Friday, August 31, 2012

Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique

Jesús Huerta de Soto is author of Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup, Auburn, Ala., 2012). It is one of those appallingly long Austrian tomes (like Human Action), whose sheer length seems designed to bludgeon the reader into submission.

But don’t be fooled by the length and prima facie scholarly tone of Money, Bank Credit and Economic Cycles: it is a terrible book, badly flawed.

In what follows I use and cite the 3rd edition of 2012 in a critique of Chapter 1.

You will need a basic understanding of the mutuum contract and the irregular deposit (depositum irregulare).

Huerta de Soto’s book seems to be the most recent and extensive treatise by an anti-fractional reserve banking Austrian. Reading it, I am struck by the many following errors in his interpretation of Roman contract law in Chapter 1 (and I have incorporated an earlier post here):
(1) Huerta de Soto misunderstands the nature of the mutuum contract. He defines the mutuum contract in these terms:
Mutuum (also from Latin) refers to the contract by which one person—the lender—entrusts to another—the borrower or mutuary—a certain quantity of fungible goods, and the borrower is obliged, at the end of a specified term, to return an equal quantity of goods of the same type and quality (tantundem in Latin). A typical example of a mutuum contract is the monetary loan contract, money being the quintessential fungible good. By this contract, a certain quantity of monetary units are handed over today from one person to another and the ownership and availability of the money are transferred from the one granting the loan to the one receiving it. The person who receives the loan is authorized to use the money as his own, while promising to return, at the end of a set term, the same number of monetary units lent. The mutuum contract, since it constitutes a loan of fungible goods, entails an exchange of “present” goods for “future” goods. Hence, unlike the commodatum contract, in the case of the mutuum contract the establishment of an interest agreement is normal, since, by virtue of the time preference (according to which, under equal circumstances, present goods are always preferable to future goods), human beings are only willing to relinquish a set quantity of units of a fungible good in exchange for a greater number of units of a fungible good in the future (at the end of the term).” (Huerta de Soto 2012: 2–3).
The trouble with this definition is that there is no reason why the mutuum contract – legally, morally, economically or historically – should be limited to a specific time period. Certainly in ancient Roman and Anglo-American law there is no such restriction.

Huerta de Soto is adamant that the mutuum contract is repaid by means of fungible goods of the same type or value, but at the end of a specified term or “at the end of a set term.”

But why must there even be a specified term at all? One can freely contract to lend a fungible good to another person, but both agree that the lender can recall the loan on demand, without any specific date being set.

And this does not even need or involve money: e.g., I lend my neighbour a chicken. My neighbour has a dozen chickens, but would like another one. We both agree I can come to my neighbour in a week, month or several months or at any time I want, and say “can I get back a chicken that will repay your loan to me?”

My neighbour may well have eaten the chicken in the meantime but provides a healthy chicken of the same age, size and value, which was all part of the original agreement. Or we may have contracted for some interest, say, 3 eggs with the chicken.

This sort of transaction can be applied to chickens, cows, animals, capital goods, and, above all, money: there is no reason whatsoever why a specified time element need be part of a mutuum contract.

Even looking at the legal history of contract in the Roman Republic and Roman empire, I see no evidence that the mutuum contract from its early history in Western civilization in ancient Rome ever required strict set dates or fixed term contracts (Zimmermann 1990: 155–156).

In Roman law, a loan of money was a mutuum, but interest and a set date (if the two parties wanted one) for repayment would be by additional stipulatio (= stipulation). In fact, without such an additional stipulatio, Roman law said that the lender could recall his loan at any time:
“A loan transaction can hardly achieve its purpose if the capital has to be repaid immediately after it has been handed over by the lender to the borrower. Yet this was, strictly speaking, the case where the mutuum was not accompanied or reaffirmed by a stipulation. For it was the datio [the act of giving over the thing borrowed – LK] that gave rise to the obligation to repay the capital, and this obligation came into effect immediately.” (Zimmermann 1990: 156).
That is to say, the default legal form of a mutuum in Roman law was a callable loan, even callable immediately.

