Coggs v. Bernard and the History of English Bailment Law

The case Coggs v. Bernard (1703) (sometimes written Coggs v. Barnard) was an important case revising some aspects of English bailment law, under the judge Sir John Holt, in 1703.

A brief summary of the case is available here:

http://en.wikipedia.org/wiki/Coggs_v_Bernard

In brief, this case concerned one William Bernard, who agreed (without charge) to transport “several barrels of brandy” owned by John Coggs. In the process of transporting the barrels, one was punctured and “150 gallons” of brandy were lost.

John Coggs brought an action against Bernard for the lost brandy.

The crucial point about this case was that Sir John Holt (Chief Justice of the King’s Bench) overturned “the then leading case in the law of bailments, Southcote’s Case (1601), which held that a general bailee was strictly liable for any damage or loss to the goods in his possession. … Under the ruling in Coggs v Bernard, a general bailee was only liable if he had been negligent.”

But a careful reading of this case shows us that – despite Sir John Holt’s revision of an earlier principle – bailment law had still actually been very well defined in English law by 1703 and even far earlier than this (since Holt was able to cite medieval authorities on bailment law), and was actually stricter in the earlier period than after 1703.

In short, this case in no sense supports the Rothbardian view that English bailment law was undeveloped or poorly defined until the 18th century (a view in Rothbard 2008: 91).

Furthermore, Coggs v. Bernard did not even explicitly involve banks, and, while it may have had consequences for any bailment services provided by banks, it still does not provide any evidence against the view that the callable mutuum contract was the main and most important contract used by English bankers and goldsmiths.

Finally, here is Sir John Holt’s summary of and judgement on the case:

1. COGGS V. BERNARD,
2 Ld. Raymond 909; 1 8m. Lead. Cas. 199. 1703.

The facts are stated in the opinion.

HOLT, C. J. The case is shortly this. This defendant undertakes to remove goods from one cellar to another, and there lay them down safely; and he managed them so negligently, that for want of care in him some of the goods were spoiled. Upon not guilty pleaded, there has been a verdict for the plaintiff, and that upon full evidence, the cause being tried before me at Guildhall. There has been a motion in arrest of judgment, that the declaration is insufficient because the defendant is neither laid to be a common porter, nor that he is to have any reward for his labor, so that the defendant is not chargeable by his trade, and a private person cannot be charged in an action without a reward.

I have had a great consideration of this case; and because some of the books make the action lie upon the reward, and some upon the promise, at first I made a great question whether this declaration was good. But upon consideration, as this declaration is, I think the action will well lie. In order to show the grounds upon which a man shall be charged with goods put into his custody, I must show the several sorts of bailments. And there are six sorts of bailments. The first sort of bailment is, a bare naked bailment of goods, delivered by one man to another to keep for the use of the bailor; and this I call a depositum, and it is that sort of bailment which is mentioned in Southcote’s case. The second sort is, when goods or chattels that are useful are lent a friend gratis, to be used by him; and this is called commodatum, because the thing is to be restored in specie. The third sort is, when goods are left with the bailee to be used by him for hire; this is called locatio et conductio, and the lender is called locator, and the borrower conductor. The fourth sort is, when goods or chattels are delivered to another as a pawn, to be a security to him for money borrowed of him by the bailor; and this is called in Latin, vadium, and in English, a pawn or a pledge. The fifth sort is, when goods or chattels are delivered to be carried, or something is to be done about them for a reward to be paid by the person who delivers them to the bailee, who is to do the thing about them. The sixth sort is, when there is a delivery of goods or chattels to somebody who is to carry them, or do something about them gratis, without any reward for such his work or carriage, which is this present case. I mention these things, not so much that they are all of them so necessary in order to maintain the proposition which is to be proved, as to clear the reason of the obligation which is upon persons in cases of trust.

As to the first sort, where a man takes goods in his custody to keep for the use of the bailor, I shall consider for what things such a bailee is answerable. He is not answerable if they are stole without any fault in him, neither will a common neglect make him chargeable, but he must be guilty of some gross neglect. There is, I confess, a great authority against me; where it is held that a general delivery will charge the bailee to answer for the goods if they are stolen, unless the goods are specially accepted to keep them only as you will keep your own. But my Lord Coke has improved the case in his report of it; for he will have it, that there is no difference between a special acceptance to keep safely, and an acceptance generally to keep. But there is no reason or justice, in such a case of a general bailment, and where the bailee is not to have any reward, but keeps the goods merely for the use of the bailor, to charge him without some default in him. For if he keeps the goods in such a case with an ordinary care, he has performed the trust reposed in him. But according to this doctrine the bailee must answer for the wrongs of other people, which he is not, nor cannot be sufficiently armed against. If the law be so, there must be some just and honest reason for it, or else some universal settled rule of law upon which it is grounded; and therefore it is incumbent upon them that advance this doctrine to show an undisturbed rule and practice of the law according to this position. But to show that the tenor of the law was always otherwise, I shall give a history of the authorities in the books in this matter; and by them show, that there never was any such resolution given before Southcote’s case. The 29 Ass. 28 is the first case in the books upon that learning; and there the opinion is, that the bailee is not chargeable, if the goods are stole. As for 8 Bdw. 2, Pitzh. Detinue 59, where goods are locked in a chest, and left with the bailee, and the owner took away the key, and the goods were stolen, it was held that the bailee should not answer for the goods; that case they say differs, because the bailor did not trust the bailee with them. But I cannot see the reason of that difference, nor why the bailee should not be charged with goods in a chest, as well as with goods out of a chest; for the bailee has as little power over them when they are out of a chest, as to any benefit he might have by them, as when they are in a chest; and he has as great power to defend them in one case as in the other. The case of 9 Edw. 4. 40. b. was but a debate at bar; for Danby was but a counsel then; though he had been chief justice in the beginning of Bdw. 4, yet he was removed, and restored again upon the restitution of Hen. 6, as appears by Dugdale’s Chronica Series. So that what he said cannot be taken to be any authority, for he spoke only for his client; and Genney, for his client, said the contrary. The case in 3 Hen. 7. 4. is but a sudden opinion; and that but by half the court; and yet, that is the only ground for this opinion of my Lord Coke which besides he has improved. But the practice has been always at Guildhall, to disallow that to be a sufficient evidence to charge the bailee. And it was practised so before my time, all Chief Justice Pemberton's time, and ever since, against the opinion of that case. When I read Southcote’s case heretofore, I was not so discerning as my brother Powys tells us he was, to disallow that case at first; and came not to be of this opinion till I had well considered and digested that matter. Though, I must confess, reason is strong against the case, to charge a man for doing such a friendly act for his friend; but so far is the law from being so unreasonable, that such a bailee is the least chargeable for neglect of any. For if he keeps the goods bailed to him but as he keeps his own, though he keeps his own but negligently, yet he is not chargeable for them; for the keeping them as he keeps his own is an argument of his honesty. A fortiori, he shall not be charged where they are stolen without any neglect in him.
Agreeable to this is Bracton, lib. 3, c. 2, 99, b. ‘J. 8. apud quern res deponitur, re obligatur, et de ea re, quam accepit, restituenda tenetur, et etiam ad id, si quid in re deposita dolo commiserit; culpae autem nomine non tenetur, scilicet desidiae vel negligentiae, quia qui negligenti amico rem custodiendam tradit, sibi ipsi et propriae fatuitati hoc debet imputare.’ As suppose the bailee is an idle, careless, drunken fellow, and comes home drunk, and leaves all his doors open, and by reason thereof the goods happen to be stolen with his own; yet he shall not be charged, because it is the bailor’s own folly to trust such an idle fellow. So that this sort of bailee is the least responsible for neglects, and under the least obligation of any one, being bound to no other care of the bailed goods than he takes of his own. This Bracton I have cited is, I confess, an old author; but in this his doctrine is agreeable to reason, and to what the law is in other countries. The civil law is so, as you have it in Justinian’s Inst. lib. 3, tit. 15. There the law goes further; for there it is said: ‘Ex eo solo tenetur, si quid dolo commiserit: culpae autem nomine, id est, desidiae ac negligentiae, non tenetur. Itaque securus est qui parum diligenter custoditam rem furto amiserit quia qui negligenti amico rem custodiendam tradit, non ei, sed suae facilitati, id imputare debet.’ So that a bailee is not chargeable without an apparent gross neglect. And if there is such a gross neglect, it is looked upon as an evidence of fraud. Nay, suppose the bailee undertakes safely and securely to keep the goods, in express words; yet even that won’t charge him with all sorts of neglects; for if such a promise were put into writing, it would not charge so far, even then. Hob. 34, a covenant, that the covenantee shall have, occupy, and enjoy certain lands, does not bind against the acts of wrongdoers. 3 Cro. 214, ace, 2 Cro. 425, ace, upon a promise for quiet enjoyment. And if a promise will not charge a man against wrongdoers, when put in writing, it is hard it should do it more so when spoken. Doct. and Stud. 130 is in point, that though a bailee do promise to redeliver goods safely, yet if he have nothing for the keeping of them, he will not be answerable for the acts of a wrongdoer. So that there is neither sufficient reason nor authority to support the opinion in Southcote’s case. If the bailee be guilty of gross negligence, he will be chargeable, but not for any ordinary neglect.

