On the Necessary and Sufficient Conditions for Legitimate Banking Contracts

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 a...

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Bibliographic Details
Authors: Bagus, Philipp (Author) ; Gabriel, Amadeus (Author) ; Howden, David (Author)
Format: Electronic Article
Language:English
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Published: Springer Science + Business Media B. V 2018
In: Journal of business ethics
Year: 2018, Volume: 147, Issue: 3, Pages: 669-678
Further subjects:B Full-reserve banking
B Demand deposit
B Money substitutes
B Banking ethics
B Fractional-reserve banking
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Summary: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, a financial contract similar to a demand deposit (e.g., very short-term bonds, money market mutual funds, etc.) cannot substitute for money. Second, 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, the demand for fractional-reserve demand deposits is fostered by an exogenous source (deposit insurance) and that demand for a good or service is not a sufficient condition to justify its legality or ethicality.
ISSN:1573-0697
Contains:Enthalten in: Journal of business ethics
Persistent identifiers:DOI: 10.1007/s10551-015-2972-y