This is true, despite the ignorant views of Austrians, such as this:
Frank Hollenbeck, “Confusing Capitalism with Fractional Reserve Banking,” Mises Daily, August 6, 2014.Consider this Austrian “history” of banking:
“Most, if not all, booms and busts originate with excess credit creation from the financial sector. These respondents, incorrectly, assume that this financial system structured on fractural reserve banking is an integral part of capitalism. It isn’t. It is fraud and a violation of property rights, and should be treated as such.There is very little evidence to support these assertions.
In the past, we had deposit banks and loan banks. If you put your money in a deposit bank, the money was there to pay your rent and food expenses. It was safe. Loan banking was risky. You provided money to a loan bank knowing funds would be tied up for a period of time and that you were taking a risk of never seeing this money again. For this, you received interest to compensate for the risk taken and the value of time preference. Back then, bankers who took a deposit and turned it into a loan took the risk of shortly hanging from the town’s large oak tree.
During the early part of the nineteenth century, the deposit function and loan function were merged into a new entity called a commercial bank.”
Frank Hollenbeck, “Confusing Capitalism with Fractional Reserve Banking,” Mises Daily, August 6, 2014.
First of all, throughout Western civilisation the essence of banking has always been the mutuum contract, not the bailment (or depositum regulare).
There is very little evidence that, when banks arose either in the ancient world or the Middle ages and early modern period, their main activity was mere bailment, and that they had to steal their depositors’ money to engage in lending.
On the contrary, the bankers always had recourse to the mutuum contract, where money is lent to a banker and the money becomes the banker’s property. The client of the banker gets an IOU in return and the debt can be recalled (1) on demand, (2) in stipulated payments, or (3) on a certain date (as in a fixed term loan).
The free banker George Selgin has demonstrated that Rothbard’s view of the origin of fractional reserve banking in Britain under the goldsmiths cannot be accepted as true (Selgin 2011).
Two major pieces of evidence that even these early English goldsmiths were mostly engaged in mutuum lending are that (1) they paid interest and (2) the earliest British goldsmiths’ notes are IOUs or negotiable debt instruments payable on demand (Selgin 2011: 11), which explicitly demonstrates to us that these were debt records and the underlying contract a mutuum, not bailment.
For example, if we turn to Henry Dunning Macleod, one of the outstanding historians of banking in Great Britain, we find that this is exactly how he explains the origin of banking under the London goldsmiths:
“It was during the great civil war, as we have already explained, that the goldsmiths of London first began to receive the cash of the merchants and country gentlemen for safe custody, on condition of repaying an equal sum on demand, and to discount bills of exchange with their own promissory notes; that commenced the business of banking. Now, this money was not placed in their hands to be locked away in their cellars, as plate and jewelry are often given into the custody of a banker for mere safe custody as a depositum, and to be restored in specie. The money was sold to the banker to become his actual property, according to the well-understood custom of bankers; that is, it was a mutuum or creditum; and was to be restored only in genere. The goldsmith bankers agreed not only to repay the money on demand, but also to pay six per cent, interest upon it. Consequently, in order to make a profit, they were obliged to trade with it.” (Macleod, in Macleod et al. 1896: 203).Although there were “banks of deposit” in mainland Europe in the early modern era (although even here it is not straightforwardly clear whether the relation between client and banker was a strict bailment: Macleod, in Macleod et al. 1896: 201–202), the idea that modern banking only emerged because “deposit bankers” who simply held money as a bailment had to steal their clients’ funds has little evidence to support it.
Nor is this true:
“During the early part of the nineteenth century, the deposit function and loan function were merged into a new entity called a commercial bank. Of course, very quickly these new commercial banks realized they could dip into deposits, essentially committing fraud, as a source of funding for loans. Governments soon realized that such fraudulent activity was a great way to finance government expenditures, and passed laws making this fraud legal. A key interpretation of law in the United Kingdom, Foley v. Hill, set precedence in the financial world for banking laws to follow …”In reality, commercial banking by means of mutuum lending had been known and conducted since Roman times (see Andreau 1999: 40–41; Reden 2007: 286–290; Harris 2006: 10–12; Harris 2011: 236; Verboven 2009: 116–117).
Frank Hollenbeck, “Confusing Capitalism with Fractional Reserve Banking,” Mises Daily, August 6, 2014.
The Austrians’ false belief that in the 19th century the “deposit function and loan function were merged into a new entity called a commercial bank” is derived from an ignorant and shoddy reading of legal history by Murray Rothbard. Rothbard thought the Carr v. Carr and Foley v. Hill cases in England legalised theft by banks of depositors’ bailments.