As to the second sort of bailment, viz. commodatum, or lending gratis, the borrower is bound to the strictest care and diligence to keep the goods, so as to restore them back again to the lender; because the bailee has a benefit by the use of them, so as if the bailee be guilty of the least neglect he will be answerable: as, if a man should lend another a horse to go westward, or for a month; if the bailee go northward, or keep the horse above a month, if any accident happen to the horse in the northern journey, or after the expiration of the month, the bailee will be chargeable; because he has made use of the horse contrary to the trust he was lent to him under; and it may be, if the horse had been used no otherwise than he was lent, that accident would not have befallen him. This is mentioned in Bracton ubi supra: his words are: ‘Is autem cui res aliqua utenda datur, re obligatur, quae commodata est, sed magna differentia est inter mutuum et commodatum; quia is qui rem mutuam accepit, ad ipsam restituendam tenetur, vel ejus pretium, si forte incendio, ruina, naufragio, aut latronum vel hostium incursu, consumpta fuerit, vel deperdita, subtracta vel ablata. Et qui rem utendam accepit, non sufficit ad rei custodiam, quod talem diligentiam adhibeat, qualem suis rebus propriis adhibere solet, si alius earn diligentius potuit custodire; ad vim autem majorem, vel casus fortuitos non tenetur quis, nisi culpa sua intervenerit. Ut si rem sibi commodatum domi, secum detulerit cum peregre profectus fuerit, et Mam incursu hostium vel praedonum, vel naufragio, amiserit, non est dubium quin ad rei restitutionem teneatur.’ I cite this author, though I confess he is an old one, because his opinion is reasonable, and very much to my present purpose, and there is no authority in the law to the contrary. But if the bailee put this horse in his stable, and he were stolen from thence, the bailee shall not be answerable for him. But if he or his servant leave the house or stable doors open, and the thieves take the opportunity of that and steal the horse, he will be chargeable; because the neglect gave the thieves the occasion to steal the horse. Bracton says, the bailee must use the utmost care: but yet he shall not be chargeable, where there is such a force as he cannot resist.

As to the third sort of bailment, scilicet locatio, or lending for hire, in this case the bailee is also bound to take the utmost care, and to return the goods when the time of the hiring is expired. And here again I must recur to my old author, fol. 62, b.: ‘Qui pro usu vestimentorum auri vel argenti, vel alterius ornamenti, vel jumenti, mercedem dederit vel promiserit, talis ab eo desideratur custodia, qualem diligentissimus paterfamilias suis rebus adhibet, quam si praestiterit et rem aliquo casu amiserit, ad rem restituendam non tenebitur. Nec sufjficit aliquem talem diligentiam adhibere, qualem suis rebus propriis adhiberit, nisi talem adhibuerit, de qua superius dictum est.’ From whence it appears, that if goods are let out for a reward, the hirer is bound to the utmost diligence, such as the most diligent father of a family uses; and if he uses that, he shall be discharged. But every man, how diligent soever he be, being liable to the accident of robbers, though a diligent man is not so liable as a careless man, the bailee shall not be answerable in this case, if the goods are stolen.

As to the fourth sort of bailment, viz. vadium, or a pawn, in this I shall consider two things; first, what property the pawnee has in the pawn or pledge; and secondly, for what neglects he shall make satisfaction. As to the first, he has a special property, for the pawn is a securing to the pawnee, that he shall be repaid his debt, and to compel the pawnor to pay him. But if the pawn be such as it will be the worse for using, the pawnee cannot use it, as clothes, &c.; but if it be such as will be never the worse, as if jewels for the purpose were pawned to a lady, she might use them: but then she must do it at her peril, for whereas, if she keeps them locked up in her cabinet, if her cabinet should be broke open, and the jewels taken from thence, she would be excused; if she wears them abroad, and is there robbed of them, she will be answerable. And the reason is, because the pawn is in the nature of a deposit, and, as such, is not liable to be used. And to this effect is Ow. 123. But if the pawn be of such a nature, as the pawnee is at any charge about the thing pawned, to maintain it, as a horse, cow, &c, then the pawnee may use the horse in a reasonable manner, or milk the cow, &c, in recompense for the meat. As to the second point, Bracton, 99. b. gives you the answer:—‘Creditor, qui pignus accepit, re obligatur, et ad Mam restituendam tenetur; et cum hujusmodi res in pignus data sit utriusque gratia, scilicet debitoris, quo magis ei pecunia crederetur, et creditoris quo magis [ei] in tuto sit creditum, sufficit ad ejus rei custodiam diligentiam exactam adhibere, quam si praestiterit et rem casu amiserit, securus esse possit, nec impedietur creditum petere.’ In effect, if a creditor takes a pawn, he is bound to restore it upon the payment of the debt; but yet it is sufficient, if the pawnee use true diligence, and he will be indemnified in so doing, and notwithstanding the loss, yet he shall resort to the pawnor for his debt. Agreeable to this is 29 Ass. 28, and Southcote’s case. But, indeed, the reason given in Southcote’s case, is, because the pawnee has a special property in the pawn. But that is not the reason of the case; and there is another reason given for it in the book of Assize, which is indeed the true reason of all these cases, that the law requires nothing extraordinary of the pawnee, but only that he shall use an ordinary care for restoring the goods. But, indeed, if the money for which the goods were pawned be tendered to the pawnee before they are lost, then the pawnee shall be answerable for them: because the pawnee, by detaining them after the tender of the money, is a wrongdoer, and it is a wrongful detainer of the goods, and the special property of the pawnee is determined. And a man that keeps goods by wrong must be answerable for them at all events; for the detaining of them by him is the reason of the loss. Upon the same difference as the law is in relation to pawns, it will be found to stand in relation to goods found.

As to the fifth sort of bailment, viz. a delivery to carry or otherwise manage, for a reward to be paid to the bailee, those cases are of two sorts; either a delivery to one that exercises a public employment, or a delivery to a private person. First, if it be to a person of the first sort, and he is to have a reward, he is bound to answer for the goods at all events. And this is the case of the common carrier, common hoyman, master of a ship, &c.: which case of a master of a ship was first adjudged, 26 Car. 2, in the case of Mors v. Slue, Raym. 220, 1 Vent. 190, 238. The law charges this person thus entrusted to carry goods, against all events, but acts of God, and of the enemies of the king. For though the force be never so great, as if an irresistible multitude of people should rob him, nevertheless he is chargeable. And this is a politic establishment, contrived by the policy of the law for the safety of all persons, the necessity of whose affairs oblige them to trust these sorts of persons, that they may be safe in their ways of dealing; for else these carriers might have an opportunity of undoing all persons that had any dealings with them, by combining with thieves, &c, and yet doing it in such a clandestine manner as would not be possible to be discovered. And this is the reason the law is founded upon in that point. The second sort are bailies, factors, and such like. And though a bailie is to have a reward for his management, yet he is only to do the best he can; and if he be robbed, &c, it is a good account. And the reason of his being a servant, is not the thing; for he is at a distance from his master, and acts at discretion, receiving rents and selling corn, &c. And yet if he receives his master’s money, and keeps it locked up with a reasonable care, he shall not be answerable for it, though it be stolen. But yet this servant is not a domestic servant, nor under his master’s immediate care. But the true reason of the case is, it would be unreasonable to charge him with a trust; farther than the nature of the thing puts it in his power to perform it. But it is allowed in the other cases, by reason of the necessity of the thing. The same law of a factor.

As to the sixth sort of bailment, it is to be taken, that the bailee is to have no reward for his pains, but yet that by his ill management the goods are spoiled. Secondly, it is to be understood, that there was a neglect in the management. But thirdly, if it had appeared that the mischief happened by any person that met the cart in the way, the bailee had not been chargeable. As if a drunken man had come by in the streets, and had pierced the cask of brandy; in this case the defendant had not been answerable for it, because he was to have nothing for his pains. Then the bailee having undertaken to manage the goods, and having managed them ill, and so by his neglect a damage has happened to the bailor, which is the case in question, what will you call this? In Bracton, lib. 3. 100, it is called mandatum. It is an obligation which arises ex mandato. It is what we call in English an acting by commission. And if a man acts by commission for another gratis, and in the executing his commission behaves himself negligently, he is answerable. Vinnius, in his commentaries upon Justinian, lib. 3. tit. 27, 684, defines mandatum to be contractus quo aliquid gratuito gerendum committitur et accipitur. This undertaking obliges the undertaker to a diligent management. Bracton, ubi supra, says, ‘Contrahitur etiam obligatio non solum scripto et verbis, sed et consensu, sicut in contractibus bonae fidei; ut in emptionibus, venditionibus, locationibus, conductionibus, societatibus et mandatis.’ I don’t find this word in any other author of our law, besides in this place in Bracton, which is a full authority, if it be not thought too old. But it is supported by good reason and authority.

The reasons are, first, because, in such a case, a neglect is a deceit to the bailor. For, when he entrusts the bailee upon his undertaking to be careful, he has put a fraud upon the plaintiff by being negligent, his pretense of care being the persuasion that induced the plaintiff to trust him. And a breach of a trust undertaken voluntarily will be a good ground for an action. 1 Roll. Abr. 10. 2 Hen. 7. 11. a strong case to this matter. There the case was an action against a man who had undertaken to keep an hundred sheep, for letting them be drowned by his default. And there the reason of the judgment is given, because when the party has taken upon him to keep the sheep, and after suffers them to perish in his default; inasmuch as he has taken and executed his bargain, and has them in his custody, if, after, he does not look to them, an action lies. For here is his own act, viz., his agreement and promise, and that after broke of his side, that shall give a sufficient cause of action.

But, secondly, it is objected, that there is no consideration to ground this promise upon, and therefore the undertaking is but nudum pactum. But to this I answer, that the owner’s trusting him with the goods is a sufficient consideration to oblige him to a careful management. Indeed if the agreement had been executory, to carry these brandies from the one place to the other such a day, the defendant had not been bound to carry them. But this is a different case, for assumpsit does not only signify a future agreement, but in such a case as this it signifies an actual entry upon the thing, and taking the trust upon himself. And if a man will do that, and miscarries in the performance of his trust, an action will lie against him for that, though nobody could have compelled him to do the thing. The 19 Hen. 6. 49. and the other cases cited by my brothers, show that this is the difference. But in the 11 Hen. 4. 33. this difference is clearly put, and that is the only case concerning this matter which has not been cited by my brothers. There the action was brought against a carpenter, for that he had undertaken to build the plaintiff a house within such a time, and had not done it, and it was adjudged the action would not lie. But there the question was put to the court—what if he had built the house unskilfully ?—and it is agreed in that case an action would have lain. There has been a question made, If I deliver goods to A., and in consideration thereof he promise to re-deliver them, if an action will lie for not re-delivering them; and in Telv. 4, judgment was given that the action would lie. But that judgment was afterwards reversed; and, according to that reversal, there was judgment afterwards entered for the defendant in the like case, Yelv. 128. But those cases were grumbled at; and the reversal of that judgment in Yelv. 4, was said by the judges to be a bad resolution; and the contrary to that reversal was afterwards most solemnly adjudged in 2 Cro. 667. Tr. 21 Jac. 1. in the King’s Bench, and that judgment affirmed upon a writ of error. And yet there is no benefit to the defendant, nor no consideration in that case, but the having the money in his possession, and being trusted with it, and yet that was held to he a good consideration. And so a bare being trusted with another man’s goods must be taken to be a sufficient consideration, if the bailee once enter upon the trust, and take the goods into his possession. The declaration in the case of Mors v. Slue, was drawn by the greatest drawer in England in that time; and in that declaration, as it was always in all such cases, it was thought most prudent to put in, that a reward was to be paid for the carriage. And so it has been usual to put it in the writ, where the suit is by original. I have said thus much in this case, because it is of great consequence that the law should be settled in this point; but I don’t know whether I may have settled it, or may not rather have unsettled it. But however that happen, I have stirred these points, which wiser heads in time may settle. And judgment was given for the plaintiff.” (quoted in Goddard 1904: 1–10).

