Deposits, Loans and Banking: Clarifying the Debate

Philipp Bagus, David Howden and Walter Block

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Banking; fractional reserves; fraud; ethics; law; business cycle (search for similar items in EconPapers)
JEL-codes: E32 E59 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (18)

Published in The American Journal of Economics and Sociology 72.3(2013): pp. 627-644

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Journal Article: Deposits, Loans, and Banking: Clarifying the Debate (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:79598

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