Henry Dunning Macleod on the Mutuum Contract

Henry Dunning Macleod has an excellent discussion of the nature and history of the mutuum contract, the basis of modern banking, and the difference between commodatum and mutuum:

“1. The commodatum, or τὸ χρησάμενον.
There are some things which can be lent, and the borrower can enjoy their use without acquiring the actual property in them; and after having enjoyed their use, he can restore the identical things ‘lent’ to their owner. Thus, if a person ‘lends’ his horse or a book to his friend, his friend can ride the horse or read the book without acquiring the property in them; and after he has enjoyed their use, he can restore the identical horse or book to its owner. In such a case, the ‘lender’ only grants a certain limited right of ‘possession’ and ‘use’ of the thing lent to the ‘borrower’; but he does not cede the right of property in it to the ‘borrower.’ He retains in himself the right of property and possession in the thing ‘lent’; and can reclaim it at any moment he pleases, without any notice to the ‘borrower.’ In such cases, there is no sale, or exchange; and there is no new property created. In such cases, the relation of creditor and debtor does not arise between the parties. And there being no sale, or exchange, there is no economic phenomenon; consequently, such transactions not being acts of commerce, do not enter into the science of economics. Such a ‘loan’ is termed in Roman law a commodatum, and in Greek law τὸ χρησάμενον; because the ‘use’ only of the thing ‘lent’ is granted to the ‘borrower,’ but not the ‘property’ in it.

2. The mutuum, or τὸ δάνειον, or δάνεισμα.
But there is another kind of ‘loan’ in which the things ‘lent’ cannot be enjoyed unless they are consumed, destroyed, or alienated. Thus, if a person ‘borrows’ such things as bread, wine, coals, oil, meat, or other things of a similar nature, he cannot enjoy their use without consuming or destroying them; and they are lent and borrowed with the knowledge and consent of both parties, for the purpose of being consumed and destroyed. Hence, from the very nature of the case, the ‘borrower’ must acquire the right of property in such things when lent; and what he undertakes to do is to return, not the identical things lent, but an equivalent amount of other things of the same nature, equal in quality and quantity to the things ‘lent.’ So when a person ‘borrows’ money, he cannot enjoy its use, unless he is able to exchange it away for other things. Hence, the person who borrows money must, from the very necessity of the case, acquire the property in it. And what he undertakes to do is, not to restore the identical money lent, but an equivalent amount of money, at the stipulated time.

In all cases, therefore, of the ‘loan’ of such things as bread, wine, oil, meat, coals, money, and things of a similar nature, the lender cedes the property in the thing ‘lent’ to the ‘borrower,’ and he acquires in exchange the right to demand, and the ‘borrower’ incurs the personal duty to render, an equivalent amount of things ‘lent,’ but not the identical things. In all such cases a new property is created; a contract, or an obligation, is created between the lender and the borrower; and they stand in the relation of creditor and debtor. All such transactions are sales or exchanges; they are all acts of commerce, or economic phenomena, and they all enter into the science of economics. A ‘loan’ of this nature is termed in Roman law a mutuum, and in Greek law a δάνειον, or δάνεισμα. To contract a loan of this nature is mutuare, or δανείζειν. A loan, therefore, comprehends two transactions of an essentially distinct nature; but the essential feature of a loan is, that it is always the same person who restores the identical thing ‘lent’ or repays an equivalent.

The Roman jurists said that mutuum is derived from quod de meo tuum—because from being my property it becomes yours. Modern scholars, however, repudiate this etymology, however plausible it may seem. The Romans and the Greeks knew very little of their own language. Modern scholars say that mutuum is connected with mutare, to exchange; as deciduous is with decido, and dividuus with divide. But though the etymology may be fanciful, as are so many others given by Roman and Greek writers, it exactly expresses the fact. In the loan of the mutuum there is always an exchange of properties. In all cases of the mutuum, or the δάνειον, the property in the thing lent is ceded to the borrower; the relation of creditor and debtor is created between them, and the right which the creditor acquires to demand back an equivalent in exchange for the thing lent is the credit, or debt; or, as Ortolan says, the price of the thing lent. The reader must, therefore, observe that every loan of money whatever, no matter between what parties, public or private, is a mutuum, and is a sale, or an exchange, an act of commerce, and, therefore, an economic phenomenon.

VII.—THEOPHILUS ON THE MUTUUM, δάνειον OR δάνεισμα, AND THE COMMODATUM, OR τὸ χρησάμενον.