BIBLIOGRAPHY
Goddard, Edwin C. 1904. Selected Cases on the Law of Bailments and Carriers: Including the Quasi-Bailment Relations of Carriers of Passengers and Telegraph and Telephone Companies as Carriers. Callaghan, Chicago.

Rothbard, Murray N. 2008. The Mystery of Banking (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

A Critique of Murray Rothbard on the Origins and Legal Basis of Fractional Reserve Banking

A very good post is available here on a blog called “Economicreflections”:

“The Legal Nature of the Relationship between Banker and Customer in Old English Law,” Economicreflections, 30 July, 2014.

The author goes into detail on the legal issues of mutuum and bailment, and the lack of evidence for Rothbard’s views.

The author makes a crucial point here about the early cases in the 19th century cited by Rothbard, but largely misunderstood by him:

“Why, then, do the first cases cited in support of the proposition that a banker’s obligation to his customer is a debt (and has nothing to do with bailment) all date from the 19th century? A first, simple, explanation is that it is very difficult to find case law in support of a proposition that is universally accepted and regarded as self-evident. If that is the case, no-one bothers to challenge it and the courts have no occasion to rule on it. I would contend that this was the case of the proposition according to which a banker’s obligation to his customer is a debt and does not result from a bailment. Indeed, a closer analysis of the three 19th century cases that seem to have definitely resolved this matter reveals that, at best, there was only an indirect link between that proposition and what was at issue in those cases.”
“The Legal Nature of the Relationship between Banker and Customer in Old English Law,” Economicreflections, 30 July, 2014.

Some of the major 19th century cases are listed here:

(1) Carr v. Carr (1811);

(2) Devaynes v. Noble (1816);

(3) Sims v. Bond (1833);

(4) Parker v. Merchant (1843);

(5) Foley v. Hill and Others (1848).

I have discussed Carr v. Carr here, and Foley v. Hill here.

The author has a good discussion of Carr v. Carr (1811), Devaynes v. Noble (1816), and Foley v. Hill (1848).

The author also points out that the distinction between mutuum and bailment (depositum regulare) was already known and described as part of English law by the 13th century English legal writer Bracton (in volume 2 of De Legibus et Consuetudinibus Angliae).

One can add that Ranulf de Glanvill’s Tractatus de Legibus et Consuetudinibus Regni Angliae (c. 1188) also describes contracts of English law in language and concepts taken from Roman law:

“Debt* may arise either upon a Lending (mutuum), or a Sale (venditio), or a Borrowing (commodatum), or a Letting out (locatio), or a Deposit (depositum), or from some other just cause inducing a Debt.

A Debt of the first description arises, when one person entrusts another with any such thing as consists in Number, or Weight, or Measure. When one person so entrusts another, if he should receive back more than he lent, he commits Usury;” (Glanville 1900: 199–200).

* Glanvill seems to be using the word “debt” here in a broader legal sense of “obligation,” not just its narrow sense – LK.

So Glanville already in the 12th century also knows the mutuum and bailment contracts.

One minor quibble concerns the legal contract discussed by the author here:

“For example, if I knock on your door to borrow a cup of sugar for the cake I’m baking, I undertake to return to you a cup of sugar but, obviously, not the sugar itself that was lent (which will end up in my cake!). If I also borrow the cup containing the sugar, this will be a bailment, provided I undertake to return to you the very same cup.”
“The Legal Nature of the Relationship between Banker and Customer in Old English Law,” Economicreflections, 30 July, 2014.

I would suggest that if the cup is still the property of the person who lent it, this is better understood as what the Romans called commodatum (or a gratuitous “loan for use”), not bailment.

BIBLIOGRAPHY
Glanville, Ranulf de. 1900. A Translation of Glanville (trans. John Beames). J. Byrne & Co., Washington, D.C.

Foley versus Hill and the History of Fractional Reserve Banking

The British court case Foley versus Hill is another case relevant to the history of fractional reserve banking.

Here is the relevant record:

“FOLEY V. HILL and Others.

[#399]
1844: March 1, 14, 15.
In the case of a legal demand, a Court of Equity acts in obedience, and not merely by analogy, to the Statute of Limitations.
A banking firm, who, on opening an account with a customer, had agreed to allow him interest at 3 per cent on the balances which should from time to time be standing to his credit, set up the Statute of Limitations as a defence to a bill filed against them, by the customer, for an account. The account, as it stood in the bankers’ book, showed a considerable balance due to the Plaintiff, but there being no item in it, or evidence of any transaction connected with it, of a date within six years prior to the filing of the bill, nor any suggestion in the bill, that the bankers were bound, by the agreement or otherwise, to have actually entered the interest as it became due to the credit of the customer in the account, or that they had omitted so to do with a fraudulent intent, the defence was allowed to prevail.
An account between a banker and his customer, consisting of three items only and interest, held not to be a proper subject for a bill in equity.

The Defendants in the year 1829 carried on the business of bankers at Stourbridge, under the firm of Hill & Co. In the year 1834, the Defendant, Hill, retired from the business, which was thenceforth carried on by the other two Defendants under the firm of Bate and Robins.

The bill, which was filed on the 27th of January 1838, stated that, in the month of April 1829, the Plaintiff opened an account with Messrs. Hill and Co., and on the same day paid the sum of 6117l. 10s. into the bank, for which they sent him a receipt inclosed in a letter, in which they agreed to allow him interest at 3 per cent, per annum upon the balances from time to time in their hands. That at the time when that account was opened the Plaintiff and one Sir Edward Scott, who was his partner in working some collieries, kept a joint account at the same bank, which account was distinct from the Plaintiff’s private account, and related exclusively to the transactions of the colliery; and that between the month of April 1829 and the month of August 1834, when the joint account was closed, the agent of the collieries drew cheques half yearly against the joint account in favour of the Plaintiff in respect of his share of the profits of the colliery; and that the amounts of such cheques were on those occasions, carried to the credit of the Plaintiff’s private account. The bill further stated that during the same period Messrs. Hill and Co. paid various sums on account of the Plaintiff, which were placed to the debit of his private account; and that they had, in pursuance of their agreement, from time to time entered in their books, to the credit of the plaintiff on his private account interest, at 3 per cent upon the balance from time to time due to him. The bill then charged that the private account was still open and unsettled, and that it consisted of numerous items on each side, and could not be fairly adjusted except under the decree of a court of equity; and, after suggesting that the Defendants intended to rely on the Statute of Limitations, it contained various charges to the effect that the Defendants had, by correspondence between themselves and otherwise, recognized the private account as an open account, and the balance due thereon to the Plaintiff as a subsisting debt; but it contained no express charge that it was the duty of the bankers under the agreement to have regularly entered interest to the credit of the private account, or that if they had omitted to do so it was with a fraudulent intent.

The Defendants by their answer admitted the agreement to allow 3 per cent, on the balances from time to time in their hands on the Plaintiff’s private account; but they stated (and so it appeared from their books) that the only items of which that account consisted were the original deposit of 6117l. 10s. on the credit side, and two sums of 1700l. and 2000l. on the debit side, both being payments made in the year 1830; and that, though previously to and down to the 35th of December 1831, interest at 3 per cent on the balances from time to time due to the Plaintiff had been calculated and placed in the interest column of his private account in their books; the amount of Such interest had never been actually entered to the credit of such account, and that since the 25th of December 1831 no interest had ever been even calculated.

With respect to the cheques drawn upon the joint account, and the amount of which were alleged by the bill to have been placed to the Plaintiff’s credit in his private account, the Defendants, in a passage of their answer, which was read by the Plaintiff as evidence, stated that those cheques had always been paid to the agent who presented them, either in cash, or, when so required by him, by bills Upon the London correspondents of the bank, payable to the Plaintiff or to his London banker’s and that the amounts of such cheques were placed to the debit of the joint account; but that none of them had ever been entered in the private account, such transactions being, as the Defendants insisted, distinct, and independent transactions having no connection with the private account.

The Defendants admitted that the private account had never been balanced or settled with the Plaintiff; but they submitted whether, under the circumstances above stated, such account still remained open and unsettled, and they claimed the benefit of the stat 21 Jac. 1. c. 16., insisting that they had never, within six years before the filing of the bill, promised to pay the Plaintiff balance of such account, or to come to any account with him in respect thereof.

The only evidence adduced on the part of the Plaintiff of an express acknowledgment by the Defendants of the subsistence of the private account within the six years, consisted of two letters, written by one of the Defendants to another, but which the Lord Chancellor, as will be seen from his judgment, did not consider to amount to such acknowledgment.

On the hearing of the cause before the Vice-Chancellor of England, his Honor made the usual decree for an account, from which decree the Defendants appealed.

The appeal now coming on to be heard,

Mr. Stuart and Mr. G. Russell, for the Plaintiff, argued that the relation between a banker and his customer was not simply that of a debtor and creditor, but a confidential relation, which imposed on the former an obligation to keep the account according to the agreement made between the parties when the account was opened; and that the Defendants being in this case under an express engagement to allow interest at 3 per cent, on the balances from time to time in their hands, it was their duty to have entered such interest regularly to the credit of the Plaintiff’s account, which would have ousted the plea of the statute; and that to allow them, under such circumstances, to avail themselves of the statutes, would be to enable them to take advantage of their own wrong. That, they said, was the ground on which the Vice-Chancellor had expressly rested his decision; and they relied on the doctrine laid down by Sir Anthony Hart in Sterndale v. Hankinson, (a) ‘that pleas of the statute were allowed in Courts of Equity by analogy only, and to prevent stale demands; and that where the circumstances of a case were such as to make it against conscience to apply the rule founded on that analogy, the Court would not enforce it.’