But neither of these cases set any such “precedent” imagined by Austrians.
In fact, in Foley v. Hill the primary issue was the relevance of the “statute of limitations” to the defence of the defendants in the case, not whether the relationship between banker and client was a debt–credit relation.
Of course, although Foley v. Hill confirmed that it was a debt–credit relation, this was not some innovation.
Finally, nor did Carr v. Carr set the precedent Austrians allege.
In Carr v. Carr, the issue was whether a mutuum contract could be changed into a bailment contract simply because the bank client wanted to interpret it so at the time he made a will.
What totally destroys the Austrian reading of Carr v. Carr 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.
Far from being some “fraud” or unnatural system grafted onto capitalism, fractional reserve banking is a fundamental part of capitalism, and the Austrian view of it is a travesty both history and economics.
Further Reading
“Mutuum versus Bailment in Banking,” July 24, 2014.
“Rothbard on ‘Deposit’ Banking: A Critique,” July 22, 2014.
“Carr versus Carr (1811) and the History of Fractional Reserve Banking,” July 23, 2014.
“Foley versus Hill and the History of Fractional Reserve Banking,” July 29, 2014.
“A Critique of Murray Rothbard on the Origins and Legal Basis of Fractional Reserve Banking,” July 30, 2014.
“Coggs v. Bernard and the History of English Bailment Law,” July 31, 2014.
BIBLIOGRAPHY
Andreau, J. 1999. Banking and Business in the Roman World (trans. J. Lloyd). Cambridge University Press, Cambridge and New York.
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.
Macleod, Henry Dunning, Horn, Antoine E. and John P. Townsend. 1896. A History of Banking in all the Leading Nations (vol. 2). Journal of Commerce and Commercial Bulletin, New York.
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.
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.
"There is very little evidence"
ReplyDeleteis there any evidence at all?
Of course banks still offer the option of storing your cash in a safe-deposit box. But you have to pay for this service. It's funny how austrians never seem to talk about this.
Quality article from Lord Keynes as usual, except for the last paragraph which claims fractional reserve is not fraudulent. It is actually fraudulent for the following very simple reason.
ReplyDeleteAn FR bank promises to return to depositors £X for every £X deposited (maybe plus interest and maybe less bank charges). That is plain incompatible with then lending on or investing the money because loans and investments are almost GUARANTEED at some point to go wrong. Witness the brute fact that banks have failed regular as clockwork ever since they were invented.
A “non fraudulent” bank would tell depositors that if they want their money lending on, then their stake in the bank will vary with the value of the underlying loans / assets. That happens under full reserve banking. And that requirement is actually being imposed right now on money market mutual funds in the US that invest in anything more risky than base money or short term government debt. See:
http://www.forbes.com/sites/keithweiner/2014/07/26/will-new-money-market-rules-break-money-markets/
and
http://www.sec.gov/rules/final/2014/33-9616.pdf
"An FR bank promises to return to depositors £X for every £X deposited (maybe plus interest and maybe less bank charges). That is plain incompatible with then lending on or investing the money because loans and investments are almost GUARANTEED at some point to go wrong."
DeleteRalph Musgrave,
The promise to repay mutuum debts on demand is compatible with the banks lending on or investing the money, even if some loans and investments go wrong.
Why? Because we can give examples of banks -- probably numerous banks -- that have existed for over century or longer that have remained solvent and have repaid their clients as debts fall due, even though some bank loans or investments go bad.
Why? Because a bank can itself lend in a liquidity crisis or sell its assets to obtain reserves (e.g., government bonds).
This point alone is enough to refute your argument.
And even if the bank were to default on its debts to clients, this is not fraud: it is merely breach of contract, a very different type of civil law offence. It is very much like when an insurance company defaults on its obligations to policy holders: breach of contract, but not fraud.
"An FR bank promises to return to depositors £X for every £X deposited (maybe plus interest and maybe less bank charges). That is plain incompatible with then lending on or investing the money because loans and investments are almost GUARANTEED at some point to go wrong."
DeleteSo you're saying that borrowing money is fraudulent, because there is always a possibility of default.
"A “non fraudulent” bank would tell depositors that if they want their money lending on, then their stake in the bank will vary with the value of the underlying loans / assets."
If I lend you $100 I expect you to repay me $100. The same goes for a bank - If I lend a bank $100 I expect to be repaid $100. I don't see why this is 'fraudulent'.
