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Deposits, Loans, and Banking: Clarifying the Debate

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  • Philipp Bagus
  • David Howden
  • Walter Block

Abstract

The relationship between banking deposits and loans remains a contentious topic. While the defense of a 100 percent reserve clause to eliminate fractional reserves has commonly been asserted on economic and ethical grounds, new legal arguments found in Jesús Huerta de Soto (2006) remain largely ignored. We address Michael S. Rozeff’s (2010) recent article as a case in point of this ignorance. Contrary to supporters of fractional reserve demand deposits, we show that such a contract – one treating a loan and a deposit interchangeably – is impermissible due to both established and a priori legal principles. At best, a fractional reserve demand deposit contract may be considered an aleatory contract. Based on an uncertain future event, we find this type of contract wholly incompatible with the reason individuals hold money – the mitigation of uncertainty. Despite what defenders of fractional reserve banking claim, deposit and loan contracts are distinct, and may not be contractually melded together.
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Suggested Citation

  • Philipp Bagus & David Howden & Walter Block, 2013. "Deposits, Loans, and Banking: Clarifying the Debate," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(3), pages 627-644, July.
    • Handle: RePEc:bla:ajecsc:v:72:y:2013:i:3:p:627-644
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    File URL: http://hdl.handle.net/10.1111/ajes.12023
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    References listed on IDEAS

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    1. J. C. Gilbert, 1953. "The Demand for Money: The Development of an Economic Concept," Journal of Political Economy, University of Chicago Press, vol. 61(2), pages 144-144.
    2. L. Randall Wray, 1998. "Understanding Modern Money," Books, Edward Elgar Publishing, number 1668.
    3. Philipp Bagus & David Howden, 2009. "The Legitimacy of Loan Maturity Mismatching: A Risky, but not Fraudulent, Undertaking," Journal of Business Ethics, Springer, vol. 90(3), pages 399-406, December.
    4. Hoppe, Hans-Hermann, 1994. "How Is Fiat Money Possible?--or, the Devolution of Money and Credit," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 7(2), pages 49-74.
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    Cited by:

    1. David Howden & Amadeus Gabriel, 2015. "The Interest Rate Brake on Maturity Transformation," Journal of Economic Issues, Taylor & Francis Journals, vol. 49(4), pages 1100-1111, October.
    2. Philipp Bagus & David Howden & Amadeus Gabriel, 2015. "Oil and Water Do Not Mix, or: Aliud Est Credere, Aliud Deponere," Journal of Business Ethics, Springer, vol. 128(1), pages 197-206, April.
    3. Philipp Bagus & David Howden & Amadeus Gabriel, 2017. "The Hubris of Hybrids," Journal of Business Ethics, Springer, vol. 145(2), pages 373-382, October.
    4. Bagus, Philipp & Howden, David, 2012. "The Continuing Continuum Problem and Future Goods," MPRA Paper 79595, University Library of Munich, Germany.
    5. Philipp Bagus & David Howden & Jesús Huerta de Soto Ballester, 2018. "Entrepreneurial Error Does Not Equal Market Failure," Journal of Business Ethics, Springer, vol. 149(2), pages 433-441, May.
    6. Vicente Moreno-Casas & Philipp Bagus, 2021. "The ethics of care and the tragedy of the commons," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 68(4), pages 405-422, December.
    7. Anthony Evans, 2014. "In Defence of ‘Demand’ Deposits: Contractual Solutions to the Barnett and Block, and Bagus and Howden Debate," Journal of Business Ethics, Springer, vol. 124(2), pages 351-364, October.
    8. Philipp Bagus & David Howden, 2023. "Consumer rights and banking contracts," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(1), pages 105-114, March.
    9. Laura Davidson, 2015. "Ethical Differences Between Loan Maturity Mismatching and Fractional Reserve Banking: A Natural Law Approach," Journal of Business Ethics, Springer, vol. 131(1), pages 9-18, September.
    10. Philipp Bagus & Amadeus Gabriel & David Howden, 2018. "On the Necessary and Sufficient Conditions for Legitimate Banking Contracts," Journal of Business Ethics, Springer, vol. 147(3), pages 669-678, February.
    11. Van Den Hauwe, Ludwig, 2017. "Monetary Constitutionalism: Some Recent Developments," MPRA Paper 83052, University Library of Munich, Germany.
    12. Bagus, Philipp & Howden, David, 2016. "Central Bank Balance Sheet Analysis," MPRA Paper 79801, University Library of Munich, Germany.
    13. Malavika Nair, 2015. "Fractional Reserve Banking, Client Collaboration, and Fraud," Journal of Business Ethics, Springer, vol. 130(1), pages 85-92, August.
    14. Jesús Huerta de Soto & Antonio Sánchez-Bayón & Philipp Bagus, 2021. "Principles of Monetary & Financial Sustainability and Wellbeing in a Post-COVID-19 World: The Crisis and Its Management," Sustainability, MDPI, vol. 13(9), pages 1-11, April.
    15. Philipp Bagus & David Howden, 2012. "The Continuing Continuum Problem of Deposits and Loans," Journal of Business Ethics, Springer, vol. 106(3), pages 295-300, March.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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