Huerta de Soto gets it Wrong on the Gold Standard

One can read this interview with the Austrian school economist Jesús Huerta de Soto in which he praises the “benefits” of deflation:

Jesús Huerta de Soto, 2014. “Deflating the Inflation Myth,” Cobden Centre, 7 December.

He makes an eyebrow raising comment here:

“[Interviewer:] Does that mean we should be happy about deflation?

[Huerta de Soto]: Certainly. It is particularly beneficial when it results from an interplay of a stable money supply and increasing productivity. A fine example is the gold standard in the 19th century. Back then, the money supply only grew by one to two percent per year. At the same time, industrial societies generated the greatest increase in prosperity in history.”
Jesús Huerta de Soto, 2014. “Deflating the Inflation Myth,” Cobden Centre, 7 December.

Really? The deflationary period of the 19th century generated “the greatest increase in prosperity in history”? What is the evidence for that?

Now it is true that there was in virtually all nations a long-run deflationary trend for most of the 19th century, even if punctuated by inflationary booms outside the 1873 to 1896 period (which was marked by almost persistent deflation).

Huerta de Soto’s statement can only mean that the gold standard era had an historically unprecedented real per capita GDP growth rate compared to all other eras both before and since.

Let us look at the average OECD real per capita GDP growth rate estimates and data for various periods over the past three centuries:

1700–1820 – 0.2%
1820–1913 – 1.2%
1919–1940 – 1.9%
1950–1973 – 4.9%
1973–1990 – 2.5%
(Davidson 1999: 22).

Uh oh.

This is what happens when an Austrian economist puts his foot in his mouth and makes statements in accordance with Austrian ideology but not backed by the empirical evidence.

As we can see, the industrial revolution of the 19th century under the gold standard most probably generated the greatest increase in real per capita wealth in history up to that time, but its record has since been surpassed. The best period of real per capita GDP growth was the 1950–1973 era: the time of Keynesian economics and modern macroeconomic management and also a much higher level of government intervention in the economy, both before and since.

But, the critic might counter-argue, didn’t Huerta de Soto really mean it was that specific deflationary period of the 19th century – which is normally taken to be the 1873 to 1896 era – that generated “the greatest increase in prosperity in history”? Possibly that is what he meant.

We can look at the data for the UK, the US and Germany below from 1873–1896 (with data from Maddison 2003):

UK Average per capita GDP Growth Rate 1873–1896: 1.057%
US Average per capita GDP Growth Rate 1873–1896: 1.422%
German Average per capita GDP Growth Rate 1873–1896: 1.495%.

Since these were the most advanced, fastest growing economies of the late 19th century, it is unlikely any other nations achieved an average per capita GDP growth rate higher than them, and certainly not in numbers large enough to affect the average for that era.

So even within the 1873 to 1896 era the figures do not seem to deviate too far from the 1820–1913 OECD average. They were also inferior to the Keynesian golden age of capitalism from 1950–1973, which remains the best period in human history for real per capita output growth.

One can also note that the deflationary era of 1873 to 1896 produced deep business pessimism at the least in the UK (and possibly other nations too) resulting from the “profit deflation” or profit squeeze of that era, and there were also protracted economic problems in the 1870s and 1890s. In the US, this period coincided with the free silver movement and bimetallist political movement that opposed the gold standard, arising in part from the debt deflationary distress to debtors in that era.

In short, the idea that under the gold standard the industrial nations “generated the greatest increase in prosperity in history” at any time before or since is untrue, and is nothing but a libertarian myth.

BIBLIOGRAPHY
Davidson, P. 1999. “Global Employment and Open Economy Macroeconomics,” in J. Deprez and J. T. Harvey (eds), Foundations of International Economics: Post Keynesian Perspectives, Routledge, London and New York. 9–34.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

Huerta de Soto on Banking in Ancient Rome: A Critique

The following points are a critique of the section on Roman banking in Chapter 2 of Money, Bank Credit and Economic Cycles:

(1) Huerta de Soto asserts that:

“Indeed, Roman argentarii [deposit bankers – LK] were not considered free to use the tantundem of deposits as they pleased, but were obligated to safeguard it with the utmost diligence.” (Huerta de Soto 2012: 53).

As we have seen in the previous post, there is no convincing evidence for this idea at all. First, Huerta de Soto’s idea that money left with a banker as a mutuum required a strict term/time limit is untrue: even the mutuum loan could be a loan callable on demand in Roman law.

Secondly, even the irregular deposit (depositum irregulare) of later Roman law did not require that the banker had to keep some equivalent amount of money for all depositors on hand at all times. In cases of mutuum loans or the irregular deposit, a tantundem was repaid at the time it was due or when the depositor/creditor demanded it.

(2) On p. 126 of Money, Bank Credit and Economic Cycles, Huerta de Soto asserts that

“In continental Europe [sc. in the 18th century], in contrast, the Roman legal tradition still exerted great influence. Roman jurists had impeccably formulated the nature of the monetary irregular deposit, basing it on the safekeeping obligation and the unlawfulness of banks’ appropriation of deposited funds. … Also, [sc. in continental Europe] the concept of irregular deposit began to return to its classical legal roots (which outlawed fractional-reserve banking)” (Huerta de Soto 2012: 126).

