“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 or historically – should be limited to a specific time period. 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 or time 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 to 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 to be paid as interest 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. The contract may just be to return the item borrowed on demand. When the borrower keeps a reserve stock of the fungible goods in question (such as animals or money), then the transaction becomes convenient for both parties: the lender has the flexibility of calling back his loan at short notice, and the debtor can use much of his stock of things borrowed for economic or consumption purposes, but keep a reserve buffer stock to repay his creditors. Fractional reserve banking works in this way.
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 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). Yet a stipulatio between two parties might set no fixed date for repayment, but make repayment on demand. 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 was a callable loan, even callable immediately, although obviously in practice most loans involved some period of time before repayment.
The serious flaw running through the strident statements about fractional reserve banking in Money, Bank Credit and Economic Cycles is the idea that mutuum requires a term/time limit with set date for repayment. That is simply not true.
BIBLIOGRAPHY
Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala
Zimmermann, Reinhard. 1990. The Law of Obligations: Roman Foundations of the Civilian Tradition. Juta, Cape Town, South Africa.
LK,
ReplyDeleteHere's another article for your collection on the issue of FRB vs. 100% Reserves: Yeager, Leland. Bank reserves: A dispute over words and classification.
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ReplyDeleteBut why must there even be a specified term or time 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.
I think it has to do with the fact that if both banker and client have a present claim to disposition of the sum of money, then that is equivalent to both parties having ownership over the money, which is fraud. For what is ownership? Ownership is having an absolute, exclusive PRESENT claim over an object. Present claims are not able to be split into more than one claim. A present claim is an absolute claim. Only one party can have a non-splittable present claim to an object. As such, either the banker has present claim, or the client has present claim. They can't both have present claims, and yet, with a fractional reserve contract, both parties seemingly have present claims. The client because he can dispose of the money whenever he wants, and the bank because the bank can also dispose of the money whenever it wants.
Note that it is not correct to say that because a period of time elapses between the client wanting the money, and the client actually taking possession of the money, that the client's claim isn't really a present claim after all, and thus the bank has true ownership. For by that same logic, the bank would also not be a present claimant to the money either, for the banker would also have to take a positive amount of time between the banker thinking of investing the money, and the banker actually going the computer or check printer and taking control of the money and investing it. Present claims don't imply that the time between wanting money and actually holding money is absolutely zero. That is impossible. Humans action requires time. Therefore, present claims are not instantaneous, zero-time-required claims. They are present in the sense of who has the right to present claim of the money, that is who can take possession within the shortest humanly possibly time whenever they want.
"I think it has to do with the fact that if both banker and client have a present claim to disposition of the sum of money, then that is equivalent to both parties having ownership over the money, which is fraud. For what is ownership? Ownership is having an absolute, exclusive PRESENT claim over an object. "
DeleteYou are wrong. In a mutuum contract ownership of the money is transferred to the borrower.
The lender does not have an "absolute, exclusive PRESENT claim over an object" at all: what he has is a debt owed to him, a callable debt.
It is inability to understand this that leads to the endless flawed and false theories of fractional reserve banking.
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ReplyDeleteIt does not make sense to say that a property title to money has been transferred from one party to another if the client still has the present claim, which is an absolute right, to dispose of the money on demand, that is, as fast as humanly possibly.
It makes sense to say that property title has been transferred only if it is the case that even though the client wants the money, and it is humanly possible for that client to take possession of the money, the client is nevertheless contractually obligated to wait for a pre-determined amount of time, during which time the bank has the exclusive right of present claim over the money, where the bank too would have to take time between wanting to do something with the money and actually doing something with the money. Only when that pre-determined minimum amount of time elapses, then the property title can go back to the client, because then the client recovers a present claim to the money (which again will entail a positive period of time between the client wanting to dispose of the money, and actually disposing of the money, like for example if the client holds his money under his pillow).