Let us turn to English law. We can cite the The Laws of England: Being a Complete Statement of the Whole Law of England (vol. 2; 3rd edn.; 1964) on the mutuum:
“The contract of mutuum differs from that of commodatum, in that in the latter a bare possession of the chattel lent, as distinguished from the property in it, vests in the borrower, the general property in it still remaining in the lender; where in mutuum that property in the chattel passes from the lender to the borrower. Mutuum is confined to such chattels as are intended to be consumed in the using and are capable of being estimated by number, weight, or measure, such as money, corn, or wine. The essence of the contract in the case of such loans is, not that the borrower should return to the lender the identical chattels lent (for such specific return would ordinarily render the loan valueless), but that upon demand or at a fixed date the lender should receive from the borrower an equivalent quantity of the chattels lent.” (Halsbury 1964: 112).
This explicitly states that, in the case of a mutuum contract, even a demand deposit in a fractional reserve bank, the loan can be repaid either at a fixed future date or on demand.

And it should be noted that, as early as the 18th century, the mutuum contract is also defined in the same terms as seen above by Thomas Wood (1661–1722), an English Doctor of Civil Law (New College, Oxford) and author of the leading work on English law in that era. In the 4th edition of A New Institute of the Imperial or Civil Law (1730; 1st edn. 1704), we have this definition of the mutuum:
“Mutuum (a Loan simply so call’d quod de meo tuum fiat [sc. “because let what is mine become yours”])

It hath no one particular name in the English Language.

is a Contract introduced by the Law of Nations, in which a Thing that consists in weight (as Bullion,) in number (as Money,) in measure (as Wine,) is given to another upon condition that he shall return another thing of the same Quantity, Nature and Value upon demand. More than Consent is required, for the Thing, viz. Money, Wine, or Oil ought to be actually delivered, and more than what was delivered cannot be repaid; but less may be repaid by Agreement. This Contract forces men to be industrious and promotes Trade, and for this reason it may be greater charity to lend than to give. Creditum is a more general Word. In the case of Money, Silver may be repaid tor Gold, unless the Creditor is to be damnified by it; for it shall be understood to be the same kind of Money when it is of the same” (Wood 1730: 212).
So even in the early 18th century in the law of the United Kingdom the mutuum is a loan repayable upon demand: a specific and strict time period (or term) for the loan is not required, though obviously the mutuum can involve a fixed term or a set date for repayment by contract.

Over a century later in America in 1848, a case is recorded in the Court of Appeals of the State of New York, involving Benjamin C. Payne, Executor vs. William Gardiner. In this case, the American court defined the mutuum in relation to deposit banking:
“In cases of mutuum the party borrowing was not held to pay interest upon the money lent; but in cases of irregular deposit, interest was due by the depositary, both ex nudo pacto and ex mora. This distinction between the two classes of deposit, as to interest, is not recognized by our law. The depository being liable in each for interest, in the event of a breach of duty.

A deposit of money with a bank or private person is what is known in the civil law as a mutuum or irregular deposit—the distinction between the two kinds of deposit not being recognized by the common law.

When money is borrowed, and no time of payment is fixed by the contract of loan, the debt, as already stated, is instantly due,
and an action may be brought without demand — the bringing of the action being a sufficient demand to entitle the lender to recover. (Chitty on Contracts, 734; Norton v. JEUam, 2 M. & W. 461.)

Even if the debt is by the terms of the agreement to be paid on demand, yet no special demand is necessary; the money being due without it.” (Tiffany 1865: 168).

“In Story on Bailments (p. 66 § 88), it is said that ‘in the ordinary cases of deposits of money with banking corporations or bankers, the transaction amounts to a mere loan or mutuum, or irregular deposit, and the bank is to restore not the same money but an equivalent sum whenever it is demanded.’” (Tiffany 1865: 169).
So American law follows English law on the mutuum: a loan under such a contract can be repaid on demand, without a specific time being set.

(2) The Classical Roman jurists include Gaius (c. 115–180 AD), Papinian (142–212 AD), Ulpian (c. 170–228), Paul (fl. 228–235 AD), and Modestinus (fl. 250 AD).