This distinction is so important that we may cite a passage from the paraphrase of the Institutes of Justinian, by Theophilus, one of the professors of law who were charged with the compilation of the Institutes, because it is more full and distinct than the corresponding passage in the Institutes:

‘A real obligation is contracted by an act, or by the manual delivery of something counted out, and this includes the mutuum, or the δάνειον. A thing is a mutuum where the property in it passes to the person who receives it; but he is bound to restore to us, not the identical thing delivered, but another of the same quality and quantity. I said so that the receiver becomes proprietor of it, that I might exclude the commodatum and the depositum; for in these latter the receiver acquires no property. But he must be bound to us to exclude the donation; for he who receives one acquires the property, but is not bound to us. I said he must restore not the identical things lent, but others of a similar quality and quantity, that I might not deprive him of the use of the mutuum. For a person takes a mutuum that he may use the things for his own purposes, and return others instead of them. For if he were obliged to give back the same things, it would be useless to borrow them. But all things are not taken as mutua, but only those which consist in weight, number, and measure. In weight, as gold, silver, lead, iron, wax, pitch, tin; in measure, such as oil, wine, and corn; in number, such as money, and in short, whatever we deliver with this intent, in number, weight, and measure, so as to bind the receiver to return to us, not the same things, but others of the same nature and quantity. Whence also it is called mutuum, because it is transferred by me to you with the intent that it should become your property (quod de meo tuum fit). But the real obligation includes commodatum, as if anyone were to ask me to lend him a book, and I lent it. But the commodatum differs widely from the mutuum. For the mutuum transfers the property, but the commodatum does not transfer it; and, therefore, the borrower (commodatarius) is bound to restore the very thing lent.’

So it is said in Roman law: ‘But it is called giving a mutuum, because from being my property it becomes yours (quod de meo tuum fit); and, therefore, if it does not become your property no obligation is created.’ But on the contrary with respect to the commodatum: ‘We retain the property and the possession of the thing lent (rei commodatae). No one by lending a thing (commodando) gives the property in it to him who borrows it.’

Thus the whole misconception which is so common among English writers has arisen from the English words ‘lend,’ ‘loan,’ and ‘borrow’ being used to denote two operations of essentially distinct natures. The French language is equally faulty; the words louer, emprunter, and emprunt are equally applied to both kinds of loan. But the distinction is clearly pointed out both in Roman and Greek law; and the Latin and Greek languages have distinct words for each operation. In the Code Napoleon the commodatum is termed prêt à usage, and the mutuum prêt de consummation. All commercial loans are mutua, and not commodata; every loan of money is in reality a sale or an exchange, in which a new property is created, which is called a credit, or a debt. And when the loan is repaid it is another exchange, by which the new property is extinguished.

No one who had the simplest knowledge of the elementary principles of Roman and Greek law, or of mercantile law, would ever have committed the mistake of confounding the distinction between the loan of money and the loan of an ordinary chattel, such as a horse, or a book, or a watch. Hence, those things only can be the subject of a mutuum which consist in pondere, numero, et mensura; or which can be estimated generically in weight, number, and measure. Such things are termed in Roman law quantitates, because equal quantities of bread, wine, oil, coals, etc., are as good as another equal quantity of the same things of the same quality, or one sum of 100 sovereigns is equal to another sum of 100 sovereigns, or one postage stamp is always equal to another of the same denomination. But, also, the Digest says mutua vice funguntur—one quantity serves the same purpose as another quantity. From this expression mediaeval jurists termed them res fungibiles, and in modern English law they are termed fungibles. In English law the former kind of loan, or the commodatum, is said to be returnable in specie, because the identical things lent are returned; the latter kind of loan, or the mutuum, is said to be returnable in genere, because only things of the same nature are returned.

It is much to be regretted that the English language has not two separate words to denote these two kinds of loan, like the Latin and the Greek, because the double meaning of lend, loan, and borrow has been the cause of great misconception among uninformed writers as to the nature of credit and banking.” (Macleod, in Macleod, Horn and Townsend 1896: 313–315).

BIBLIOGRAPHY
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.

Henry Dunning Macleod on the History of Banking

Henry Dunning Macleod was a 19th century historian of banking in Great Britain, and this is a nice summary by him of the nature and history of banking:

