condition to justify its legality or ethicality.

Keywords

Banking ethics Demand deposit Fractional-reserve banking Full-reserve banking Money substitutes 

Notes

Acknowledgments

We would like to thank an anonymous referee for helpful suggestions. All errors are our own.

References

  1. Bagus, P., & Howden, D. (2010). Fractional reserve free banking: Some quibbles. Quarterly Journal of Austrian Economics, 13(4), 29–55.Google Scholar
  2. Bagus, P., & Howden, D. (2011). Monetary equilibrium and price stickiness: Causes, consequences, and remedies. Review of Austrian Economics, 24(4), 383–402.CrossRefGoogle Scholar
  3. Bagus, P., & Howden, D. (2012a). Monetary equilibrium and price stickiness: A rejoinder. Review of Austrian Economics, 25(3), 271–277.CrossRefGoogle Scholar
  4. Bagus, P., & Howden, D. (2012b). Still unanswered quibbles with fractional reserve free banking. Review of Austrian Economics, 25(2), 159–171.CrossRefGoogle Scholar
  5. Bagus, P., & Howden, D. (2012c). The continuing continuum problem and future goods. The Journal of Business Ethics, 106(3), 295–300.CrossRefGoogle Scholar
  6. Bagus, P., & Howden, D. (2013). Some ethical dilemmas of modern banking. Business Ethics: A European Review, 22(3), 235–245.CrossRefGoogle Scholar
  7. Bagus, P., & Howden, D. (2015). The economic and legal significance of ‘Full’ deposit availability. European Journal of Law and Economics.Google Scholar
  8. Bagus, P., Gabriel, A., & Howden, D. (2015a). Reassessing the ethicality of some common financial practices. Journal of Business Ethics. doi: 10.1007/s10551-014-2525-9.
  9. Bagus, P., Howden, D., & Gabriel, A. (2015b). The hubris of hybrids. Journal of Business Ethics. doi: 10.1007/s10551-015-2884-x.
  10. Bagus, P., Howden, D., & Block, W. E. (2013). Deposits, loans and banking: Clarifying the debate. The American Journal of Economics and Sociology, 72(3), 627–644.CrossRefGoogle Scholar
  11. Bagus, P., Howden, D., & Gabriel, A. (2015). Oil and water do not mix, or: Aliud est credere, aliud deponere. Journal of Business Ethics, 128(1), 197–206.CrossRefGoogle Scholar
  12. Barnett, W., & Block, W. E. (2009). Time deposits, dimensions and fraud. Journal of Business Ethics, 88(4), 711–716.CrossRefGoogle Scholar
  13. Davidson, L., & Block, W. E. (2011). The case against fiduciary media: Ethics is the key. The Journal of Business Ethics, 98(3), 505–511.CrossRefGoogle Scholar
  14. de Soto, J. H. (1995). A critical analysis of central banks and fractional-reserve free banking from the Austrian perspective. Review of Austrian Economics, 8(2), 25–38.CrossRefGoogle Scholar
  15. de Soto, J. H. (1998). A critical note on fractional-reserve free banking. The Quarterly Journal of Austrian Economics, 1(4), 25–49.CrossRefGoogle Scholar
  16. de Soto, J. H. (2006). Money, bank credit and economic cycles, (trans.) Melinda Stroup. Auburn, AL: Ludwig von Mises Institute.Google Scholar
  17. Evans, A. J. (2010). Public attitudes to banking. ESCP Europe for the Cobden Centre: A student consultancy project.Google Scholar
  18. Evans, A. J. (2013). In defense of ‘Demand’ deposits: Contractual solutions to the Bagus and Howden and Block and Barnett debate. Journal of Business Ethics, 124(2), 351–364.CrossRefGoogle Scholar
  19. Evans, A. J. (Forthcoming). What is the Latin for ‘Mayonnaise’? A response to bagus, Howden and Gabriel. Journal of Business Ethics.Google Scholar
  20. Hoppe, H. H., Hülsmann, J. G., & Block, W. E. (1998). Against fiduciary media. Quarterly Journal of Austrian Economics, 1(1), 19–50.CrossRefGoogle Scholar
  21. Howden, D. (2014). A pre-history of the federal reserve. In D. Howden & J. T. Salerno (Eds.), The fed at one hundred: A critical review of the federal reserve system (pp. 9–21). London and New York: Springer.Google Scholar
  22. Howden, D. (2015a). Money. In B. Per & H. David (Eds.), The next generation of Austrian economics: Essays in honor of Joseph T Salerno (pp. 43–58). Auburn, AL: Ludwig von Mises Institute.Google Scholar
  23. Howden, D. (2015b). Money in a world of finance. Journal of Prices & Markets 3(2). In Papers and Proceedings of the Third Annual International Conference of Prices & Markets. Toronto, ON. Accessed 6–7 November 2014.Google Scholar
  24. Hülsmann, J. G. (2000). Banks cannot create money. The Independent Review: A Journal of Political Economy, 5(1), 101–110.Google Scholar
  25. Knight, F. H. (1921). Risk, uncertainty, and profit. Boston, MA: Hart, Schaffner & Marx.Google Scholar
  26. Nair, M. (2011). Money or money substitutes? Implications of Selgin’s small change challenge. Journal of Austrian Economics, 14(2), 143–157.Google Scholar
  27. Nair, M. (forthcoming). Fractional reserve banking, client collaboration, and fraud. Journal of Business Ethics.Google Scholar
  28. Rothbard, M. N. (1990). What has government done to our money?. Auburn, AL: Ludwig von Mises Institute.Google Scholar
  29. Rothbard, M. N. [1962] (2001). Man, economy, and state with power and market, Scholar’s Edition. Auburn, AL: Ludwig von Mises Institute.Google Scholar
  30. Salerno, J. T. (2010). Money, sound and unsound. Auburn, AL: Ludwig von Mises Institute.Google Scholar
  31. Selgin, G. (1988). The theory of free banking: Money supply under competitive note issue. New Jersey: Rowman and Littlefeld.Google Scholar
  32. von Mises, L. (1949). Human action: A treatise on economics, scholar’s edition. Auburn, AL: Ludwig von Mises Institute.Google Scholar
  33. White, L. H. (2003). Account for fractional-reserve banknotes and deposits, or, what’s twenty quid to the bloody midland bank? The Independent Review, 7(3), 423–441.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  1. 1.Department of Applied Economics IUniversidad Rey Juan CarlosMadridSpain
  2. 2.Department of Economics, Strategy and OrganizationGroupe Sup de Co La RochelleLa Rochelle Cedex 1France
  3. 3.Department of Business and EconomicsSaint Louis University – Madrid CampusMadridSpain

Personalised recommendations