Oops, slight error in my comment:
Delete"Why? Because a bank can itself **borrow** in a liquidity crisis or sell its assets to obtain reserves (e.g., government bonds).
if everyone tries to convert their deposits to cash (i.e. withdraw cash) at the same time, in theory this should simply cause interest rates on deposits to rise to a level at which people are willing to hold deposits again.
Delete"if everyone tries to convert their deposits to cash (i.e. withdraw cash) at the same time,"
DeleteWell, you get a bank run then, and in unregulated systems with no central bank, that is a serious problem.
But when banks default like this, it still isn't fraud: it is breach of contract, just as if some terrible natural disaster caused thousands of insurance claims and an insurance company could not honour its contracts.
Lord Keynes,
DeleteThe fact that (to quote you) some banks “have remained solvent and have repaid their clients as debts fall due, even though some bank loans or investments go bad” doesn’t alter the fact that in other cases the loans are so bad and numerous that the bank DOES GO INSOLVENT. Did Lehmans and Northern Rock fail or not? Not to mention the hundreds of other banks that have failed throughout history.
And the fact that a failing bank can “sell its assets” doesn’t alter the brute fact that some failing banks just run out of assets to sell. So they go insolvent. They go bust.
As for the distinction between fraud and breach of contract, that’s is a bit of a grey area or hair splitting distinction. Fraud involves a DELIBERATE attempt to deceive. I’d argue that what fractional banks do is fraudulent or semi-fraudulent because they know perfectly well that their loans may go wrong and big time, thus their promise to return depositors’ money is a deliberate attempt to deceive.
Philippe,
No: I’m not saying that “borrowing money is fraudulent, because there is always a possibility of default”. I’m saying that if A lends money to B and B promises to return it while lending it on to C, then that is fraudulent because the fact that C may not return the money means the promise is a dishonest one.
In contrast, if A lends money to B and A and B agree to share profits and losses involved in lending to C, then that is not fraudulent. And the latter is what is involved in full reserve banking. That is, under full reserve, depositors have the choice between, 1. having their money loaned to the “Cs” of the world, or 2. having their money lodged in a totally safe manner, i.e. at the central bank and/or having their money put into short term government debt.
Next you ask “If I lend a bank $100 I expect to be repaid $100. I don't see why this is 'fraudulent'.” Answer: it’s fraudulent because the bank PROMISES to return the $100, which it quite clearly may not be able to. If instead the bank said something like “you lend us $100, and in the event of our not being able to repay you, we share the loss, then that would be honest or non-fraudulent. And that’s what is involved in full reserve banking (see my reply to Lord Keynes above).
Ralph Musgrave,
Delete(1) the fact that some banks fail does not make FR banking fraudulent, anymore than the fact that some insurance companies fail makes insurance fraudulent.
(2) as for the distinction between (1) fraud and (2) mere breach of contract, despite what you say, it is a clear and correct distinction in this case.
(3) " I’d argue that what fractional banks do is fraudulent or semi-fraudulent because they know perfectly well that their loans may go wrong and big time, thus their promise to return depositors’ money is a deliberate attempt to deceive."
That is rubbish. A bank does not know for certain that it will face in the future a situation where a sufficient number of its loans go bad, causing it to be insolvent.
As I said above, the fact that many banks have remained solvent for a century or more -- and continue to be solvent to this day -- shows how wrong you are.
The empirical evidence:
http://en.wikipedia.org/wiki/List_of_oldest_banks_in_continuous_operation
"No: I’m not saying that “borrowing money is fraudulent, because there is always a possibility of default”.
DeleteOK, but then you go right on and prove for us that this is exactly what you think:
" I’m saying that if A lends money to B and B promises to return it while lending it on to C, then that is fraudulent because the fact that C may not return the money means the promise is a dishonest one."
Frankly, this is incoherent, self-contradictory and shows ignorance of the difference between fraud and breach of contract.
"Answer: it’s fraudulent because the bank PROMISES to return the $100, which it quite clearly may not be able to."
DeleteSo if I promise to drive you to the grocery store, but my car breaks down on the way and I can't honour my promise, then according to you the original promise was fraudulent?
No, Ralph, it is not fraud, if a formal contract was made, it is called breach of contract.
Just as when a bank promises to repay its debt to you and cannot do so, it is breach of contract, not fraud.
"I’m saying that if A lends money to B and B promises to return it while lending it on to C, then that is fraudulent because the fact that C may not return the money means the promise is a dishonest one."
