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The Continuing Continuum Problem of Deposits and Loans

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Barnett and Block (J Bus Ethics 18(2):179–194, 2011) argue that one cannot distinguish between deposits and loans due to the continuum problem of maturities and because future goods do not exist—both essential characteristics that distinguish deposit from loan contracts. In a similar way but leading to opposite conclusions (Cachanosky, forthcoming) maintains that both maturity mismatching and fractional reserve banking are ethically justified as these contracts are equivalent. We argue herein that the economic and legal differences between genuine deposit and loan contracts are clear. This implies different legal obligations for these contracts, a necessary step in assessing the ethics of both fractional reserve banking and maturity mismatching. While the former is economically, legally, and perhaps most importantly ethically problematic, there are no such troubles with the latter.

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  1. Throughout this article, unless otherwise noted, references to Barnett and Block will be to their (2011) rejoinder.

  2. Yeager (2010) suggests that such definitions are an imposition of a preferred meaning onto a word and that these definitions shift the argument to one about names, classifications and definitions. We maintain that there exists a certain contract with a certain legal nature that arises to meet a defined need. The name given to this contract is of secondary importance. As definitions arise from convention, we prefer the traditional word attached to such a contract, namely a “deposit” (an alternative term would be “bailment”). Similarly, a different goal, such as to purchase a good, can also be defined by a contract, with the legal implications thereof explicated. Although the specific name we attach to such a contract does not aid nor impair its analysis, it is helpful (though not essential) to use conventional terminology such as a “purchase contract” or “sales agreement”. Such usage does not assume anything of the specific contract itself, but enables the analysis of the implications of such an arrangement.

  3. This is not to imply that economic science can separate practical from theoretical problems. The whole corpus of economics deals with theoretical issues, but their relevance is only gained through application in the external world; problems of practical importance are linked to theoretical issues (Rothbard 1962/2001, p. 616).

  4. This is not to imply that every historically evolved event can be considered just. There are historical cases of fractional reserve banking coming into existence by the misappropriation of genuine deposit contracts (Huerta de Soto 2006/2009). Moreover, not every historically evolved occurrence is consistent with the fundamental principles of law. Huerta de Soto (2006/2009), Bagus and Howden (2009) and Bagus et al. (forthcoming) show that a fractional reserve deposit contract involves a legal contradiction, and is hence an invalid contract (even if it is understood and voluntarily agreed upon by both parties).

  5. We thank John Welch for alerting us to this passage, and the application of Charles Peirce’s work to the issue at hand. von Mises (1951/1952, pp. 128–130) discusses the issue of vague concepts in economics. Specifically, he critiques the idea of excess profits as being separable from legitimate profits. There is no way to distinguish between different levels of profits, nor to make value judgments of them. There is a way that we can distinguish between concepts such as deposit and loan contracts, which remain vague only in practice and not in theory.

  6. Indeed, Rothbard (2001, Chap. 7 and passim) structures the pricing of all goods as a product of the discounted value of some “future good”, not yet in existence but expected to be. Barnett and Block have endorsed, in varying degrees and both together and separately, the concept of the “future good” for categorizing types of both exchanges and goods. See, for example, Barnett and Block (2005, 2007) and Hermann Hoppe et al. (1998). Their rejoinder contains a self-citation to Barnett and Block (2007, p. 134, n16) to argue against the existence of future goods, yet the cited passage contains no more substantiating evidence to that end besides the statement: “[T]he category ‘claims on future consumers’ goods’ is so broad as to be almost meaningless.”

  7. Both Barnett and Block and Cachanosky may have fallen prey to fractional reserve banking supporters’ misuse of the terms “loan” and “deposit”, as they take deposit as a synonym for loan. Barnett and Block rightly claim that positive laws in the U.S. and elsewhere support their view, while Cachanosky reckons that the law is evidence in support of his argument that deposits are loans. Yet the issue at stake is not whether positive laws are correct or not. We are concerned with the ethics of the practice, which may be judged independently of the prevailing law of the jurisdiction. By decree a government can say that a deposit is a loan, a gift, a marriage or any other kind of contract, yet this does not change the underlying goals, structure and obligations of the deposit to those of another contract.

  8. Interestingly, at least one of the authors of Barnett and Block (2009, 2011) must agree with us that cases of “deposit” contracts where both the depositor and depository agree that the depository can make use of the “deposited” funds for loan activities is illegal (see Bagus et al., forthcoming).

  9. Selgin (2010) provides an interesting piece of history, providing evidence that Goldsmiths in seventeenth century London offered contracts that were neither demand deposits nor loans. These contracts were akin to aleatory contracts, whereby a financial institution promises its best to return an invested sum on demand (Bagus and Howden 2009). Lacking a full guarantee of return, these promises trade at a discount to money (i.e., they would become a type of money substitute). While Selgin provides evidence that the Goldsmiths offered such contracts, he maintains that Goldsmiths did not pioneer fractional reserve banking. Selgin’s empirical evidence that Goldsmiths offered a third contract distinct from the two we posit that are legally permissible is not irreconcilable with our own view. Indeed, Selgin’s work would only be problematic if it could be shown that: 1) people who agreed to these contracts wanted to maintain the full availability of their money, or 2) if these historical instances were used to argue for the legitimacy of the fractional reserves demand deposit.


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Correspondence to Philipp Bagus.

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Bagus, P., Howden, D. The Continuing Continuum Problem of Deposits and Loans. J Bus Ethics 106, 295–300 (2012).

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