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


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.


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



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


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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

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