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.