DeleteThat doesn't make sense. The bank promises to repay you, but that doesn't mean that there is zero possibility that it will not be able to repay you. When you deposit money at a bank - unless you pay for it to be kept in a private safe deposit box - you are lending that money to the bank. That is a loan to the bank. They promise to repay the money, but there is always a possibility that they might default, just as any borrower might.
LK,
Delete"Well, you get a bank run then"
Yes, but I'm saying that in theory banks could simply raise the interest rate on deposits up to a level at which people would be willing to hold deposits again instead of cash.
In theory there is always an interest rate at which people will hold deposits instead of cash.
in other words there is, in theory, a market clearing price at which all deposits are sold, and people hold deposits instead of cash. So in theory bank runs shouldn't happen, as the interest rate on deposits should just change to stop people from wanting to withdraw their cash all at the same time.
DeleteLord Keynes,
DeleteRe your first point (about insurance), Laurence Kotlikoff, who is an advocate of full reserve, actually regards insurance companies as being about as dishonest as banks. And the solution he advocates for both is similar, namely that neither should promise to pay customers a SPECIFIC SUM (repayment of deposits in the case of banks, and payouts in the case of disasters in the case of insurance companies). Reason is that that can lead to insolvency for both banks and insurance companies.
The alternative he suggests for both is some sort of profit and loss sharing system. (That’s for LENDING entities / banks under full reserve. As to where depositors under full reserve want total safety, they put their money into entities / banks that just lodge money at the central bank or invest in short term government debt.)
Next you say “A bank does not know for certain that it will face in the future a situation where a sufficient number of its loans go bad, causing it to be insolvent.” My answer to that is that the likelihood of insolvency depends very much on capital ratios. For example given the 3% or so ratios that banks had prior to the crunch, technical or actual insolvency is VERY LIKELY. That is, bank assets only have to fall by about 3% and the bank is technically insolvent. And the idea that it’s UNLIKELY that a bank’s assets won’t fall by as much as 3% is totally unrealistic. That is, any bank with a 3% capital ratio which claims “it’s highly unlikely we won’t go insolvent” is into fraud.
As to higher capital ratios, the higher they are, the less likely is insolvency, but the higher are capital ratios, the more one is into full reserve or “100% reserve” banking. And when the ratio is 100%, then that’s pure unrefined full reserve banking.
Re your next comment (10.42am) I apologise profusely for my “ignorance of the difference between fraud and breach of contract.” Perhaps you can tell me EXACTLY WHERE the dividing line is between a breach of contract which occurs because of GENUINELY unforeseen circumstances, and breach of contract which occurs because of risks that the “breacher” knew perfectly well were very likely to go bad.
Re your 10.46 comment and your example of a car breaking down, that is a “genuinely unforeseen circumstance” and is thus not fraud (unless you knew perfectly well that your car was highly unreliable, in which case I’d classify that as fraud). But to repeat, I look forward to your explanation as to exactly where the dividing line is between those two.
Philippe,
In relation to banks you say “but there is always a possibility that they might default, just as any borrower might.” Yes, we all know that. But that’s not what banks say. Their usual message is something like “Your money is safe with us”, which is a lie. To repeat, if they said something like “You are welcome to deposit your money with us, but in the event of our making a hash of our loans, we’ll go halves in the losses” that would be TOTALLY HONEST. And that’s roughly speaking what full reserve banking consists of.
(1) "Re your first point (about insurance), Laurence Kotlikoff, who is an advocate of full reserve, actually regards insurance companies as being about as dishonest as banks."
Deletewhich isn't much of an argument... Cite someone who already agrees with you.
And, no, Ralph, normal insurance businesses are not fraudulent.
Since you admit below in regard to the "car breaking down" example that this a "'genuinely unforeseen circumstance' and is thus not fraud", you actually **accept the argument** that clearly refutes on this point.
(2) "For example given the 3% or so ratios that banks had prior to the crunch, technical or actual insolvency is VERY LIKELY. ...
Even assuming that argument is sound, this does not prove that FR banking is all inherent fraudulent in way you say above.
All that is required, in essence, is regulations for higher ratios, stopping banks from lending money to asset speculators, and holding junk exotic debt instruments.
(3) "As to higher capital ratios, the higher they are, the less likely is insolvency, but the higher are capital ratios, the more one is into full reserve or “100% reserve” banking. "
It simply does not follow that full reserve is necessary even here.
