Year: 2025
Type: book-chapter
Abstract: Opprobrium directed at banks and bankers during economic crises stems from ethical conflicts caused by the primary product of the banking industry: the fractional-reserve demand deposit. There exist two schools of thought on the legality and the ethical nature of this contract. The “essentialist” school views this contract as inherently contradictory due to the conflicting attributes fundamental to its construct. The “nominalist” school views this contract as sui generis —a financial innovation that has passed the market test—holding that while past financial and legal institutions may have been at odds with such a contract, the modern economy is different. In this article we show that the essentialist view on banking contracts is not only defensible but necessary, given the unique attributes of money and perfect money substitutes. This viewpoint allows the resolution of the legal and economic difficulties while improving the ethical standing of banks: it clarifies ownership rights in deposits, and mitigates the risk of bank runs by requiring full reserves.
DOI: 10.35297/001c.146167
Authors: Philipp Bagus, David Howden
Institutions: Universidad Rey Juan Carlos, Saint Louis University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W4415667872