Fractional-Reserve Banking and the Double-Title to Property Problem

This thesis discusses the legitimacy of fractional-reserve banking under the title-transfer theory of contract. Fractional-reserve banking is the practice of banks lending out some of the money that is deposited with them. This can be contrasted to a 100% reserve system in which all deposited funds are held by the bank at all times. The title-transfer theory of contract posits that all contracts are the exchange of title to some piece of property and that all title to a particular piece of property can only be held by one individual at a time. Fractional-reserve banking appears to create a problem for the title-transfer theory of contract since it seems that both the depositor of money and those who borrow money from the bank have title to the money that was originally deposited. This is what is known as the double-title to property problem. Essentially, this thesis dissolves the double-title to property problem by offering a conceptual understanding of bank deposits as a form of call loan in which bank depositors give up title to money they deposit thus never creating an instance in which two titles to the same piece of property arises in the practice of fractional-reserve banking. This conceptual understanding of bank deposits describes fractional-reserve banking in a way which is ultimately different from how some who oppose fractional-reserve banking have described it. The call loan understanding views banks as debtors and depositors as their creditors who hold debt which is callable at any time. This understanding can be contrasted to the view that banks offers warehouse services that protect deposited money and bank depositors are people who seek to have their money protected and safeguarded by the bank. This thesis then explores some of the practical implications of conceptualizing bank deposits as call loans. While some have argued that banks must be bound by different rules when it comes to treasury management, bankruptcy, and contract formation, this thesis explores how banks can operate just like any other business that must practice debt management while dealing with uncertainty. This analysis engages with existing criticisms which posit that business practices for fractional-reserve banks must be different from other businesses in order to protect creditors from conditions which critics claim do not appear in other industries. This thesis argues that any such concerns regarding the treatment of creditors by fractional-reserve banks can already be addressed by existing business ethics literature that applies generally to all industries