“The contract of mutuum differs from that of commodatum, in that in the latter a bare possession of the chattel lent, as distinguished from the property in it, vests in the borrower, the general property in it still remaining in the lender; where in mutuum that property in the chattel passes from the lender to the borrower. Mutuum is confined to such chattels as are intended to be consumed in the using and are capable of being estimated by number, weight, or measure, such as money, corn, or wine. The essence of the contract in the case of such loans is, not that the borrower should return to the lender the identical chattels lent (for such specific return would ordinarily render the loan valueless), but that upon demand or at a fixed date the lender should receive from the borrower an equivalent quantity of the chattels lent.” (Halsbury 1964: 112).This clearly entails that in the case of a mutuum demand deposit in a fractional reserve bank:
(1) Ownership of the money passes from the client to the fractional reserve bank;And it should be noted that as early as the 18th century, the fundamental terms of the mutuum contract as stated above are already described in exactly these terms by the jurists:
(2) The bank returns only money up to the same value (a tantundem), not the original money;
(3) By the terms of the mutuum contract, the money can be returned either at a fixed future date or on demand.
“Mutuum (a Loan simply so call’d quod de meo tuum fiat [sc. “because let what is mine become yours”]) ... 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.” (Wood 1730: 212).Another two points should be stressed:
(1) British common law was the basis of American law, so the legal status of fractional reserve banking in the US must have been developed under the British common law framework: there is no evidence that it was held to be illegal in the US;
(2) Fractional reserve banking had been revived on a significant scale by London’s goldsmiths from the middle of the 17th century onwards (roughly 80 years before passage was written), and there remains not one convincing shred of evidence that the goldsmiths were guilty of fraud or embezzlement when they engaged in the practice (Selgin 2011).
Halsbury, H. S. G. 1964. The Laws of England: Being a Complete Statement of the Whole Law of England (vol. 2; 3rd edn.; ed. G. T. Simonds), Butterworth, London.
Selgin, G. “Those Dishonest Goldsmiths,” revised January 20, 2011
Wood, Thomas. 1730. A New Institute of the Imperial or Civil Law (4th edn.), J. and J. Knapton, London.