If I owned $100 and held it under my pillow, or in my wallet, then it would be absurd to suggest I am not the true owner of the money because a positive amount of time must elapse before I can take physical possession of the money. This is the area in which I think both pro-FRB and anti-FRB advocates are slipping. The pro-FRB advocates often claim that because time has to elapse before a client of an FRB bank can take possession of their money, that the bank is somehow the true owner of the money. But that is silly, because a banker would ALSO have to spend time before he can take actual possession of the money, and I as owner of money under my pillow, or in my wallet, would also have to spend time before I can take physical possession of the money. So clearly the mere fact that time elapses, is not sufficient for proving that clients are not the true owners. There has to be more.
If there is no pre-determined amount of time that must elapse before the client can take possession as quickly as humanly possible, if the client always had the exclusive right to a present claim over the money all along, then while the client and banker may believe and agree that they have engaged in a contract that transfers the property title, it can be argued that they really have not, and that their contract is null and void.
Note that voluntary contracts can be null and void, if the contract is humanly impossible, or violates a third party. For example, A and B who contract to trade a flying invisible unicorn, is a contract null and void because it cannot be enforced. A and B who contract to harm C, is also a null and void contract. Fractional reserve banking is a combination of these two. One, it is impossible for more than one party to have a PRESENT claim to a property, and two, contracts cannot harm third parties, which fractional reserve banking contracts definitely do (they cause the business cycle, hence recessions, unemployment, drops in output, etc).
And this does not even need to 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?”
You're predefining the contract as a loan, when that is precisely what is under dispute.
(1) "It does not make sense to say that a property title to money has been transferred from one party to another if the client still has the present claim, which is an absolute right, to dispose of the money on demand, that is, as fast as humanly possibly. "
ReplyDeleteThe client has no "absolute right, to dispose of the money on demand": he has the right to call back the debt owed to him on demand. The debtor might not be able to pay (say, the lender freely contracted not to bother with security): this is the risky nature of all business enterprises and investment, the nature of capitalism.
(2) ... "Only when that pre-determined minimum amount of time elapses, then the property title can go back to the client, because then the client recovers a present claim to the money "
You are confused: your argument here requires that the same money is returned to the lender. Anyone with a modicum of understanding of the mutuum contract knows that only a tantundem is returned: a fungible good of the same value, type, quality etc.
(3) " The pro-FRB advocates often claim that because time has to elapse before a client of an FRB bank can take possession of their money, that the bank is somehow the true owner of the money"
That is not why the FRB becomes owner of the money.
The borrower/bank becomes legal owner of the money, because this is the stated/specified in the contract both parties accept and recognised by law.
The rest of your argument is worthless because your initial argument here ("pro-FRB advocates often claim that because time has to elapse before a client of an FRB bank... etc.") is simply worthless too.
(4) ... You're predefining the contract as a loan, when that is precisely what is under dispute.
LOL.. Say, if 2 parties (say, in world free even of government) agreed to the following contract:
(1) Bill lends Steve a chicken as a mutuum loan. Both parties agree Steve becomes owner of the chicken. He can consume it by eating it or even reselling it to someone else.
(2) Bill says to Steve: "Steve, I know you keep a reserve stock of chickens, so I want to call back this "chicken debt" (that is, the repayment of the debt by a another chicken, a tantundem chicken of the same sex, quality and age) on demand at some time this year, but I don't know when. Is that alright?"
Steve says: "Bill, that is perfectly alright, I accept these terms completely. The "chicken debt" I owe you can be repaid on demand by me".
----
You are telling me there is doubt that this free contract is a mutuum loan?
You would be talking rubbish.
Tell us another joke, Major_Freedom (and I suspect that's who you are).
The client has no "absolute right, to dispose of the money on demand": he has the right to call back the debt owed to him on demand.
DeleteThose are two different ways of saying the same thing. The absolute right to call back the debt on demand, and the absolute right to dispose of the money on demand, are equivalent.
The debtor might not be able to pay (say, the lender freely contracted not to bother with security): this is the risky nature of all business enterprises and investment, the nature of capitalism.
Sure, but then the claim is not absolute, but conditional. It is conditional on the bank's promise, not the bank's property.
