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.