“Here, again, great misconception prevails as to the meaning of the word banker and the nature of the business of banking. Gilbert says: ‘A banker is a dealer in capital; or, more properly, a dealer in money. He is an intermediate party between the borrower and the lender. He borrows of one party and lends to another; and the difference between the terms at which he borrows and those at which he lends forms the source of his profit.’ So a report of the House of Commons says: ‘The use of money, and that only, they regard as the province of a bank, whether of a private person or incorporation, or the banking department of the Bank of England.’ Notwithstanding the apparently high authority of these passages, which have misled so many unwary persons, these descriptions of the nature of the business of banking are entirely erroneous. In former times, there were many persons who acted as intermediaries between persons who wanted to lend and those who wanted to borrow. They were called ‘money scriveners.’ The father of John Milton was a money scrivener, but no one ever called a money scrivener a banker. At the present day, many firms of solicitors act as intermediaries between persons who wish to lend and others who wish to borrow. They may have some clients who wish to lend and other clients who want to borrow; and they act as agents between them. The first set of clients may entrust their money to the firm to lend to the second set, and the solicitors receive a commission on the sums which pass through their hands. But no one ever called a firm of solicitors who transact such business ‘bankers’; which shows that there is an essential distinction between the business of money scriveners and such a firm of solicitors and the business of ‘bankers.’ Solicitors who transact such agency business do not acquire any property in the money which passes through their hands. They receive it merely as a bailment or a depositum. They are only the custodians or the trustees of the money and it is only entrusted to their custody for the express purpose of being applied in a particular way. The actual property in the money passes directly from the lender to the borrower through the medium of the trustees or bailees, and if the latter appropriated the money in any way to their own purposes it would be a felony, and they would be liable to be punished for embezzlement. But the case of a banker is wholly different. When his customers pay in money to their account they cede the property in the money to the banker. The money placed with him is not a depositum or a bailment; it is a mutuum or creditum; it is a ‘loan’ or sale of the money directly to himself. The banker is not the bailee or trustee of the money, but its actual proprietor. He may trade with it or employ it in any way he pleases for his own profit or advantage. The banker buys the money from his customer, and in exchange for it he gives his customer a credit in his books, which is simply a right of action to demand back an equivalent amount of money from his banker at any time he pleases, and the customer may transfer this right of action to any one else he pleases, just like so much money.

When the client of a solicitor entrusts money to him, to lend to some one else, he retains the property in it until the arrangement with the borrower is completed; and then the property in the money is transferred directly from the lender to the borrower, without in any way vesting in the solicitor. But when a customer pays in money to his banker, the property in it instantly and, ipso facto, vests in the banker; and the customer has nothing but a right of action against the person of the banker to demand back an equivalent sum. So long as the money remains in the possession of the customer, it is a jus in rem; but when he has paid it into his account he has nothing but a jus in personam.

Galiani says (Delia Moneta, p. 325): ‘Banks began when men saw from experience that there was not sufficient money in specie for great commerce and great enterprises. The first banks were in the hands of private persons with whom persons deposited money; and from whom they received bills of credit (fedi di credito), and who were governed by the same rules as the public banks now are. And thus the Italians have been the fathers and the masters and the arbiters of commerce; so that in all Europe they have been the depositaries of money, and are called bankers.’ So Genovesi says (Delle deioni di Economia Civile, part II., ch. 5, § 5): ‘These monti (banks) were first administered with scrupulous fidelity, as were all human institutions made in the heat of virtue. From which it
came to pass that many placed their money on deposit, and as a security, received paper, which was called and is still called bills of credit. Thus private banks (banchi) were established among us, whose bills of credit acquired a great circulation, and increased the quantity of signs and the velocity of commerce.’ And this was always recognized as the essential feature of banking. Thus Marquardus says (Dejure Mercatorum, Lib. II., ch. 12, § 13): ‘And by “banking” is meant a certain species of trading in money, under the sanction of public authority, in which money is placed with bankers (who are also cashiers and depositaries of money) for the security of creditors and the convenience of debtors, in such a way that the property in the money passes to them; but always with the condition understood that any one who places his money with them may have it back whenever he pleases.’

A ‘banker’ is therefore a person who trades in the same way as the public banks did; they acquired the property in the money paid in; and in exchange for it they gave bills of credit; which circulated in commerce exactly like money and produced all the effects of money. And, moreover, when they bought or discounted bills of exchange, they did it exactly in the same way; they bought them by issuing their own credit, and not with money. And experience showed that they might multiply their bills of credit several times exceeding the quantity of money they held; and thus for all practical purposes multiply the quantity of money in circulation. This the essential business of a banker is to create and issue credit to circulate as money.” (Macleod, in Macleod, Horn and Townsend 1896. 199–201).

The essence of banking as an institution of capitalism has always been the taking of money as a mutuum, often with the client having the right to demand repayment of the bank’s debt to him on demand.

And it was not 17th century English goldsmiths who were the first European bankers, but banking in the sense defined above predated them by many centuries, and certainly existed not only in Italy in the Middle Ages, but also in the ancient Roman Republic and Empire too.

The business of banking as described above is not fraudulent. Thus the vision of banking as held by many Rothbardian libertarians goes against over 2000 years of capitalism.

The callable mutuum loan is – and always has been – a fundamental private business practice and, with the use of fractional reserves, the basis of banking.

This is why in the end Rothbardians – by their own criterion of being vehemently against restrictions on free, voluntary, non-fraudulent private exchanges/contracts – are actually anti-capitalist.

BIBLIOGRAPHY
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.