In later Roman law by the time of Justinian, there appears to have been a type of contract that modern scholars call the depositum irregulare (or irregular deposit), a term invented by the fifteenth century jurist Jason of Maino. This contract, when involving money, allowed the transferral of ownership (dominium) of money deposited in a bank to the banker. Thus the money could be used by the bank and lent out to provide a return in interest for the “depositor,” and the “depositor” received back the same quantity (or tantundem) of money, not the same money itself that had been deposited (Zimmermann 1990: 215–216). Note how the word “deposit” is highly misleading here, because the irregular deposit is very much like a mutuum (a loan for consumption).

Indeed, in the time of the Roman jurists Ulpian (c. 170–223 AD) and Papinian (142–212 AD), it appears that the depositum irregulare was merely considered to be a type of mutuum, and it may well be that the whole legal concept of depositum irregulare is a development of later legal theorists, unknown to jurists of the second or third century AD (Oudshoorn 2007: 135–136). Admittedly, there are a number of dissenting modern legal scholars these days who do think that the Classical Roman jurists recognised the depositum irregulare (Evans-Jones and MacCormack 1998: 133), but even if so, it was almost the functional equivalent of the mutuum, and the question is still controversial.

The depositum irregulare (or irregular deposit) is sometimes also called the “improper deposit” or “general deposit” in modern legal terminology, and as a legal concept has been most influential on the civil law systems on Continental Europe, rather than in Anglo-American law.

Now Huerta de Soto has a very questionable definition of the irregular deposit. He asserts that the classical Roman jurists
“had already recognized the irregular deposit contract, understood the essential principles governing it, and outlined its content and essence as explained earlier in this chapter.” (Huerta de Soto 2012: 26).
By the latter clause, Huerta de Soto seems to mean that Roman classical jurists defined the irregular deposit contract in the terms he himself describes on pp. 4–20. But Huerta de Soto’s definition of the irregular deposit (depositum irregulare) includes these two characteristics that are highly dubious:
(1) there is no interest on the money “deposited” (or really lent out) in the irregular deposit, and
(2) the bank is required to keep what Huerta de Soto misleadingly calls a tantundem always available in full for all holders of irregular deposits.
These two aspects make Huerta de Soto’s definition of the irregular deposit utterly unorthodox. He cites certain Spanish legal sources and Spanish legal scholars for his definition, but it is clearly eccentric and aberrant, certainly with respect to Roman law and Anglo-American law.

Huerta de Soto’s assertion that the classical Roman jurists defined the irregular deposit in the way he does (and perhaps in the way certain Spanish legal scholars do) is untrue.

First, as we have seen above, the question whether the classical Roman jurists even had a concept of the “irregular deposit” is intensely problematic (Zimmermann 1990: 217): many scholars think that the irregular deposit (depositum irregulare) was not even recognised by the classical Roman jurists (Schulz 1951: 520), who interpreted “deposit” banking in terms of the mutuum contract. Some scholars also feel that many of texts in Justinian’s Digest from earlier jurists that seem to refer to the irregular deposit are interpolated and hence unreliable (Schulz 1951: 520).

Secondly, contrary to Huerta de Soto, the irregular deposit by the time of post-Classical Roman law in Justinian’s Digest regularly paid interest (Buckland 1963: 470):
“the so-called ‘irregular’ deposit primarily concerned deposits of money upon the terms that the recipient - often but not necessarily a banker - was bound to restore not the same coins but an equivalent, ownership of the deposit being transferred to him. As he was owner the depositee could use the money, in which case it was usual to pay interest on it to the depositor. There are clearly similarities between this contract and mutuum.” (Evans-Jones and MacCormack 1998: 133).
Thirdly, there was absolutely no obligation that the banker had to keep a tantundem always available in full for all holders of irregular deposits at all times. If Huerta de Soto were correct, then no institution taking irregular deposits could ever be a bank or pay interest: it would be the equivalent of a mere warehouse facility. Yet even in late Roman law the irregular deposit paid interest.

In short, Huerta de Soto’s definition of the irregular deposit is at variance with Roman law.