Independently, however, of this point, they contended that the bill transactions which had arisen out of some of the cheques drawn in favour of the Plaintiff against the joint account, and several of which were admitted to have taken place within the six years, were private dealings between the Plaintiff and the bank, and ought to have been entered as such in his private account.

Mr. Bethell and Mr. K. Parker, for the Defendants, as to the relation between a banker and his customer, cited Devalues v. Noble ;(a) and, as to pleas of the statute in Courts of Equity, Hovenden v. Lord Annesley ;(b) and they insisted that, after leaving out of the case the transactions connected with the joint account, which they contended were wholly independent of the private account, the latter was no longer a proper subject for a suit in equity; as all that was required was a computation of what was due for principal and interest on the sum of 6117l. 10s., after deducting the two sums of 1700l. and 2000l, Dinwiddic v. Bailey ;(c) King v. Rossett.(d)

Mr. Stuart, in reply.

THE LORD CHANCELLOR.—The Defendants in this case car¬ried on the business of bankers at Stourbridge, under the firm of Hill and Co. The Plaintiff Foley deposited with them, in the year 1829, the sum of 6117l. 10s., and received from them the usual receipt; and in a note inclosing the receipt, they engaged to allow him 3 per cent, interest on the balances, which should from time exist in his favour on the account. Foley subsequently drew two cheques, at different times, for 1700l. and 2000l. upon this account. The latter of these cheques was drawn in July 1830. The Defendants en¬tered these payments, according to the usual custom, in a ledger, and also calculated interest on the balances up to December 1831. From that time there has been no payment in respect of the account; no entry in the books, no acknowledgment of debt. The Defendants, under these circumstances, set up the Statute of Limitations. And the question is, whether that is a valid de¬fence to the suit.

It is quite clear, that a banker is not to be considered a trustee for his customer in the legal sense of the term. Money advanced by a customer to a banker is a loan, and constitutes a debt. If it were necessary to refer to authorities in support of this propo¬sition, I might refer to Sims v. Bond,(a)in the Queen’s Bench, where it was laid down, that sums paid to the credit of a custo¬mer with his banker, though usually called deposits, are in truth loans to the banker. And that is in accordance with the doctrine of Sir Grant in Devaynes v. Noble. He says, ‘There is a fallacy in likening the dealings of a banker to the case of a deposit, to which, in legal effect, they have no sort of resemblance: money paid into a banker’s, becomes immediately a part of his general assets; and he is merely a debtor for the amount.’ And he lays down the same doctrine in Carr v. Carr.(b) Here, there was a loan by Foley to the defendants, to be repaid with interest at 3 per cent.: that was the simple transaction between them, and if this were a case at law, a plea of the Statute would be a sufficient answer, unless there were some special circumstances to take the case out of the Statute; and the only question therefore is, whe¬ther that defence is to have the same effect in a court of equity.

Now, the doctrine on that point is clearly and satisfactorily stated by Lord Redesdale in the case referred to at the bar, of Hovenden v. Lord Annesley.{c) He says, ‘it is a mistake in point of language to say, that Courts of Equity act merely by analogy to the statute; they act in obedience to it—that is, as as [sic] he afterwards explains himself, ‘upon all legal titles and le¬gal demands’—(and this, it will be observed, is a legal demand.) ‘I think,’ he adds, ‘the statute must be taken virtually to in¬clude courts of equity: for when the legislature, by statute, limi¬ted the proceedings at law, in certain cases, and provided no ex¬press limitations for proceedings in equity, it must be taken to have contemplated that equity followed the law; and, therefore, it must be taken to have virtually enacted in the same cases a limitation for courts of equity also.’ If, therefore, the Statute would in this case be a good defence at law, (I am now on the general question without reference to any specialty,) it constitutes a sufficient answer here: and the only remaining question is, whether there are any special circumstances to take the present case out of the statute.

[His Lordship then adverted to the letters above referred to, and to the transactions connected with the joint or colliery account; and, after stating his opinion, that neither the one nor the other amounted to an acknowledgment that the debt was due or the account open, he proceeded as follows:—]

It is further said, however, that it was the duty of the Defendants, as bankers, or by reason of the mode in which they usually conducted their business, to have entered the interest half-yearly in their books, on the balance remaining due: that if such entries had been regularly made, the case would have been taken out of the statute; and that having neglected to do this, they ought not to be allowed to profit from their neglect by setting up the Statute of Limitations as a defence founded on their own omission. But no such question is raised by the bill, no such equity is insisted upon or suggested. The bill is confined entirely to the statement of subsequent transactions for the purpose of taking the case out of the statute.

But, assuming it to have been the duty of the bankers to keep the account between them and the Plaintiff, and that the neglect of this duty had been made matter of complaint in the bill, what is there to shew that it was their duty to keep the account in any particular form? In the account produced, the interest is calculated upon the balance of the principal money due after the last payment, and for a year from that time. The balance remaining afterwards unchanged, the subsequent interest would be a matter of easy calculation whenever it might be necessary to make it for any purpose.

If it is meant to be said, that the Defendants ceased to enter the interest for a fraudulent purpose, that should have been made matter of charge in the Plaintiff’s bill; but there is no such suggestion, the only facts relied upon to meet the defence on the statute being, as I have already stated, the subsequent transactions between the parties.

I think, therefore, the Statute of Limitations is a sufficient defence, as the record is at present constituted.

But there is another point which is of great importance to the practice of the Court. This bill is filed for an account: that is the sole object of it. Now the account consists of three items only; one on one side and two on the other. I am of opinion that such an account as that is not a proper subject for a bill in this Court: it is a case for an action for money had and received. A party has no right to come here upon a simple transaction of this kind, when justice may be administered in a more simple way and at less expense in a court of law. When this objection was made before the Vice-Chancellor, he stated that two actions would have been necessary in a court of law, because one partner had left the firm; but that was a misapprehension: for it appears that Hill was a partner up to the date of the last transaction; and if that fact had been present to the mind of the Vice-Chancellor, he would, probably, on principle, have come to the same conclusion upon the last point that I have.

The bill, therefore ought to be dismissed, and, on the last ground, with costs.
(Phillips 1848: 398–407).

As we can see, the primary issue in this case appears to have been the relevance of the “statute of limitations” to the defence of the defendants in the case.

With respect to the nature of the banking contract between client and banker, the important passage is here:

“It is quite clear, that a banker is not to be considered a trustee for his customer in the legal sense of the term. Money advanced by a customer to a banker is a loan, and constitutes a debt. If it were necessary to refer to authorities in support of this propo¬sition, I might refer to Sims v. Bond,(a)in the Queen’s Bench, where it was laid down, that sums paid to the credit of a custo¬mer with his banker, though usually called deposits, are in truth loans to the banker. And that is in accordance with the doctrine of Sir Grant in Devaynes v. Noble. He says, ‘There is a fallacy in likening the dealings of a banker to the case of a deposit, to which, in legal effect, they have no sort of resemblance: money paid into a banker’s, becomes immediately a part of his general assets; and he is merely a debtor for the amount.’ And he lays down the same doctrine in Carr v. Carr.(b)”

This merely confirms what had been accepted in the Carr versus Carr case, and even in that case there is no evidence that the judge in the case did anything but recognise what had been accepted legal and business practice.

BIBLIOGRAPHY
Phillips, Thomas Jodrell. 1848. Reports of Cases Argued and Determined in the High Court of Chancery during the Time of Lord Chancellor Lyndhurst: With a Few during the Time of Lord Chancellor Cottenham. Vol. I. 1841–1847. Banks, Gould and Co. New York.

John Quiggin on Apriorism in Austrian Economics

John Quiggin has an excellent post here on the apriorist method in Austrian economics:

John Quiggin, “Austrian Economics and Flat Earth Geography,” John Quiggin, July 28th, 2014.

Also posted here:
John Quiggin, “Austrian Economics and Flat Earth Geography,” Out of the Crooked Timber, July 27, 2014.

One minor point here is that John Quiggin says that apriorist praxeology was “also endorsed, in a more qualified fashion, by Hayek.”

Actually, Hayek rejected Mises’ apriorism and adopted a – more or less – Popperian method for economics.

We know this because Hayek said so explicitly in a letter to Terence W. Hutchison dated 15 May, 1983. In this, Hayek stated:

“I had never accepted Mises’ a priorism. .... Certainly 1936 was the time when I first saw my distinctive approach in full clarity – but at the time I felt it that I was merely at last able to say clearly what I had always believed – and to explain gently to Mises why I could not ACCEPT HIS A PRIORISM”. (quoted in Caldwell 2009: 323–324).

In fact, in 1937 Hayek had published an article called “Economics and Knowledge” where he criticised Mises’ apriorism; Hayek also appears to have moved closer to Popperian ideas on methodology in later years:

“I became one of the early readers [sc. of Karl Popper’s Logik der Forschung, 1934]. It had just come out a few weeks before …. And to me it was so satisfactory because it confirmed this certain view I had already formed due to an experience very similar to Karl Popper’s. Karl Popper is four or five years my junior; so we did not belong to the same academic generation. But our environment in which we formed our ideas was very much the same. It was very largely dominated by discussion, on the one hand, with Marxists and, on the other hand, with Freudians. Both these groups had one very irritating attribute: they insisted that their theories were, in principle, irrefutable. Their system was so built up that there was no possibility – I remember particularly one occasion when I suddenly began to see how ridiculous it all was when I was arguing with Freudians, and they explained, ‘Oh, well, this is due to the death instinct.’ And I said, ‘But this can’t be due to the [death instinct].’ ‘Oh, then this is due to the life instinct.’ … Well, if you have these two alternatives, of course there’s no way of checking whether the theory is true or not. And that led me, already, to the understanding of what became Popper’s main systematic point: that the test of empirical science was that it could be refuted, and that any system which claimed that it was irrefutable was by definition not scientific. I was not a trained philosopher; I didn’t elaborate this. It was sufficient for me to have recognized this, but when I found this thing explicitly argued and justified in Popper, I just accepted the Popperian philosophy for spelling out what I had always felt. Ever since, I have been moving with Popper.” (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 18–19).

