“Mutuum (also from Latin) refers to the contract by which one person—the lender—entrusts to another—the borrower or mutuary—a certain quantity of fungible goods, and the borrower is obliged, at the end of a specified term, to return an equal quantity of goods of the same type and quality (tantundem in Latin). A typical example of a mutuum contract is the monetary loan contract, money being the quintessential fungible good. By this contract, a certain quantity of monetary units are handed over today from one person to another and the ownership and availability of the money are transferred from the one granting the loan to the one receiving it. The person who receives the loan is authorized to use the money as his own, while promising to return, at the end of a set term, the same number of monetary units lent. The mutuum contract, since it constitutes a loan of fungible goods, entails an exchange of “present” goods for “future” goods. Hence, unlike the commodatum contract, in the case of the mutuum contract the establishment of an interest agreement is normal, since, by virtue of the time preference (according to which, under equal circumstances, present goods are always preferable to future goods), human beings are only willing to relinquish a set quantity of units of a fungible good in exchange for a greater number of units of a fungible good in the future (at the end of the term).” (Huerta de Soto 2012: 2–3).The trouble with this definition is that there is no reason why the mutuum contract – legally, morally or historically – should be limited to a specific time period. Huerta de Soto is adamant that the mutuum contract is repaid by means of fungible goods of the same type or value, but at the end of a specified term or at the end of a set term.
But why must there even be a specified term or time at all? One can freely contract to lend a fungible good to another person, but both agree that the lender can recall the loan on demand, without any specific date being set.
And this does not even need to involve money: e.g., I lend my neighbour a chicken. My neighbour has a dozen chickens, but would like another one. We both agree I can come to my neighbour in a week, month or several months or at any time I want, and say “can I get back a chicken that will repay your loan to me?”
My neighbour may well have eaten the chicken in the meantime but provides a healthy chicken of the same age, size and value, which was all part of the original agreement. Or we may have contracted for some interest, say, 3 eggs to be paid as interest with the chicken.
This sort of transaction can be applied to chickens, cows, animals, capital goods, and, above all, money: there is no reason whatsoever why a specified time element need be part of a mutuum contract. The contract may just be to return the item borrowed on demand. When the borrower keeps a reserve stock of the fungible goods in question (such as animals or money), then the transaction becomes convenient for both parties: the lender has the flexibility of calling back his loan at short notice, and the debtor can use much of his stock of things borrowed for economic or consumption purposes, but keep a reserve buffer stock to repay his creditors. Fractional reserve banking works in this way.
Even looking at the legal history of contract in the Roman Republic and Roman empire, I see no evidence that the mutuum contract from its early history in Western civilization ever required strict set dates or fixed term contracts (Zimmermann 1990: 155–156).
In Roman law, a loan of money was a mutuum, but interest and a set date (if the two parties wanted one) for repayment would be by additional stipulatio (= stipulation). Yet a stipulatio between two parties might set no fixed date for repayment, but make repayment on demand. In fact, without such an additional stipulatio, Roman law said that the lender could recall his loan at any time:
“A loan transaction can hardly achieve its purpose if the capital has to be repaid immediately after it has been handed over by the lender to the borrower. Yet this was, strictly speaking, the case where the mutuum was not accompanied or reaffirmed by a stipulation. For it was the datio [the act of giving over the thing borrowed – LK] that gave rise to the obligation to repay the capital, and this obligation came into effect immediately.” (Zimmermann 1990: 156).That is to say, the default legal form of a mutuum was a callable loan, even callable immediately, although obviously in practice most loans involved some period of time before repayment.
The serious flaw running through the strident statements about fractional reserve banking in Money, Bank Credit and Economic Cycles is the idea that mutuum requires a term/time limit with set date for repayment. That is simply not true.
Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala
Zimmermann, Reinhard. 1990. The Law of Obligations: Roman Foundations of the Civilian Tradition. Juta, Cape Town, South Africa.