(3) Jesús Huerta de Soto cites Justinian’s Digest 16.3.24 and argues that whenever anyone made an irregular deposit of money in Roman times, he received a written certificate or deposit slip. In fact, the relevant passage of the Digest says nothing of the sort. Here it is full:
Lucius Titius to Sempronius Greeting: ‘I notify you by this letter written by my own hand, that the hundred pieces of money which you loaned to me this day, and which have been counted by the slave Stichus, your agent, are in my hands, and that I will pay them to you on demand, when and where you desire me to do so.’ The question arises whether any increase by way of interest is to be considered? I answered that an action on deposit will lie, for what is the loaning of anything for use but the depositing of it? This is true, if the intention was that the very same coins should be returned, for if it was understood that only the amount should be paid, the agreement exceeds the limits of the deposit. If, in the case which has been stated, an action on deposit will not lie, since it was only agreed to pay the same sum, and not the identical coins, it is not easy to determine whether an account of the interest should be taken. It has, in fact, been established that, in bona fide actions, it is the duty of the judge to decide that, with reference to interest, only such can be paid as the stipulation provides for. But is contrary to good faith and the nature of a deposit, that interest should be claimed before the party who granted the favor by receiving the money, is in default in returning it. If, however, the agreement was that interest should be paid from the beginning, the condition of the contract shall be observed.” (Digest 16.3.24).
This text merely refers incidentally to a letter that Lucius Titius wrote to Sempronius, by which the former informed the latter of the money he had received from him: there is absolutely nothing here to lead us to infer that, when someone made an irregular deposit of money, that person regularly or formally received a written certificate or deposit slip in Roman times.

(4) On pp. 29–30, de Soto commits a quite clear error:
“[sc. Digest 16.3.24] … reveals the immediate availability of the money to the depositor and the custom of giving him a deposit slip or receipt certifying a monetary irregular deposit, which not only established ownership, but also had to be presented upon withdrawal.

The essential obligation of depositaries is to maintain the tantundem constantly available to depositors. (Huerta de Soto 2012: 29–30).
We have already seen that Digest 16.3.24 does establish at all that the depositor received a written certificate or deposit slip when money was left on irregular deposit or even regular deposit (or bailment).

Huerta de Soto’s statement that the “essential obligation of depositaries is to maintain the tantundem constantly available to depositors” when applied to Roman law is utterly wrong and confused, as I have also noted above.

Huerta de Soto has imported questionable legal definitions of the irregular deposit from the various Spanish legal scholars that he cites which do not apply to Roman law, or indeed to Anglo-American contract law. Frankly, I doubt whether his definition of the irregular deposit even applies to interpretations of that concept in many other Continental European civil law systems either.

A tantundem applies to the mutuum loan or irregular deposit (depositum irregulare), and is the quantity of fungible goods of the same value, quality or amount returned to the creditor when he (1) requests repayment (as in a callable loan) or (2) when his loan is due (as in a loan with a set term/time limit). Despite Huerta de Soto, the debtor is not obliged to maintain a “tantundem constantly available to depositors” at all: he is only obliged to repay a tantundem when he is asked or when the debt is due.

On p. 35, the very same error occurs:
“However, the [sc. medieval] codes do not include the important clarifications made in the Corpus Juris Civilis to the effect that, though ownership is “transferred [sc. in the case of the irregular deposit],” the safekeeping obligation remains, along with the responsibility to keep continually available to the depositor the equivalent in quantity and quality (tantundem) of the original deposit.” (Huerta de Soto 2012: 35).
Huerta de Soto is wrong. The Medieval codes did not include any such “clarifications” because they did not exist in Roman law, even in the post-Classical period. In Roman law, no such obligation occurred in the case of the irregular deposit: it was in essence the functional equivalent of a mutuum, and the tantundem was required to be paid when due or (if it was in the contract) on demand. The banker was not obliged to engage in some safekeeping obligation in which he had to “keep continually available to the depositor the equivalent in quantity and quality (tantundem) of the original deposit.”

On p. 31 and p. 34, Huerta de Soto misuses the word tantundem again: he applies the term tantundem to a regular deposit (depositum regulare or bailment), where it is inappropriate.

(5) On pp. 30–32, Huerta de Soto conflates the terms of the regular deposit (depositum regulare) with irregular deposit (depositum irregulare).
All in all, Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles has incredible and shocking errors. And this is just the first chapter.


Buckland, William Warwick. 1963. A Text-book of Roman Law from Augustus to Justinian (3rd edn.). Cambridge University Press, Cambridge.