So Hayek lumped in apriorism in economics with Marxism and Freudianism!

It is also clear that Mises disliked Popper and Popper’s approach to epistemology in his seminal book Logik der Forschung (1934; later published in English as The Logic of Scientific Discovery, 1959):

“Popper was familiar with the early [sc. socialist] calculation debate – Polanyi’s seminar discussed it – but not much taken by it. He knew of Mises and his circle, but it is unlikely that he read Mises closely. He strongly disliked subjectivism and libertarianism. He ‘first met Mises early in 1935 in Vienna, owing to his interest in my first book. . . . Both he and I were aware of a strong opposition between our views in the field of the theory of knowledge and methodology. Mises saw me as a dangerous opponent.’” (Hacohen 2000: 478).

So it could not be more clear: Mises saw Popper “as a dangerous opponent”; but Hayek, rejecting apriorism, essentially endorsed Popper’s views on epistemology and method.

Nevertheless, Quiggin’s point that Misesian apriorist praxeology as a method for economics is untenable is right.

Mises needed synthetic a priori knowledge and a type of Kantian epistemology to justify his praxeology, but the arguments for synthetic a priori knowledge are unconvincing and must be rejected. Misesian praxeology does not yield universally and necessarily true empirical statements about economic reality.

Furthermore, not even the human action axiom can be known a priori: it is clearly a synthetic a posteriori proposition.

In addition, the very idea that Mises in Human Action succeeded in deducing all his theories by deductive logic is manifestly untrue, and Misesians and Rothbardians have never answered the challenge of George J. Schuller to set out Human Action in a formal symbolic form in which all axioms, premises, and deductions are shown formally and proven.

Even modern Kantians have rejected Mises’ attempt to ground his praxeology on Kant’s epistemology.

There has also arisen amongst modern Austrians a feeble and ignorant belief that Mises was not really using a synthetic a priori epistemology. This is simply untrue, as I have shown here and here, and even if it were true and praxeology were simply analytic a priori, then it would follow logically that praxeology cannot give necessary truth about the real world.

Further Reading
“Limits of the Human Action Axiom,” February 28, 2011.

“Hayek on Mises’ Apriorism,” May 23, 2011.

“What is the Epistemological Status of Praxeology and the Action Axiom?,” July 27, 2013.

“Barrotta’s Kantian Critique of Mises’s Epistemology,” July 28, 2013.

“David Friedman versus Robert Murphy,” August 4, 2013.

“Mises Fails Philosophy of Mathematics 101,” August 30, 2013.

“Bob Murphy All At Sea on Geometry and Economic Epistemology,” August 31, 2013.

“Mises’s Non Sequitur on synthetic a priori Knowledge,” September 2, 2013.

“Hoppe’s Caricature of Empiricism,” September 10, 2013.

“Hoppe on Euclidean Geometry,” September 11, 2013.

“Robert Murphy gets Mises’s Epistemology Wrong,” September 13, 2013.

“Hoppe on Euclidean Geometry, Part 2,” September 14, 2013.

“Mises on Kant and Praxeology,” September 15, 2013.

“Mises was Confused about the Analytic–Synthetic Distinction,” September 15, 2013.

“Schuller’s Challenge to Misesian Apriorists has never been answered,” December 7, 2013.

“Mises versus Ayer on Analytic Propositions and a priori Reasoning,” March 16, 2014.

“David Gordon on Praxeology and the Austrian Method: A Critique,” March 13, 2014.

“Why Mises’s Praxeological Theories are not Necessarily True of the Real World,” March 15, 2014.

“Mises and Empiricism,” April 17, 2014.

“Why Should we reject the Existence of Synthetic a priori Knowledge?,” May 23, 2014.

BIBLIOGRAPHY
Caldwell, B. 2009. “A Skirmish in the Popper Wars: Hutchison versus Caldwell on Hayek, Popper, Mises, and methodology,” Journal of Economic Methodology 16.3: 315–324.

Hacohen, Malachi Haim. 2000. Karl Popper, The Formative Years, 1902–1945: Politics and Philosophy in Interwar Vienna. Cambridge University Press, Cambridge, UK and New York.

Hayek, F. A. 1937. “Economics and Knowledge,” Economica n.s. 4.13: 33–54.

Nobel Prize-Winning Economist: Friedrich A. von Hayek. Interviewed by Earlene Graver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen A. Alchian, Robert Chitester, Regents of the University of California, 1983.
https://archive.org/details/nobelprizewinnin00haye

Endogenous Money Debate

That is, in the latest issue of Review of Keynesian Economics (ROKE) between Steve Keen, Brett Fiebiger, Marc Lavoie and Tom Palley.

Matias Vernengo has a nice summary of it here:

Matias Vernengo, “A Debate on Endogenous Money and Effective Demand: Keen, Fiebiger, Lavoie and Palley,” Naked Keynesianism, July 25, 2014.

Two of the papers are also available for download:

Keen, Steve. 2014. “Endogenous Money and Effective Demand,” Review of Keynesian Economics 2.3: 271–291
http://www.elgaronline.com/downloadpdf/journals/roke/2-3/roke.2014.03.01.xml

Lavoie, Marc. 2014. “A Comment on ‘Endogenous Money and Effective Demand’: A Revolution or a Step Backwards?,” Review of Keynesian Economics 2.3: 321–332.
http://www.elgaronline.com/downloadpdf/journals/roke/2-3/roke.2014.03.04.xml

Matias Vernengo makes the point that Schumpeter’s contributions to economics are overrated: for example, his view of trade cycles is basically like the real business cycle theory.

How to Think of the Range of Assets Subject to Liquidity Preference

To follow up on Philip Pilkington’s posts on liquidity preference.

I propose the following table as a preliminary way of conceptualising the range of assets subject to liquidity preference.

At the top, we start from the least liquid assets and move down the list to the most liquid asset (physical currency or high-powered money held as reserves at a central bank).

One can quibble about the order of some of the assets at the top and middle (such as stocks and shares), but a rise in liquidity preference involves investors selling off or shunning purchases of assets at the top of the list and moving into assets at the bottom.

For Keynes, a rising liquidity preference lowers demand for less liquid/illiquid assets and lowers their price (raising their yields), while it raises the prices of liquid assets (lowering yields).

It is also important to note that in the terminology of financial markets and financial market theory, the word “cash” is often taken to mean:

(1) physical currency (notes and coins) or reserves, or

(2) demand deposits, checking accounts, transactions accounts, or savings accounts, or

(3) short-term, liquid government bills/bonds, or

(4) short-term, liquid money market funds.

Further Reading
Philip Pilkington, “Keynes’ Liquidity Preference Trumps Debt Deflation in 1931 and 2008?,” Fixing the Economists, February 24, 2014.

Philip Pilkington, “What is a Liquidity Trap?,” Fixing the Economists, July 4, 2013.

Philip Pilkington, “Financial Markets in Keynesian Macroeconomic Theory 101,” Fixing the Economists, July 24, 2014.

Philip Pilkington, “Paul Krugman Does Not Understand the Liquidity Trap,’” Fixing the Economists, July 23, 2014.

BIBLIOGRAPHY
Kelton, S. 2012. “Liquidity Preference,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 372–378.

Liquidity Preference and the Zero-Lower Bound versus the Liquidity Trap

Philip Pilkington has two excellent posts here:

Philip Pilkington, “Financial Markets in Keynesian Macroeconomic Theory 101,” Fixing the Economists, July 24, 2014.

Philip Pilkington, “Paul Krugman Does Not Understand the Liquidity Trap,’” Fixing the Economists, July 23, 2014.

The first deals with liquidity preference and the definition of “cash” as understood in financial market theory.

The second discusses the difference between the zero-lower bound versus the “liquidity trap” as defined by Keynes and the New Keynesians.

This is what Keynes had to say in the General Theory about the liquidity trap:

“There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto. Indeed, owing to the unwillingness of most monetary authorities to deal boldly in debts of long term, there has not been much opportunity for a test. Moreover, if such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest” (Keynes 1964 [1936]: 207).

Keynes said that he knew “of no example of … [sc. the liquidity trap] hitherto.”

Paul Davidson explains the old neoclassical synthesis view of the liquidity trap:

“…Old Keynesians claimed that, at some low, but positive, interest rate, the demand curve for speculative money balances becomes infinitely elastic (horizontal). This horizontal segment of the speculative demand curve was designated the liquidity trap by Old Keynesians such as Paul Samuelson and James Tobin. These mainstream Old Keynesians made the liquidity trap the hallmark of what Samuelson labeled Neoclassical Synthesis Keynesianism. If the economy is enmeshed in the liquidity trap, then Old Keynesians argued that the Monetary Authority is powerless to lower the rate of interest to stimulate the economy no matter how much the central bank exogenously increased the supply of money. This view of the impotence of monetary policy was succinctly summarized in the motto ‘you can’t push on a string.’ The liquidity trap implied that monetary policy would be powerless to stimulate the economy if it fell into recession. These Old Keynesians, therefore, proclaimed that deficit spending fiscal policy was the only policy action available to pull an economy out of a recession. This faith in deficit spending as the only solution for recession became the policy theme for ‘Keynesians’, even though Keynes's speculative motive analysis denies the existence of a ‘liquidity trap’....

In the decade after the Second World War, econometricians searched in vain to demonstrate the existence of a liquidity trap (that is, a horizontal segment of the speculative demand for money) where monetary policy could not affect the interest rate.” (Davidson 2002: 95).

It seems that the liquidity trap as defined by Keynes is not something that an economy actually experiences.

There seems to be some confusion here.

If we go back to the crucial passage:

“There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto. Indeed, owing to the unwillingness of most monetary authorities to deal boldly in debts of long term, there has not been much opportunity for a test. Moreover, if such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest” (Keynes 1964 [1936]: 207).