You are confused: your argument here requires that the same money is returned to the lender. Anyone with a modicum of understanding of the mutuum contract knows that only a tantundem is returned: a fungible good of the same value, type, quality etc.
Not at all. I am not assuming the SAME exact quantity of money is returned at all. I am just referring to a present claim on an existing sum of money. It doesn't matter where this money is, as long as it exists.
That is not why the FRB becomes owner of the money.
The borrower/bank becomes legal owner of the money, because this is the stated/specified in the contract both parties accept and recognised by law.
Contracts are null and void if they cannot be backed by reality. I am referring to the reality behind the contracting. I am talking about why A and not B can justifiably claim that the contract has been fulfilled or violated. At some point, you're going to have to step outside the concept of contracting itself, and ground a contract's validity in reality.
If I asked whether or not a contract has been fulfilled or violated, then obviously this question cannot be answered by referring to another contract. At some point, we're going to have to refer to reality. In reality, only one party can have absolute present claim over a sum of money, regardless of what any contract says.
You can't contract away reality.
The rest of your argument is worthless because your initial argument here ("pro-FRB advocates often claim that because time has to elapse before a client of an FRB bank... etc.") is simply worthless too.
You are not the judge of what is worthy or not. I am. I say it is worthy.
PS I am not this MajorFreedom guy.
DeleteHere's the thing, Lord Keynes. From an MMT perspective, if the right to have the chicken returned is *negotiable* -- which it is in bank deposits -- then the mutuum contract *creates money*.
DeleteThis is endogenous money creation. It has to be watched like a hawk because it's what creates bubbles. (The Austrians don't seem to understand this at all.)
It is not money creation per se that creates bubbles, but speculators taking loans to gamble on asset prices.
DeleteThe solution is effective financial regulation.
Let's use your chicken argument, and extend that so the neighbor opens a "chicken bank". He only has 10 customers, who all "loan" him chickens (which fowl constitute his only bird reserves), but he promises to pay them all like chickens on demand (total obligations = 10 chickens, payable at any time). This would of course work if the chickens were not consumed, loaned out, or otherwise gambled, for the chicken banker would always possess a number of chickens equal to his contractual obligations.
DeleteProblems arise when the chicken banker acts in such a way that he suddenly does not have enough chickens on-hand to fulfill ALL of his obligations (10 chickens are to be repayed to their respective, true owners on demand), such as lending the chickens, or using them to gamble in the Farmer's Market. At the moment the farmer no-longer is in the position to fulfill even one of his legally-binding contracts as a consequence of his own actions, he is guilty of fraud (claiming he can fulfill a contract when in fact he cannot). THAT is the core issue, not all of that other stuff! Its about the fraud. And before you answer 'that's how the industry/business of banking is and everyone knows it," widespread and endemic fraud is still...what? FRAUD.
(1) "This would of course work if the chickens were not consumed, loaned out, or otherwise gambled, for the chicken banker would always possess a number of chickens equal to his contractual obligations."
DeleteThat is utterly false: for as in the case of FR banks it is unlikely that that 10 chickens will be called back at the same time.
The farmer can operate on fractional chicken reserves: say, 4-5. The rest he can lend on at interest to get a return.
If he gets more than 4-5 requests for chickens at one time, he can
(a) borrow the necessary chicken/chickens to repay his clients, or
(b) sell some assets and buy a chicken/chickens to repay his clients.
And this is analogous to what banks do: if they get a demand for more reserves than they have, they
(a) borrow the necessary money on fed funds market
or
(b) sell some financial assets and obtain the money.
(2) "At the moment the farmer no-longer is in the position to fulfill even one of his legally-binding contracts as a consequence of his own actions, he is guilty of fraud (claiming he can fulfill a contract when in fact he cannot)"
You are plainly ignorant of the law: the farmer who cannot repay his "chicken" debts as they fall due is merely guilty of breach of contract.
He is not guilty of fraud. "Fraud" has simply not occurred.
The creditors are able to sue in a private civil law action for repayment of the debt - just as money creditors can sue to obtain repayment of debt.