“In ordinary cases of deposits of money with banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded. But persons are sometimes in the habit of making, what is called, a special deposit of money or bills in a bank, where the specific money, as silver or gold coin, or bills, are to be restored, and not an equivalent. In such cases the transaction is a genuine deposit; and the banking company has no authority to use the money so deposited, but is bound to return it in individuo to the party.” (Story 1832: 66).The two legal contracts here are as follows:
(1) mutuum (sometimes called faenus/fenus when interest was part of the contract [Buckland 1925: 273]) or loan for consumption, in which ownership of the thing lent is transferred from creditor to debtor, and only something of the same quality, type and quantity is repaid.These legal concepts go right back to ancient Roman law and were known in the Middle Ages.
(2) depositum regulare or bailment (and also called special deposit), in which a person retains ownership of the thing given to another person for safekeeping.
Fractional reserve banking normally involves the mutuum contract (and a variant on the mutuum called the “irregular deposit” or depositum irregulare) and, when banking on fractional reserves became important in medieval and early modern Europe, this was the primary contract used between bankers and their clients, not that of bailment (even though no doubt such bailment contracts were made too).
This is confirmed by the evidence of some of the earliest British goldsmiths’ notes.
These must be understood as IOUs or negotiable credit/debt instruments payable on demand (though sometimes with receipt of the initial amount left with the banker), with the statement “I promise to repay upon demand ...,” which explicitly demonstrates to us that these were IOUs or debt records, not certificates of bailment (Selgin 2011: 11).
An early example of a goldsmiths note is one issued by the London banker Feild Whorwood in 1654. This is both a receipt for the sum delivered to the banker (but not a certificate of bailment) and, without any doubt, a promissory note:
“Recd [i.e., received], ye [the] 16th [December] 1654 of Sam Tofte the some [sum] of Twenty five pounds w[hi]ch I promise to repay upon Demand I say R[eceived]The nature of the contract entered into by Sam Tofte (the holder of the bank account) and the banker Feild Whorwood is made perfectly clear to us by the words of the banker: “I promise to repay upon Demand ....”
interest of both £2-05-0.” (Melton 1986: 101).
* = by me.
This was a receipt of money to the banker given by Sam Tofte as a loan or mutuum, and one re-payable on demand, with interest. It was no bailment contract.
The idea that the earliest goldsmiths were only engaged in bailment and that fractional reserve banking simply arose by fraud is not supported by the historical evidence.
Buckland, W. W. 1925. A Manual of Roman Private Law. Cambridge University Press, Cambridge.
Melton, Frank T. 1986. Sir Robert Clayton and the Origins of English Deposit Banking, 1658–1685. Cambridge University Press, Cambridge.
Selgin, G. “Those Dishonest Goldsmiths,” revised January 20, 2011
Story, Joseph. 1832. Commentaries on the Law of Bailments, with Illustrations from the Civil and the Foreign Law. Hilliard and Brown, Cambridge.
It appears that the "mutuum" is what we call a deposit and the "depositum regulare" is what we call a safe deposit box. The key to money today is that it is fungible and unidentifiable. I.e. all currency is equivalent to all other currency (of the same denomination). Thus, we don't need to deal with the same branch of the same bank for all our transactions. An interesting history.ReplyDelete
"It appears that the "mutuum" is what we call a deposit and the "depositum regulare" is what we call a safe deposit box. The key to money today is that it is fungible and unidentifiable. I.e. all currency is equivalent to all other currency"Delete
David W. Viel,
Money has been fungible since the time when fungible money units were first invented, and the concepts of mutuum and "depositum regulare" go right back to the ancient Roman republic -- that is, the ancient history of Western civilization.
The fraud in fractional reserve banking is that it is impossible for fractional reserve banks to fulfill all their obligations (without the help of deposit insurance) in case of a massive withdrawal of funds.ReplyDelete
I think David Viel is correct here.
"The fraud in fractional reserve banking is that it is impossible for fractional reserve banks to fulfill all their obligations (without the help of deposit insurance) in case of a massive withdrawal of funds."Delete
No, that is not "fraud". That is an example of a scenario where it is not possible for the bank to fulfill its contractual obligations -- that is, it is merely breach of contract in which a bank fails to repay debt.
Like most Austrians your argument is ignorant, pathetic and stupid.
banks do normally have the money to repay depositors, they just don't have it in the form of cash. Instead it is held in the form of bonds and other financial assets, which can take a while to sell for cash.Delete
Just look at the paper Bob Murphy cites in his Mises Canada post by N. Cachanosky, 2009, “The Definition of Inflation According to Mises: Implications for the Debate on Free Banking,” Libertarian Papers Vol. 1, Art. No. 43: p. 5:
“Mises …. suggests inflation [is] … ‘an increase in the quantity of money above the market demand of money.’ Note that, under Mises’ suggested definition, not every increase in the quantity of money is inflation, only increases that exceed market demand …. [Mises] saves the term inflation for cases where the quantity of money is increasing above the market demand for money” (Cachanosky 2009: 5).
Cachanosky even cites Mises’ statement in The Free Market and Its Enemies (1952 ), p. 44, made in 1952:
“Inflation is an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings.”
Did Murphy even read the paper properly?
Have posted this comment over at Freeadvice:
LK, what is fraud by your definition? And what's your point in being so abrasive?Delete
As it is defined in dictionaries and in the law:Delete
"The use of false representations to gain unjust advantage; criminal deception."
FR banking is not fraud because the bank legally owned your money from the point you paid it in, and never promised to keep 100% reserves.
Failure to repay your FR bank account debt is breach of contract, not fraud.
God, Reading Mises is so boring.ReplyDelete
But he's the greatest economist in human history!! ... or so the comments section at Free Advice tells me.Delete
more like a boring right-wing ranter.Delete
over at Bob Murphy's blog I saw a comment by you:ReplyDelete
“You were too stupid to grasp he concept of self ownership.
lol.. What has “self ownership” got to do with this debate?"
I can't see who originally said “You were too stupid to grasp he concept of self ownership" and who he was responding to... link?
oh, it looks like Murphy deleted Gamble's original comment I was responding to -- looks even HE thought Gamble's comment was too stupid to allow on his blog.Delete
I think Gamble was educated by youtube videos.Delete