Some questions:

(1) what did Keynes mean by the “interest rate”? Did he mean the base rate, or the yield on long term debt, or interest rates in the broadest sense to include the base rate and yields on short and long term debt?

(2) what did Keynes mean by “cash”? Did he mean, as it apparently does in modern financial market theory,

(1) physical currency, such notes and coins in circulation;
(2) demand deposit and demand deposit-like accounts (checking accounts, transactions accounts, savings accounts);
(3) short-term, liquid money market funds, and
(4) short-term, liquid government bills/bonds?

Further Reading
Philip Pilkington, “What is a Liquidity Trap?,” Fixing the Economists, July 4, 2013.

BIBLIOGRAPHY
Davidson, P. 2002. Financial Markets, Money, and the Real World. Edward Elgar, Cheltenham.

Keynes, J. M. 1964 [1936]. The General Theory of Employment, Interest, and Money. Harvest/HBJ Book, New York and London.

Mutuum versus Bailment in Banking

From an early 19th century treatise on bailment law:

“In ordinary cases of deposits of money with banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded. But persons are sometimes in the habit of making, what is called, a special deposit of money or bills in a bank, where the specific money, as silver or gold coin, or bills, are to be restored, and not an equivalent. In such cases the transaction is a genuine deposit; and the banking company has no authority to use the money so deposited, but is bound to return it in individuo to the party.” (Story 1832: 66).

The two legal contracts here are as follows:

(1) mutuum (sometimes called faenus/fenus when interest was part of the contract [Buckland 1925: 273]) or loan for consumption, in which ownership of the thing lent is transferred from creditor to debtor, and only something of the same quality, type and quantity is repaid.

(2) depositum regulare or bailment (and also called special deposit), in which a person retains ownership of the thing given to another person for safekeeping.

These legal concepts go right back to ancient Roman law and were known in the Middle Ages.

Fractional reserve banking normally involves the mutuum contract (and a variant on the mutuum called the “irregular deposit” or depositum irregulare) and, when banking on fractional reserves became important in medieval and early modern Europe, this was the primary contract used between bankers and their clients, not that of bailment (even though no doubt such bailment contracts were made too).

This is confirmed by the evidence of some of the earliest British goldsmiths’ notes.

These must be understood as IOUs or negotiable credit/debt instruments payable on demand (though sometimes with receipt of the initial amount left with the banker), with the statement “I promise to repay upon demand ...,” which explicitly demonstrates to us that these were IOUs or debt records, not certificates of bailment (Selgin 2011: 11).

An early example of a goldsmiths note is one issued by the London banker Feild Whorwood in 1654. This is both a receipt for the sum delivered to the banker (but not a certificate of bailment) and, without any doubt, a promissory note:

“Recd [i.e., received], ye [the] 16th [December] 1654 of Sam Tofte the some [sum] of Twenty five pounds w[hi]ch I promise to repay upon Demand I say R[eceived]
P[er] me*
Feild Whorwood
interest of both £2-05-0.” (Melton 1986: 101).

* = by me.

The nature of the contract entered into by Sam Tofte (the holder of the bank account) and the banker Feild Whorwood is made perfectly clear to us by the words of the banker: “I promise to repay upon Demand ....”

This was a receipt of money to the banker given by Sam Tofte as a loan or mutuum, and one re-payable on demand, with interest. It was no bailment contract.

The idea that the earliest goldsmiths were only engaged in bailment and that fractional reserve banking simply arose by fraud is not supported by the historical evidence.

BIBLIOGRAPHY
Buckland, W. W. 1925. A Manual of Roman Private Law. Cambridge University Press, Cambridge.

Melton, Frank T. 1986. Sir Robert Clayton and the Origins of English Deposit Banking, 1658–1685. Cambridge University Press, Cambridge.

Selgin, G. “Those Dishonest Goldsmiths,” revised January 20, 2011
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709

Story, Joseph. 1832. Commentaries on the Law of Bailments, with Illustrations from the Civil and the Foreign Law. Hilliard and Brown, Cambridge.

Carr versus Carr (1811) and the History of Fractional Reserve Banking

Updated

Carr versus Carr was a case heard in the British Court of Chancery on November 30, 1811, and related to the legal status of a “deposit” of money at a bank that had been made by a testator who had died.

Unfortunately, the details of this case and its significance are subject to gross distortion and misunderstanding by anti-fractional reserve banking libertarians and Austrians (Rothbard 1994: 41; Rothbard 2008: 91–92; Huerta de Soto 2012: 125, n. 10). Their interpretations of it – and the history of fractional reserve banking – are mostly a product of their ignorance and lurid imaginations.

Here are some basic details of the case:

Carr vs. Carr
Date: November 30, 1811.

The Judge (acting as Master of the Rolls): Sir William Grant (who held the office from 1801 to 1817).

The Testator: a man who bequeathed to the plaintiff “whatever debts might be due to him (the Testator) from the Plaintiff or others, at the time of his death.” The Testator then gave the residue of his personal estate to the Defendant.

Defendant: Carr. The defendant argued that the bank balance was not a debt due to the plaintiff.

Plaintiff: Carr. He went to court to defend his right to the bank balance as due to him as a debt owed by the bank to the testator, and which was now rightfully his by the provision of the will.

Lawyers for the Plaintiff: Sir S. Romilly and Bell.

Lawyers for the Defendant: Hart and Wetherell.

First, let us look at the complete record of the case as recorded in John Herman Merivale’s Reports of Cases Argued and Determined in the High Court of Chancery: Commencing in Michaelmas Term, 1815. Vol. 1. 1815–1816 (1817):

[p. 541] ....
“CARR v. CARR, Rolls, Nov. 30, 1811
The Testator bequeathed to the Plaintiff ‘whatever debts might be due to him (the Testator) from the Plaintiff or others, at the time of his death;’ and gave the residue of his personal estate to the Defendant.

Besides other debts due to the Testator at the time of his death, his bankers had in their hands a bill of exchange, drawn by the Plaintiff, and made payable to the Testator, which had been so drawn on account of a debt then due from the Plaintiff to the Testator, and which had not yet become payable. The Testator had also a cash balance due to him on his banker’s account. The questions were, Whether this [p. 542] bill of exchange, and the said cash balance, or either of them, passed to the Plaintiff by the above bequest.

Sir S. Romilly and Bell, for the Plaintiff, (a)
Contended that they clearly passed; that they were choses in action [sc. intangible property or rights that can be enforced by legal action in a court of law – LK], and could only be recovered by action, and therefore must be considered as debts.

Hart and Wetherell for the Defendant,
Submitted that the bill of exchange, under these circumstances, most be considered as having been delivered to the bankers by the Testator as money, and that it was therefore to be considered as if in his own possession. And, as so the cash balance, they contended that this could not be considered as a debt in the contemplation of the Testator; that, though, strictly speaking, a debt, yet it was, in the common opinion of mankind, considered as money deposited with the banker; that in construction of Wills, words ought not to be taken according to their strict legal meaning, but according to the intention of the Testator; and that, in this case, the Testator could not have conceited it to be a debt.

Sir S. Romilly in reply.
This is clearly a debt; it might be proved under a commission of bankrupt; or a commission might be taken out upon it; It would not pass under a bequest of all the Testator’s ready money, and therefore must clearly pass as a debt.

(a) The arguments and judgment, Ex relatione.

[p. 543]....
The Master of the Rolls
Was clear that the bill of exchange passed. He had entertained some doubt on the other point; but thought that the money which had been paid into the banker’s ought also to pass as a debt. This was not a depositum. A sealed bag of money might, indeed, be a depositum; but money paid in, generally, to a banker could not be so considered. He observed, that money had no ear-mark; that, when money is paid into a banker’s, he always opens a debtor and creditor account with the payor; The banker employs the money himself, and is liable merely to answer the drafts of his customer to that amount. This would clearly support a commission of bankrupt; it would not pass by the description of ready money; and, therefore, it must be considered as a debt, and must pass by that description.

The Plaintiff was accordingly declared entitled to the debt due on the bill of exchange, with interest from the time the same became payable; and to the balance of cash at the banker’s, with interest from the Testator’s death; and also to the several other debts which were due and owing by him and others to the Testator at the time of his death. And it was ordered that the defendant should join with the Plaintiff in enabling him to receive what debts were due to the Testator at the time of his death, other than those already received by the defendant.—Costs for Plaintiff.” (Merivale 1817: 541–543).

Before we move to an interpretation of the case, let us look at Rothbard’s description of it:

“But, it might be asked, what about the severe legal penalties for embezzlement? Isn’t the threat of criminal charges and a jail term enough to deter all but the most dedicated warehouse embezzlers? Perhaps, except for the critical fact that bailment law scarcely existed until the eighteenth century. It was only by the twentieth century that the courts finally decided that the grain warehouseman was truly a bailee and not simply a debtor.” (Rothbard 2008: 89).

“Why, then, were the banks and goldsmiths not cracked down on as defrauders and embezzlers? Because deposit banking law was in even worse shape than overall warehouse law and moved in the opposite direction to declare money deposits not a bailment but a debt.

Thus, in England, the goldsmiths, and the deposit banks which developed subsequently, boldly printed counterfeit warehouse receipts, confident that the law would not deal harshly with them. Oddly enough, no one tested the matter in the courts during the late seventeenth or eighteenth centuries. The first fateful case was decided in 1811, in Carr v. Carr. The court had to decide whether the term ‘debts’ mentioned in a will included a cash balance in a bank deposit account. Unfortunately, Master of the Rolls Sir William Grant ruled that it did. Grant maintained that since the money had been paid generally into the bank, and was not earmarked in a sealed bag, it had become a loan rather than a bailment.” (Rothbard 2008: 91–92).

The idea that “bailment law scarcely existed until the eighteenth century” and “deposit banking law was in even worse shape than overall warehouse law” in Europe or the UK is an utter travesty of legal history, as can been seen in the last post.

Rothbard thinks that Sir William Grant in Carr versus Carr made some unprecedented ruling that legalised the “fraud” of goldsmiths and deposit bankers. This is, again, false.

