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On the Necessary and Sufficient Conditions for Legitimate Banking Contracts

Author

Listed:
  • Philipp Bagus
  • Amadeus Gabriel

    (CERIIM - Centre de Recherche en Intelligence et Innovation Managériales - Excelia Group | La Rochelle Business School, CEREGE [Poitiers, La Rochelle] - Centre de recherche en gestion [EA 1722] - UP - Université de Poitiers = University of Poitiers - ULR - La Rochelle Université)

  • David Howden

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, that a financial contract similar to a demand deposit (e.g., very short-term bonds, money market mutual funds, etc.) cannot substitute for money. Second, that 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, that the demand for fractional-reserve demand deposits is fostered by an exogenous source (deposit insurance) and that demand for an action is not a sufficient condition to justify its legality or ethicality.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Philipp Bagus & Amadeus Gabriel & David Howden, 2018. "On the Necessary and Sufficient Conditions for Legitimate Banking Contracts," Post-Print hal-02634058, HAL.
    • Handle: RePEc:hal:journl:hal-02634058
    DOI: 10.1007/s10551-015-2972-y
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    Cited by:

    1. 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.

    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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