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Home | Blog | Oil and Water Do Not Mix, or: Aliud Est Credere, Aliud Deponere

Oil and Water Do Not Mix, or: Aliud Est Credere, Aliud Deponere

March 4, 2014
In this article published in the Journal of Business Ethics, Philipp Bagus, David Howden, and Amadeus Gabriel contend that fractional reserve deposit banking is impossible and illegitimate. Working paper version. Abstract The financial crisis has led to new interest in the ethics of financial markets. In this article, we further the debate on the nature of banking contracts by showing that the fundamental subjective purposes of loan and deposit contracts are irreconcilable. Any resultant mixture of the two contracts is a legal aberration. We consider a mutual fund as an important and legitimate alternative to the common demand deposit to provide high liquidity and some yield without offering full availability of a nominal sum. Besides being a close substitute for how many deposit accounts function today, the mutual fund has the additional benefit of satisfying all legal and ethical requirements. Loan and investment contracts (such as money market mutual funds) allow for the “bank” to make use of their clients’ funds while the intents of money owners are clearly classified without running into legal or ethical problems.

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