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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.

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  1. For the purpose of this article we can assume that gold has emerged as the medium of exchange, and that banks issue fiduciary media that is redeemable in gold.

  2. Although the term maturity “transformation” might be preferred because it is more neutral, this article will follow the convention of referring to it as ‘mismatching’.

  3. On this point see Bagus and Howden (2011), and responses by Selgin (2012), and Evans and Horwitz (2012) and Bagus and Howden (2012a, b).

  4. BH in particular closely follow the work of Huerta de Soto (2006), who stresses the Roman legal tradition of deposit and loan contracts.

  5. We can make a distinction between present goods and future goods to generate a theory of time preference, without claiming that future goods are tangible.

  6. See (Accessed June 4, 2013).

  7. See ‘HSBC re-opens market for perpetual bonds with $3.4 billion sale’, Accessed July 23, 2013.

  8. See Budget 2012, UK Treasury, Accessed July 23, 2013.

  9. BH (2012a, p. 299) liken these to aleatory contracts, where repayment is determined by an uncertain event. For example the bank will make a promise to redeem the money, but is not contractually bound to do so. I thank a referee for suggesting that BH’s argument is that such contracts can be considered both a deposits and a loan, but this brings us to the issue of hybrid contracts that will be discussed in Sect. 2.

  10. These examples aren’t be used to ‘disprove’ BH’s analysis. Rather, they are intended to show that their distinction between deposit and loan contracts is not as straightforward as they claim. The challenge for them is to clarify whether they deem ‘demand deposits’ to be a special case or whether there are other hybrid financial assets that they would also claim are illegitimate.

  11. I appreciate a referee for pointing out that in these cases we might still consider that interest has been ‘paid’, even if it’s been waived.

  12. In other words it cannot be logically derived from first principles that this must always be the case.

  13. In addition this is empirically debatable. A 2010 ICM poll found that only 15 % of the UK general public use a current account ‘for safekeeping’, as opposed to 67 % that did so because of ‘convenient access’ (Evans 2010a).

  14. Whether or not this ruling is accurate is a separate matter—the main point is that it has influenced the use of the terms under consideration.

  15. Although curiously they point out in a footnote ‘money is a fungible good… a loan of money may be repaid with any equal amount of money’ (BB 2009, p. 714). This acknowledgement that money is ‘dissimilar to cases of loans of books, lawnmowers, etc’. (p. 714) despite having previously claimed that ‘what is true for books is also the case for money’ (p. 713).

  16. For example when my parents bought their house they were informed that they couldn’t keep pigs on the land.

  17. In response to this Hulsmann accepts that this is the case, but argues that ‘it leads to fewer bankruptcies than does fractional-reserve banking’ Hulsmann (1998, pp. 67–71).

  18. ‘Issuing promises to pay on demand in excess of the amount on hand is simply fraud’ (Rothbard 1962/2005, p. 21).

  19. “Yes, under certain hypothetical and narrowly stipulated conditions, something vaguely resembling the fractional reserve system defended by Hayek could be construed so as to avoid the charge of fraud” (Block and Garschina 1996, p. 91).

  20. The question then becomes what if they win? Imagine that depositors successfully sue a bank for engaging in a fraudulent contract on the grounds that there’s no ‘meeting of the mind’. They would presumably be allowed to withdraw their money and place it in a 100 % reserve account, but they can do so anyway. Would they be asked to repay the interest they’d accrued in the meantime?

  21. As a referee has pointed out to me, the entire 100 % reserve argument could be characterised as the advocation of a 100 % margin requirement.

  22. See White (2009/1984), although I am grateful to a referee for pointing out that Checkland (1975) suggests that this period was far from flawless.

  23. See Dowd (1992). I am grateful to a referee for reminding me of this particular episode.

  24. In this regard the role of auditor is to reduce the likelihood that a business will be unable to pay it’s creditors in full, not to ensure that the probability becomes 0.

  25. I am grateful to a referee for pointing out that Bagus et al. (2013) confront the issue of the “impossible contract” in businesses other than banks.

  26. Comment on “White and Horwitz on Hoppe”, Mises Institute Blog, May 23rd 2009 ( Accessed July 23, 2013.

  27. Mutual fund type accounts are also considered by Selgin (1988, p. 30.

  28. See White 2002, p. 160.

  29. See Dowd 1991, p. 761 for a literature review demonstrating the amount of attention they received in the 1980s.

  30. Whilst this sort of provision would be almost impossible to secure for a normal business (since it would require letters to be written by all current creditors), the option clause takes away the need for this since it is an ex-ante creditors letter, similar to how some sovereign bonds have ‘collective action clauses’, ‘which allow a government to impose a deal on all creditors if a certain proportion of them agree’ [see ‘Fingers on the trigger’ The Economist, June 4th 2011. (]. Accessed July 23, 2013.

  31. A ‘negotiable order of withdrawal’ (NOW) account is a deposit account that was set up to get around Regulation Q, which banned the payment of interest on demand deposits. This is slightly different to what I am referring to as a ‘withdrawal clause’, or ‘notice of withdrawal’ which is a specific clause that applies to either a time deposit or a NOW account.

  32. This is how I understand the baking proposal made by Toby Baxendale, who uses the term ‘reverse option clause’ to mean a form of withdrawal clause. See ( Accessed July 23, 2013).

  33. Cowen and Kroszner (1990) seem unimpressed with these types of account, saying that ‘certificates of deposits (CDs) are the primary fixed value investment claim that successfully competes with these non-par value instruments. CDs, however, can offer only competitive rates of return by restricting access to depositors funds, an infeasible option for deposit banking’ (p. 233). However it’s not clear that financial innovations couldn’t mean that such restrictions are routinely not enforced.

  34. Available here: ( Accessed July 23, 2013. I acknowledge seeing these terms for the first time in a comment referring to Citibank made on Shostak (2011).

  35. A point also made by Steven Horwitz ( Accessed July 23, 2013).

  36. See Accessed July 23, 2013.

  37. See Accessed July 23, 2013.

  38. Again, BH present their argument as something unique about the banking system. But if they do not believe that these examples are analogous to banking then why not? And if they are analogous, are they also illegitimate?

  39. It is worth noting that historically US banks were prevented from owning equity—they couldn’t directly invest in the stock market. There are legal restrictions on banks diversifying into other businesses, and these are an example of the centralised regulatory system that has the potential to increase systemic risk.

  40. I thank Andrew Young for bringing this to my attention.

  41. It is crucial to point out that unlike the discussion of BB and BH, the Chicago plan is a policy proposal that is grounded in the banking system as it existed in the real world. Therefore it would be an error to believe that Fisher, Simons, or Friedman treated this as their ideal monetary regime. Similarly the reason more attention isn’t given to narrow banking in this article is that it is essentially a regulatory means to solve the problem, rather than a theoretical ideal.


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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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Correspondence to Anthony J. Evans.

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Evans, A.J. In Defence of ‘Demand’ Deposits: Contractual Solutions to the Barnett and Block, and Bagus and Howden Debate. J Bus Ethics 124, 351–364 (2014).

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  • 100 % Reserve requirement
  • Banking
  • Demand deposits
  • Fractional reserve banking
  • Fraud
  • Maturity mismatching
  • Time deposits