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Ethical Differences Between Loan Maturity Mismatching and Fractional Reserve Banking: A Natural Law Approach

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  • Laura Davidson

Abstract

In a number of recent articles, the debate on the ethics of fractional reserve “free” banking has been extended to loan maturity mismatching, specifically the banking practice of borrowing short and lending long. Barnett and Block (J Bus Ethics 88(4):711–716, 2009 ; 2010 ) claim the practice is illicit, because like fractional reserve banking it creates duplicate property titles. They argue there is a continuum in the time dimension between the two kinds of activities. Bagus and Howden (J Bus Ethics 90(3):399–406, 2009 ; 106(3):295–300, 2012a ; Eur J Law Econ, 2012b ; Bus Ethics 22(3):235–245, 2013 ) maintain that loan maturity mismatching does not create duplicate titles and is not illicit, and that from an economic and legal perspective there is no continuum with fractional reserve banking. Cachanosky (J Bus Ethics 104:219–221, 2011 ) and Evans (J Bus Ethics, 2013 ) enter the debate from the free-banking standpoint and view both practices as legitimate. In this paper, I agree with the conclusions of Bagus and Howden, but adopt a different approach to support this position. Using the title-transfer theory of contract, I demonstrate from first principles why loan maturity mismatching does not create duplicate property titles and is a legitimate practice. Employing this same theory, I then present a novel argument to show why the contractual arrangements found in fractional reserve banking are logically contradictory and illegitimate. Copyright Springer Science+Business Media Dordrecht 2015

Suggested Citation

  • Laura Davidson, 2015. "Ethical Differences Between Loan Maturity Mismatching and Fractional Reserve Banking: A Natural Law Approach," Journal of Business Ethics, Springer, vol. 131(1), pages 9-18, September.
    • Handle: RePEc:kap:jbuset:v:131:y:2015:i:1:p:9-18
    DOI: 10.1007/s10551-014-2263-z
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    References listed on IDEAS

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    1. Hoppe, Hans-Hermann, 1994. "How Is Fiat Money Possible?--or, the Devolution of Money and Credit," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 7(2), pages 49-74.
    2. Nicolás Cachanosky, 2011. "A Comment on Barnett and Block on Time Deposit and Bagus and Howden on Loan Maturity Mismatching," Journal of Business Ethics, Springer, vol. 104(2), pages 219-221, December.
    3. Philipp Bagus & David Howden & Walter Block, 2013. "Deposits, Loans, and Banking: Clarifying the Debate," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(3), pages 627-644, July.
    4. Philipp Bagus & David Howden, 2012. "The Continuing Continuum Problem of Deposits and Loans," Journal of Business Ethics, Springer, vol. 106(3), pages 295-300, March.
    5. Hulsmann, Jorg Guido, 1996. "Free Banking and the Free Bankers," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 9(1), pages 3-53.
    6. Philipp Bagus & David Howden & Amadeus Gabriel, 2015. "Oil and Water Do Not Mix, or: Aliud Est Credere, Aliud Deponere," Journal of Business Ethics, Springer, vol. 128(1), pages 197-206, April.
    7. Philipp Bagus & David Howden, 2009. "The Legitimacy of Loan Maturity Mismatching: A Risky, but not Fraudulent, Undertaking," Journal of Business Ethics, Springer, vol. 90(3), pages 399-406, December.
    8. George A. Selgin & Lawrence H. White, 1994. "How Would the Invisible Hand Handle Money?," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1718-1749, December.
    9. Bagus, Philipp & Howden, David, 2013. "Some Ethical Dilemmas with Modern Banking," MPRA Paper 79599, University Library of Munich, Germany.
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    Cited by:

    1. Philipp Bagus & David Howden & Jesús Huerta de Soto Ballester, 2018. "Entrepreneurial Error Does Not Equal Market Failure," Journal of Business Ethics, Springer, vol. 149(2), pages 433-441, May.
    2. repec:idn:jimfjn:v:4:y:2018:i:2j:p:1-32 is not listed on IDEAS
    3. Yaser Taufik Syamlan & Nur Istiana, 2018. "Does Fractional Reserve Banking System Exist In Indonesian Islamic Banking?," Journal of Islamic Monetary Economics and Finance, Bank Indonesia, vol. 4(2), pages 369-400, November.
    4. Xuemeng Guo & Jiaxin Ma & Yuting Feng & Bingyao Chen, 2023. "Green Credit Policy and Short-Term Financing for Long-Term Investment: Evidence from China’s Heavily Polluting Enterprises," Sustainability, MDPI, vol. 15(24), pages 1-18, December.

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