Deposits, Loans and Banking: Clarifying the Debate

Bagus, Philipp and Howden, David and Block, Walter (2013): Deposits, Loans and Banking: Clarifying the Debate. Published in: The American Journal of Economics and Sociology , Vol. 3, No. 72 (2013): pp. 627-644.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking, fractional reserves, fraud, ethics, law, business cycle
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E59 - Other

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