(4) "Re your 10.46 comment and your example of a car breaking down, that is a “genuinely unforeseen circumstance” and is thus not fraud (unless you knew perfectly well that your car was highly unreliable, in which case I’d classify that as fraud). But to repeat, I look forward to your explanation as to exactly where the dividing line is between those two."
The "dividing line" is quite clear. The old style banks under effective financial regulation were stable and highly successful.
The rare instances in which a sufficient number of loans causing some few banks to become insolvent were precisely “genuinely unforeseen circumstances”.
"In relation to banks you say “but there is always a possibility that they might default, just as any borrower might.” Yes, we all know that. But that’s not what banks say. Their usual message is something like “Your money is safe with us”, which is a lie. "
Deletelol.. they are NOT telling a lie.
Our modern financial systems have either explicit or implicit deposit insurance and central banking to guarantee banking stability.
Did people in the UK or the US lose their deposits in the 2009-2009 crisis?
This obsession with FR banking, for all the wrong reasons, is a terrible error and misunderstanding.
DeleteYou seem to be saying that governments should not have deposit insurance and central banking to guarantee banking stability, but instead allow the banking system to function under some laissez faire system where depositors lose money and life savings when "loan banks" experience bad loans and losses. That would be a disastrous idea.
Ralph Musgrave, virtually NOBODY
wants 100% banking. If they did, the market would supply this service.
Nobody in their right mind wants to put their money in a safe deposit box in some warehouse and pay money to have it stored and get no return.
Even if people really did this or you forced people to do this, it would have bad economic consequences: it would devastate the dynamic system of endogenous money necessary for capitalism to function, and would induce deflationary forces.
LK,
Deleteto be fair, Ralph isn't talking about a sort of Rothbardian full-reserve banking system where "banks" are just warehouses for metal.
Ralph,
DeleteI'm not sure why your 'full-reserve banking' plan would (theoretically) be less risky for customers than fractional reserve banking. If for example there was a financial crisis leading to a collapse in the value of assets held by your 'full reserve banks', bank customers would lose a lot of money, possibly all their money, as the value of their bank 'shares' collapsed (even more so if everyone tried to sell their 'shares' at the same time)...
Lord Keynes,
DeleteI’ll take your points in turn, starting with your 4:47am comment. Yes, I’m saying get rid of taxpayer funded deposit insurance and lender of last resort. Both of those are subsidies of the banking industry, and as it explains in the introductory economics text books, subsidies mis-allocate resources. Moreover both Vickers and Dodd-Frank referred to the desirability of disposing of all bank subsidies, thought they failed miserably to achieve that objective.
Re you point about “depositors lose money and life savings..” we already have an institution that invests billions or trillions worth of savers’ money with no guarantee that savers will get their money back: it’s called the “stock exchange”. In contrast , under full reserve, those who want total safety for their money can have just that: they are offered 100% safe account. And that leads nicely to the next point.
You say “nobody wants 100% reserve banking”. If that’s true, how come National Savings and Investments is so popular? NSI invests just in base money and government debt, which is what the safe half of the banking industry would do under full reserve. Granted NSI does not offer ALL THE SERVICES offered by a normal bank. But it gets very close. For example it does not offer cheque books or debit cards, but offers almost the same thing in that its customers can transfer sums via telephone to any other bank within about 24 hours.
Next, you say “Nobody in their right mind wants to put their money in a safe deposit box in some warehouse and pay money to have it stored and get no return.”
Of course they don’t! What they want is the “have your cake and eat it” arrangement under which they can have their money invested or loaned on so as to earn interest and all without running any of risks inherent to lending or investing: those risks are carried by the taxpayer. Personally I’d like the taxpayer to carry the risks involved in me running a car and pay for my house insurance.
Re your final paragraph and the need for “endogenous money”, is there any reason the state cannot supply all the money needed to keep the economy running at capacity? Indeed, as Robert Mugabe so ably demonstrated, the state can issue quantities of money far in excess of the latter “capacity” amount.
And finally, THIS IS a complicated issue. Adair Turner said that since the crisis he has been on a steep learning curve. So have I. It’s taken me thousands of hours of reading to get to grips with the full versus fractional reserve argument (assuming I have actually got to grips with it). I’m actually publishing a paper / book on the subject in the next month or so. I will of course be giving it maximum publicity and drawing attention to my inspiring (?) thoughts on the subject.