A reading of the case shows that the fundamental point is that even the lawyers Hart and Wetherell, acting for the defendant, admitted that, strictly speaking, the cash balance at the bank was legally a debt, and not a bailment:

Hart and Wetherell for the Defendant,
Submitted that the bill of exchange, under these circumstances, most be considered as having been delivered to the bankers by the Testator as money, and that it was therefore to be considered as if in his own possession. And, as so the cash balance, they contended that this could not be considered as a debt in the contemplation of the Testator; that, though, strictly speaking, a debt, yet it was, in the common opinion of mankind, considered as money deposited with the banker; that in construction of Wills, words ought not to be taken according to their strict legal meaning, but according to the intention of the Testator; and that, in this case, the Testator could not have conceited it to be a debt. (Merivale 1817: 542).

That is, the lawyers acting for the defendant conceded that the law already understood this money balance as a debt (or mutuum), but they argued that the Testator at the time he wrote the will considered it a bailment. Whether the Testator really did think this is an open question, but even if he did this was most probably a mistaken and erroneous view on his part. The nature of the contract will probably have been a mutuum loan to the bank, a traditional and ancient legal contract that had been used by bankers for centuries and centuries – in fact all the way back to ancient Rome.

The lawyers acting for the defendant also exploited the “common opinion of mankind”: the mistaken belief that many people have that they continue to own the money they “deposit” at a bank. But this misunderstanding does not prove that the original contract really was a bailment (depositum regulare), or that fractional reserve banking had arisen by fraud in the UK.

The point above is enough to damn the whole libertarian interpretation of the case. If it was already admitted that the bank balance was legally a debt by lawyers acting for the defendant, then this strongly suggests that fractional reserve banking was already normally interpreted legally as a mutuum contract, not as a bailment.

The ruling of the judge was as follows:

“The Master of the Rolls
Was clear that the bill of exchange passed. He had entertained some doubt on the other point; but thought that the money which had been paid into the banker’s ought also to pass as a debt. This was not a depositum. A sealed bag of money might, indeed, be a depositum; but money paid in, generally, to a banker could not be so considered. He observed, that money had no ear-mark; that, when money is paid into a banker’s, he always opens a debtor and creditor account with the payor; The banker employs the money himself, and is liable merely to answer the drafts of his customer to that amount. This would clearly support a commission of bankrupt; it would not pass by the description of ready money; and, therefore, it must be considered as a debt, and must pass by that description.” (Merivale 1817: 543).

When the judge/Master of the Rolls Sir William Grant gave this ruling, he was not inventing some new legal principle, but drawing on centuries of legal tradition and banking practice.

First let us consider this:

“This was not a depositum. A sealed bag of money might, indeed, be a depositum; but money paid in, generally, to a banker could not be so considered. He observed, that money had no ear-mark; that, when money is paid into a banker’s, he always opens a debtor and creditor account with the payor;” (Merivale 1817: 543).

The principle of distinguishing a bailment from a mutuum by handing over money sealed in a bag or box was an ancient tradition and already well known in the common law and civil law traditions of European nations.

The principle was this: money delivered to a banker without being sealed in a bag, sack or box was a mutuum loan to the banker (and not a bailment). This goes right back to ancient Roman law and banking practice (Reden 2012: 281). In the emperor Justinian’s Digest 19.2.31, this authoritative statement of Roman law tells us quite clearly that when money was left unsealed with someone (and implicitly even a banker) it was not a bailment, but a mutuum:

idem iuris esse in deposito: nam si quis pecuniam numeratam ita deposuisset, ut neque clusam neque obsignatam traderet, sed adnumeraret, nihil alius eum debere apud quem deposita esset, nisi tantundem pecuniae solveret.

“The same rule of law applies to deposits, for where a party has deposited a sum of money without having enclosed it in anything, or sealed it up, but simply after counting it, the party with whom it is left is not bound to do anything but repay the same amount of money [tantundem]” (Digest 19.2.31; trans. from Scott 1932).

Alternatively, if a person brought money to a banker sealed or enclosed in a bag or box, then the money became a bailment (or depositum regulare) and could not be used by the banker.

Sir William Grant, then, drew on previously established banking practice and legal tradition: he observed that the original money given to the banker by the testator had been unsealed in any bag or box (the “money had no ear-mark”), and consequently had to be considered a mutuum, not a bailment. His ruling that the money was not a bailment follows logically from his fact, and was not some radical, unprecedented ruling.

All in all, this case simply does not support the Rothbardian interpretation of it, and does not provide any evidence that fractional reserve banking arose essentially from fraud by goldsmiths as they stole gold or silver that had been left with them as bailments.

In reality, from the beginning, medieval and early modern European fractional reserve banking had a perfectly good legal basis in the mutuum contract: this was well defined in English law by the 18th century and almost certainly even earlier. Thomas Wood (1661–1722), an English Doctor of Civil Law (New College, Oxford) and eminent jurist, wrote the leading work on English law in the 18th century. 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).

Even earlier the definition of mutuum in the Lexicon Technicum: or, An Universal English Dictionary of Arts and Sciences (1723; 2nd edn.) was as follows:

MUTUUM, in the Civil Law, is a Loan simply so called; or a Contract introduced by the Law of Nations, in which a Thing that consists in Weight, (as suppose Bullion) in Number, as Money: or in Measure, as Corn, Wine, Oil, &c. is given to another upon Condition that he shall return another Thing of the same Quantity, Nature, and Value, upon Demand. So that this is a Contract without Reward, and admits, properly speaking, of no Recompence. And therefore where Use and Interest is agreed on, they arise from some distinct particular Argument, or by Custom of the Country. (s.v. “mutuum”).

Carr versus Carr affirmed that conventional bank accounts were mutuum contracts of this type, and the case also suggests that British fractional reserve banking was normally being conducted under the mutuum contract.

BIBLIOGRAPHY
Harris, John. 1723. Lexicon Technicum: or, An Universal English Dictionary of Arts and Sciences (vol. 2; 2nd edn.). D. Brown, J. Walthoe et al., London.

Huerta de Soto, Jesús. 2012. Money, Bank Credit, and Economic Cycles (3rd edn.; trans. M. A. Stroup). Ludwig von Mises Institute, Auburn, Ala. p. 429, n. 28.

Merivale, John Herman. 1817. Reports of Cases Argued and Determined in the High Court of Chancery: Commencing in Michaelmas Term, 1815. Vol. 1. 1815–1816. J. Butterworth and Son, London; J. Cooke, Ormond Quay, Dublin.

Reden, Sitta. 2012. “Money and Finance,” in Walter Scheidel (ed.), The Cambridge Companion to the Roman Economy. Cambridge University Press, Cambridge. 266–286.

Rothbard, Murray N. 1994. The Case Against the Fed. Ludwig von Mises Institute, Auburn, Ala.

Rothbard, Murray N. 2008. The Mystery of Banking (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

Scott, S. P. 1932. The Civil Law. Central Trust Co., Cincinnati.

Unknown. 1853. “Leading Cases in Banking Law,” The Bankers’ Magazine, and Journal of the Money Market (vol. 13) April. 275–281.

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

Rothbard on “Deposit” Banking: A Critique

Rothbard’s The Mystery of Banking (2008; 2nd edn.) is one of the popular Austrian screeds against fractional reserve banking.

It suffers from many defects, not least of all an astonishingly ignorant and poor understanding of the legal basis, and history, of banking.

In chapter VI, Rothbard (2008: 75–84) engages in a thought experiment to illustrate what he calls “loan banking”: he imagines a “Rothbard Bank” which simply takes money, and then loans that money out with a strict date set for repayment.

This is a simple model of a financial intermediary giving loans of money analogous to a time deposit or term deposit, where demand deposits do not exist and where the IOUs of the bank or borrowers are never monetised.

Rothbard’s ideal and imaginary “pure” loan banking which does not expand the money supply is not applicable to anything but the most primitive form of capitalist economy.

In reality, most banks in any sophisticated enough economy are engaged in borrowing money themselves from clients/depositors either as (1) a callable mutuum loan or (2) a mutuum loan with a maturity date. Banks grant credit and create broad money by issuing IOUs, either banknotes or demand deposits, to clients/depositors and these IOUs become used in the community as credit money.

Rothbard’s thesis is that originally banking was some “pure” form of “loan banking” which never created new money nor expanded the money supply, but was only corrupted later when goldsmiths fraudulently lent out the gold or silver that was supposedly deposited with them as a bailment (or depositum regulare):

“If loan banking was a way of channeling savings into productive loans to earn interest, deposit banking arose to serve the convenience of the holders of gold and silver. Owners of gold bullion did not wish to keep it at home or office and suffer the risk of theft; far better to store the gold in a safe place. Similarly, holders of gold coin found the metal often heavy and inconvenient to carry, and needed a place for safekeeping. These deposit banks functioned very much as safe-deposit boxes do today: as safe ‘money warehouses.’ As in the case of any warehouse, the depositor placed his goods on deposit or in trust at the warehouse, and in return received a ticket (or warehouse receipt) stating that he could redeem his goods whenever he presented the ticket at the warehouse. In short, his ticket or receipt or claim check was to be instantly redeemable on demand at the warehouse. ....

But over the decades, one or more money warehouses, or deposit banks, gained a reputation for probity and honesty. Their warehouse receipts then began to be transferred directly as a surrogate for the gold coin itself. The warehouse receipts were scrip for the real thing, in which metal they could be redeemed. They functioned as ‘gold certificates.’ In this situation, note that the total money supply in the economy has not changed; only its form has altered. .... Deposit banking, when the banks really act as genuine money warehouses, is still eminently productive and noninflationary. ....

All men are subject to the temptation to commit theft or fraud, and the warehousing profession is no exception. In warehousing, one form of this temptation is to steal the stored products outright—to skip the country, so to speak, with the stored gold and jewels. Short of this thievery, the warehouse man is subject to a more subtle form of the same temptation: to steal or ‘borrow’ the valuables ‘temporarily’ and to profit by speculation or whatever, returning the valuables before they are redeemed so that no one will be the wiser. This form of theft is known as embezzlement, which the dictionary defines as ‘appropriating fraudulently to one’s own use, as money or property entrusted to one’s care.’ …

The English goldsmiths discovered and fell prey to this temptation in a very short time, in fact by the end of the Civil War. So eager were they to make profits in this basically fraudulent enterprise, that they even offered to pay interest to depositors so that they could then ‘lend out’ the money. The ‘lending out,’ however, was duplicitous, since the depositors, possessing their warehouse receipts, were under the impression that their money was safe in the goldsmiths’ vaults, and so exchanged them as equivalent to gold. Thus, gold in the goldsmiths’ vaults was covered by two or more receipts. A genuine receipt originated in an actual deposit of gold stored in the vaults, while counterfeit ones, masquerading as genuine receipts, had been printed and loaned out by goldsmiths and were now floating around the country as surrogates for the same ounces of gold. ….

