Fractional Reserve Banking, Client Collaboration, and Fraud

• Published in: Journal of business ethics Vol. 130; no. 1; pp. 85 - 92
• Main Author: Nair, Malavika
• Format: Journal Article
• Language: English
• Published: Dordrecht Springer 01.08.2015; Springer Netherlands; Springer Nature B.V
• Subjects: Agreements; Bank reserves; Banking; Banking industry; Banks; Business and Management; Business Ethics; Central banks; Collaboration; Education; Ethics; Fraud; Free markets; Loans; Management; Philosophy; Quality of Life Research; Studies; Fractional reserve banking; Client collaboration; Fraud
• ISSN: 0167-4544; 1573-0697
• DOI: 10.1007/s10551-014-2176-x

This paper traces the recent debate over the legitimacy of maturity mismatching and fractional reserve banking. It shows that there is common ground between Bagus and Howden (Journal of Business Ethics, 90(3):399–406, 2009, 106:295–300, 2012) on the one hand and Evans (Journal of Business Ethics, 2013) on the other regarding contractual arrangements that lead to fractional reserve banking, while both agree that fractional reserve banking that arises out of a bailment or storage contract constitutes fraud. Block and Barnett (Journal of Business Ethics, 88(4):711–716, 2009, 100:229–238, 2011) stress the illegitimacy of fractional reserve banking for creating more money substitutes than there is actual money. While it is true that fractional reserve banks are capable of creating money, this activity still cannot be regarded as fraudulent using a common law definition of fraud for it can only take place with requisite client collaboration that makes it impossible to identify a victim.