Views of Banking Ethics

Jes Villa

Chapter 2 in Ethics in Banking, 2015, pp 8-32 from Palgrave Macmillan

Abstract: Abstract Much of the current financial structure can be traced to three innovations in the 17th century. The first of these was the establishment of a system of bank transfers that has survived to this day in the form of cheque issuance and inter-bank transfers. The second was the foundation of fractional reserve banking that enabled banks to lend substantially more than the amount of deposits they carried on their books. The third was the creation of the Bank of England as the official issuer of bank notes, which were initially backed by gold bullion, and the keeper of bank reserves. The modus operandi of banking was twofold: on the one hand, a bank had to be able to guarantee its depositors that they could withdraw their money whenever they wanted; on the other hand, the same bank had to lend the funds out so it could generate income in order to be able to pay interest to encourage the depositors to place their funds. The three innovations were the original measures that made possible the institution of modern banking.1 Essentially reserve banking means that, if the reserve requirement is, for example, 10 per cent, a bank can lend out 90 per cent of say $100, that is $90, to another person who may deposit that amount at another bank, which in turn can lend out $81 to a third person, and this goes on to the next bank and borrower. The initial deposit of $100 has created loans of $171 and is capable of creating even further loans, so this is called the ‘multiplier effect’ in money creation, and this allows banks to greatly expand lending.

Keywords: Social Contract; Virtue Ethic; Practical Wisdom; Invisible Hand; Categorical Imperative (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-1-137-34028-3_2

Ordering information: This item can be ordered from
http://www.palgrave.com/9781137340283

DOI: 10.1057/9781137340283_2

Access Statistics for this chapter

More chapters in Palgrave Macmillan Studies in Banking and Financial Institutions from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().