Philippe,
Re your 10.42am comment, full reserve is certainly not “less risky” for customers WHERE THEY CHOOSE to have their money loaned on or invested. It’s MORE RISKY. That’s because under full reserve, lenders / investors carry the full risks involved in their little money making scheme, as distinct from the existing system where the taxpayer carries the ultimate risk.
An important question arises from your point, namely that in the event of it suddenly becoming apparent that lending entities / banks had made a series of silly loans, would the deflationary effect or collapse not be as bad as under the existing system? Two former central bank governors, Mervyn King and Alan Greenspan gave an answer to that, namely that experience shows that a collapse in share values (e.g. the dot com bust) has a negligible deflationary effect compared to banks actually closing their doors, i.e. going insolvent (witness the recent crisis).
(1) "Yes, I’m saying get rid of taxpayer funded deposit insurance and lender of last resort"
DeleteThis would be a disaster and a reversion to highly unstable system.
(2) "If that’s true, how come National Savings and Investments is so popular?"
Good lord. Investing in government bonds is most decidedly NOT 100% reserve banking.
I am actually starting to doubt whether you even understand the meaning of "100% reserve banking. "
(3) "Both of those are subsidies of the banking industry, and as it explains in the introductory economics text books, subsidies mis-allocate resources."
No, Ralph, there is no reason to think that subsidies must necessarily "misallocate resources".
(4) "In contrast , under full reserve, those who want total safety for their money can have just that: they are offered 100% safe account."
People ALREADY have 100% safe accounts under are current system.
Ralph,
Delete"experience shows that a collapse in share values (e.g. the dot com bust) has a negligible deflationary effect compared to banks actually closing their doors, i.e. going insolvent (witness the recent crisis)."
that's not really relevant.
A collapse in the value of bank assets under your scheme would have a very different effect to a collapse in share values on the stock exchange in the current system.
Rothbard's view of fractional reserve banking makes even less sense it if became the normal practice through voluntary transactions. If people who deposited money in banks, mutuum- fashion, signed explicit contracts with the banks to allow banks to lend out their money, and if this became the normal practice as a market outcome, how can you characterize it as fraud?
ReplyDeleteExactly. And we should note that for a long time banking was mainly done by the rich or savvy merchants, who were much more concerned with understanding what kind of contract they enter into.
DeleteIn fact, the standard way to distinguish mutuum from bailment goes right back to ancient Rome:
if money is delivered to a banker without being sealed in a bag, sack or box, it was a mutuum loan to the banker.
In the emperor Justinian’s Digest 19.2.31 -- the authoritative statement of Roman law -- this is how it was understood::
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).
-------
That is, repayment merely by tantundem is a mutuum.
About 1,312 years later in 1845, a US judge in the Dawson et al. vs. the Real Estate Bank case (before the Supreme Court of Arkansas) knows the same business practice and legal principle:
From a careful consideration of the authorities on this subject, we understand the general rule to be, that where money, not in a sealed packet, or closed box, bag or chest, is deposited with a bank or banking corporation, the law presumes it to be a general deposit [another name for mutuum - LK], until the contrary appears; because such deposit is esteemed the most advantageous to the depositary, and most consistent with the general objects, usages, and course of business of such companies or corporations. But if the deposit be made of any thing sealed or locked up or otherwise covered or secured in a package, cask, box, bag or chest, or any thing of the like kind of or belonging to the depositor, the law regards it as a pure or special deposit, and the depositary as having the custody thereof only for safe keeping, and the accommodation of the depositor.”
Pike, A. 1845. Reports of Cases Argued and Determined in the Supreme Court of Law and Equity of the State of Arkansas Volume V. B. J. Borden, Little Rock. pp. 296–297.
Yeoman work, LK. The Austrian story about the history of money and banking always struck me as a bit too pat. I had no idea of the legal history you have so kindly dug up. Quite telling. Even more telling that so little of this appears in mainstream economic discussions of money and banking. Thank you for doing the leg work and digging all these details up.
ReplyDeleteDear Lord Keynes,
ReplyDeleteWith apologies for the delay, I have added a second post on the same subject in my blog. I would be very interested in your comments (and those of your readers) and, as ever, fell free to link to or copy from the post.
It is excellent, once again!
DeleteI will certainly link to it tomorrow.
I look forward to your next post on the "law concerning deposits of fungible commodities, such as wheat".
Also, I'll just post the link here too for others to read:
Deletehttp://economicreflections.wordpress.com/2014/08/10/the-legal-nature-of-the-relationship-between-banker-and-customer-in-old-english-law-2-2/