On the Necessary and Sufficient Conditions for Legitimate Banking Contracts

Philipp Bagus, Amadeus Gabriel and David Howden

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Banking ethics; Demand deposit; Fractional-reserve banking; Full-reserve banking; Money substitutes (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2018-01-01
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (1)

Published in Journal of Business Ethics 147.3(2018): pp. 669-678

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Related works:
Journal Article: On the Necessary and Sufficient Conditions for Legitimate Banking Contracts (2018)
Working Paper: On the Necessary and Sufficient Conditions for Legitimate Banking Contracts (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:84833

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