Evans-Jones, R. and G. MacCormack. 1998. “Obligations,” in E. Metzger (ed.), A Companion to Justinian’s Institutes. Cornell University Press, Ithaca, N.Y. 127–207.

Halsbury, H. S. G. 1964. The Laws of England: Being a Complete Statement of the Whole Law of England (vol. 2; 3rd edn.; ed. G. T. Simonds), Butterworth, London.

Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup). Ludwig von Mises Institute, Auburn, Ala.

Oudshoorn, J. G. 2007. The Relationship Between Roman and Local Law in the Babatha and Salome Komaise Archives: General Analysis and Three Case Studies on Law of Succession, Guardianship and Marriage. Brill, Leiden and Boston.

Schulz, F. H. 1951. Classical Roman Law. Clarendon Press, Oxford.

Tiffany, J. 1865. Reports of Cases Argued and Determined in the Court of Appeals of the State of New York (vol. II), Weare C. Little, law Bookseller, Albany.

Wood, Thomas. 1730. A New Institute of the Imperial or Civil Law (4th edn.), J. and J. Knapton, London.

Zimmermann, Reinhard. 1990. The Law of Obligations: Roman Foundations of the Civilian Tradition. Juta, Cape Town, South Africa.


  1. A much-needed debunking, LK. May you have the stamina (and the stomach) to subject the rest of the book to similar scrutiny.

    1. Thanks very much for this comment.

      You know, I was actually looking forward to reading Huerta de Soto’s book.

      But when reading even the first chapter I was amazed at how incredibly flawed it is.

      All I can say is that, if this is how mutuum and irregular deposit are defined in Spanish law, then Spanish law must be utterly at a variance with the rest of the Western world.

      Certainly it does not go back to Roman law.

    2. Prof. Selgin, how do you respond to LK's debunking of Free Banking? After all, wasn't there a banking crisis in Australia in the 1890's that conclusively proves that Free Banking is a failed idea? Also, by its own logic it would lead to "endless Austrian Business Cycles."

  2. Are you planning to do a chapter by chapter critique?

  3. Perhaps the most important chapters relating to banking.

    There are 812 pages of text, and from about 265 to 508, it deals with ABCT, which I have already critiqued elsewhere.

  4. I agree that de Soto’s book is an “appallingly long Austrian tome”.

    It’s actually the first three chapters that deal with legal niceties, rather than the first chapter isn’t it? Strikes me there is simple flaw in the whole “legal argument” which is thus.

    If fractional reserve DOES break legal principles, but is on balance beneficial or is the best banking system available, then it’s the LAW that should be amended, not fractional reserve that should be outlawed. I.e. the IMPORTANT QUESTION is whether fractional reserve is the best system. The legal niceties are irrelevant.

    The other point to over which de Soto and other Austrians devote millions of words all to no avail is their idea that reduced interest rates lengthen production processes. No doubt reduced interest rates have that effect TO SOME EXTENT, but the size or importance of that effect strikes me as being negligible compared to other factors.

    Have you written anything on the latter point?

  5. (1) FRB does not break legal principles.

    (2) As Robert Vienneau has argued, there is no necessary reason why lower interest rates would cause production to be re-oriented to higher-order capital goods anyway, and even classifying capital structure into well-defined, strict higher orders is dubious in itself:

    Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September

    Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4

    1. It doesn't matter if it does break 'legal principles'.

      There is no law without enforcement. It's the enforcement that shapes what the actual law is, rather than the words on the piece of paper and endless debates on the Internet

      There are no lightning strikes. And when you try to enforce a law - particularly one that is systemic, you'll find that the access to the courts may be restricted.

      In the UK you can't go to court over an employment matter for instance. There is only a tribunal and it can only rule in limited circumstances. And even if you get a judgement you have to enforce it in a civil manner - which is more difficult than you imagine.

  6. I put the book to the reading list.Life is short and the list is long and well priotiriserad so the book ends up somewhere in the lower section, but i thank you LK for an excellent summary of this Huerta de Soto's long and strained work. The divine eternity seems to me to reflect, not so much in the depth of the thought´s of Huerta de Soto but more in the length of his sentence structure