Why, then, were the banks and goldsmiths not cracked down on as defrauders and embezzlers? Because deposit banking law was in even worse shape than overall warehouse law and moved in the opposite direction to declare money deposits not a bailment but a debt.” (Rothbard 2008: 83–91).

Rothbard’s view, then, is that deposit banking on fractional reserves began as fraud, and the fraud was aided by the lack of a proper legal framework for bailment and mutuum loans.

This view is false, and largely the product of Rothbard’s own overactive imagination and his laughable ignorance of history.

First, Rothbard’s grasp of the legal history of banking throughout Western civilisation is utterly abysmal and embarrassing:

“Thus, in England, the goldsmiths, and the deposit banks which developed subsequently, boldly printed counterfeit warehouse receipts, confident that the law would not deal harshly with them. Oddly enough, no one tested the matter in the courts during the late seventeenth or eighteenth centuries. The first fateful case was decided in 1811, in Carr v. Carr. The court had to decide whether the term ‘debts’ mentioned in a will included a cash balance in a bank deposit account. Unfortunately, Master of the Rolls Sir William Grant ruled that it did. Grant maintained that since the money had been paid generally into the bank, and was not earmarked in a sealed bag, it had become a loan rather than a bailment.” (Rothbard 2008: 91–92).

In reality, the legal principle and banking convention that money delivered to a banker without being sealed in a bag, sack or box was a mutuum loan to the banker (and not a bailment) goes right back to ancient Roman law and banking practice (Reden 2012: 281). In the emperor Justinian’s Digest 19.2.31, this authoritative statement of Roman law tells us quite clearly that when money was left unsealed with someone (and implicitly even a banker) it was not a bailment, but a mutuum:

idem iuris esse in deposito: nam si quis pecuniam numeratam ita deposuisset, ut neque clusam neque obsignatam traderet, sed adnumeraret, nihil alius eum debere apud quem deposita esset, nisi tantundem pecuniae solveret.

“The same rule of law applies to deposits, for where a party has deposited a sum of money without having enclosed it in anything, or sealed it up, but simply after counting it, the party with whom it is left is not bound to do anything but repay the same amount of money [tantundem]” (Digest 19.2.31; trans. from Scott 1932).

Alternatively, if a person brought money to a banker sealed or enclosed in a bag or box, then the money became a bailment (or depositum regulare) and could not be used by the banker.

These principles were also accepted in medieval and early modern European law (Dotson 2004: 183). The practice of giving over money as a mutuum loan to a banker without being sealed in a bag or box, as described above, was recognised in Talmudic law (Goldin 1913: 68), as it was from the Jewish community from which many medieval bankers came.

The convention entered European civil law well before the 19th century. For example, John Ayliffe’s A New Pandect of Roman Civil Law (1734) states the principle:

“If I deposit a Bag of Money, or the like, with another Person, which Bag is sealed up, and the Person with whom this Depositum is lodged shall purloin or embezzle the same, or meddle with any part thereof against my Will, I may have both an Action of Theft and an Action ex Deposito against him, but not both together. But if the Person, with whom the Money is lodged, shall by my Permission make use of the Money thus deposited, he shall only be compelled to pay the Interest upon that account, as in other Pleas bona fidei;” (Ayliffe 1734: 520).

Bizarrely, Rothbard states that in Europe “bailment law scarcely existed until the eighteenth century” (!) (Rothbard 2008: 89). In fact, bailment law was highly developed even in the ancient Roman world (Berger 1953: 43), and the bailment law of medieval and early modern Europe was derived from the sophisticated legal system of the Romans (Dotson 2004: 184).

Secondly, Rothbard gives us a potted history of banking as follows:

“Factors, investment banks, finance companies, and moneylenders are just some of the institutions that have engaged in loan banking. In the ancient world, and in medieval and pre-modern Europe, most of these institutions were forms of ‘moneylending proper,’ in which owners loaned out their own saved money. Loan banks, in the sense of intermediaries, borrowing from savers to lend to borrowers, began only in Venice in the late Middle Ages. In England, intermediary-banking began only with the ‘scriveners’ of the early seventeenth century. The scriveners were clerks who wrote contracts and bonds, and were therefore often in a position to learn of mercantile transactions and engage in moneylending and borrowing. By the beginning of the eighteenth century, scriveners had been replaced by more advanced forms of banking.” (Rothbard 2008: 83–84).

In fact, even in the ancient world deposit banking under the mutuum contract was widely practised (see Andreau 1999: 40–41; Reden 2007: 286–290; Harris 2006: 10–12; Harris 2011: 236; Verboven 2009: 116–117), and even Rothbard’s statement that “loan banks” “in the sense of intermediaries, borrowing from savers to lend to borrowers, began only in Venice in the late Middle Ages” is untrue.

Even the Middle ages had deposit banking by at least the 13th century:

“The medieval economy was grounded in credit, a necessity given the limited European precious metal reserves which plagued merchant and king alike. …. Along with moneylending and foreign exchange, medieval deposit banking was another fuel for the commercial economy. Term deposits and ‘on demand’ deposits were both present in medieval banking by the thirteenth century. Interest was in all likelihood anticipated on such deposits.” (Reyerson 1999: 65)

In both the ancient world and the medieval world, such deposit banking on fractional reserves was generally conducted under the framework of the mutuum contract, not the bailment (depositum regulare).

The free banker George Selgin also demonstrates that Rothbard’s view of the origin of fractional reserve banking in Britain cannot be accepted as true (Selgin 2011).

Rothbard is puzzled that English jurists in the 19th century were ruling that unsealed money given to bankers was legally a mutuum, not a bailment (Rothbard 2008: 91–92), and even ascribes to these jurists the “major share of the blame for our fraudulent system of fractional reserve banking and for the disastrous inflations of the past two centuries” (Rothbard 2008: 93).

In this, he is, yet again, utterly mistaken. The English jurists of the 19th century were simply following the legal precedents and banking practices of many hundreds of years: their description of the mutuum loan was precisely how Western legal systems had always treated unsealed money transfers to bankers.

In short, the evidence points to the conclusion that deposit banking on fractional reserves was normally based on the mutuum contract from the beginning, and that Rothbard’s history is seriously flawed.

Further Reading
“Why is the Fractional Reserve Account a Mutuum, not a Bailment?,” December 17, 2011.

“Hoppe on Fractional Reserve Banking: A Critique,” December 11, 2011.

“If Fractional Reserve Banking is Fraudulent, Why isn’t the Insurance Industry Fraud?,” September 29, 2011.

“The Mutuum Contract in Anglo-American Law,” September 30, 2011.

“Rothbard Mangles the Legal History of Fractional Reserve Banking,” October 1, 2011.

“More Historical Evidence on the Mutuum Contract,” October 1, 2011.

“What British Law Says about the Mutuum Contract,” October 2, 2011.

“If Fractional Reserve Banking is Voluntary, Where is the Fraud?,” October 3, 2011.

“Huerta de Soto on the Mutuum Contract: A Critique,” August 11, 2012.

“A Simple Question for Opponents of Fractional Reserve Banking,” August 17, 2012.

“Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique,” August 31, 2012.

“Huerta de Soto on Justinian’s Digest 16.3.25.1,” September 1, 2012.

“Huerta de Soto on Banking in Ancient Rome: A Critique,” September 2, 2012.

BIBLIOGRAPHY
Andreau, J. 1999. Banking and Business in the Roman World (trans. J. Lloyd). Cambridge University Press, Cambridge and New York.

Ayliffe, John. 1734. A New Pandect of Roman Civil Law, as Anciently Established in that Empire; and now Received and Practised in Most European Nations. Tho. Osborne, London.

Barlow, C. T. 1978. Bankers, Moneylenders, and Interest Rates in the Roman Republic. University of North Carolina, Chapel Hill.

Berger, A. 1953. Encyclopedic Dictionary of Roman Law. American Philosophical Society, Philadelphia.

Dotson, John E. 2004. “Banks and Banking,” in C. Kleinhenz (ed.), Medieval Italy: An Encyclopedia. Vol. 1, A to K. Routledge, London. 89–92.

Goldin, H. E. 1913. Mishnah. A Digest of the Basic Principles of the Early Jewish Jurisprudence, Baba Meziah (Middle Gate), Order IV, Treatise II. G. P. Putnam’s Sons, New York & London.

Harris, William V. 2006. “A Revisionist View of Roman Money,” Journal of Roman Studies 96: 1–24.

Harris, William V. 2011. Rome’s Imperial Economy. Twelve Essays. Oxford University Press, Oxford.

Reden, Sitta von. 2007. Money in Ptolemaic Egypt: From the Macedonian Conquest to the End of the Third Century BC. Cambridge University Press, Cambridge.

Reden, Sitta. 2012. “Money and Finance,” in Walter Scheidel (ed.), The Cambridge Companion to the Roman Economy. Cambridge University Press, Cambridge. 266–286.

Reyerson, K. L. 1999. “Commerce and Communications,” in David Abulafia (ed.), The New Cambridge Medieval History V. c.1198–c.1300. Cambridge University Press, Cambridge. 50–70.

Rothbard, Murray N. 2008. The Mystery of Banking (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

Scott, S. P. 1932. The Civil Law. Central Trust Co., Cincinnati.

Selgin, G. “Those Dishonest Goldsmiths,” revised January 20, 2011
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709

Verboven, K. 2009. “Currency, Bullion and Accounts Monetary Modes in the Roman World,” Belgisch Tijdschrift voor Numismatiek en Zegelkunde / Revue Belge de Numismatique et de Sigillographie155: 91–121.