But we have already seen that neither Roman Classical jurists nor post-Classical/late Roman jurists defined the irregular deposit in the way that Huerta de Soto does.

And the idea that the Romans banned fractional reserve banking, or that it was illegal at Rome is utterly absurd.

Roman contract law either in the mutuum or the later irregular deposit (depositum irregulare) contract allowed fractional reserve banking, and the practice itself was clearly conducted during the Roman Republic and Empire without prosecution:

“Roman bankers did indeed lend – much of the extensive evidence was gathered by Andreau. It can also be demonstrated, in case it needs to be, that classical banks practised fractional reserve banking – for otherwise there would have been no need in the crisis of 85 B.C. to give the bankers of Ephesus ten years to pay back their depositors. We have no evidence as to how large their reserves were normally: according to De Roover, medieval bankers typically maintained a reserve ratio as high as 29–30 per cent.” (Harris 2006: 11).

There is not one shred of evidence that fractional reserve banking was illegal under Roman law or considered immoral at Rome.

(3) On pp. 54–55, Huerta de Soto briefly discusses the case of the banker Callistus (a future pope), who managed a bank and stole the funds, and was punished for this.

But the whole episode does not demonstrate that fractional reserve banking was illegal at Rome, nor that banks had to keep an equivalent in money for all irregular deposits they held. Callistus was corrupt, and his fraud is completely different from the normal, legal activities of fractional reserve banks.

I will end with the observation that one of the sources of Huerta de Soto’s unorthodox definition of the irregular deposit (depositum irregulare) appears to be the work of Pasquale Coppa-Zuccari (1873–1927), an Italian professor of civil law and business law who taught at the University of Urbino, the University of Siena, the University of Messina and University of Palermo from 1901 to 1910 onwards.

In particular, these two works are cited by Huerta de Soto:

Coppa Zuccari, Pasquale. 1901. Il deposito irregolare. Modena.

Coppa-Zuccari, Pasquale. 1902. “La natura giuridica del deposito bancario,” Archivio giuridico “Filippo Serafini”, n.s. 9: 441–472.

Now my Italian is not very good, but I suspect that an investigation of these works will reveal an equally flawed understanding of the irregular deposit, and may be the source of the questionable legal theory in Huerta de Soto’s book.

Update

Huerta de Soto cites the following passage of Pasquale Coppa Zuccari on p. 16 (n. 15) of Money, Bank Credit and Economic Cycles to defend his view of the irregular deposit. I reproduce the Italian with my translation following:

“Conseguenza immediata del diritto concesso al deponente di ritirare in ogni tempo il deposito e del correlativo obbligo del depositario di renderlo alla prima richiesta e di tenere sempre a disposizione del deponente il suo tantundem nel deposito irregolare, è l'impossibilità assoluta per il depositario di corrispondere interessi al deponente.” (Coppa Zuccari 1901: 292 quoted in Huerta de Soto 2012: 16, n. 15).

“The direct consequence of the right granted to the depositor to withdraw the deposit at any time and the corresponding obligation of the depositary to return it at the first request and keep available to the depositor his tantundem in the irregular deposit [sc. is that] it is absolutely impossible for the depositary to pay interest to the depositor.”

So it appears that Coppa Zuccari also held the erroneous view that a banker taking irregular deposits had to keep money of the same amount available at all times. Whether Coppa Zuccari himself argued that this was the view of the Romans I cannot say, but what can be said is that Classical and post-Classical Roman law said no such thing.

BIBLIOGRAPHY

Coppa Zuccari, Pasquale. 1901. Il deposito irregolare. Modena.

Harris, W. V. 2006. “A Revisionist View of Roman Money,” Journal of Roman Studies 96: 1–24.

Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala.

Huerta de Soto on Justinian’s Digest 16.3.25.1

Here is Huerta de Soto’s interpretation and translation of Justinian’s Digest 16.3.25.1 in Money, Bank Credit and Economic Cycles (2012), which is a quotation from the Classical jurist Papinian (142–212 AD):

“Roman jurists established that when a depositary [sc. in an irregular deposit - LK] failed to comply with the obligation to immediately return the tantundem upon request, not only was he clearly guilty of the prior crime of theft, but he was also liable for payment of interest on arrears. Accordingly, Papinian states:

He who receives the deposit of an unsealed package of money and agrees to return the same amount, yet uses this money for his own profit, must pay interest for the delay in returning the deposit.

(Huerta de Soto 2012: 32).

Huerta de Soto makes a similar statement on p. 65 of Money, Bank Credit and Economic Cycles, citing the Digest 16.3.25.1.

Now Huerta de Soto is correct that the passage in question says that interest must be paid if the person owing the tantundem is in default. But he is utterly incorrect in saying that the Roman jurists though that the guilty party was also “clearly guilty of the prior crime of theft.” That is not what the passage says.

Let us look at the original Latin with my more literal translation:

Qui pecuniam apud se non obsignatam, ut tantundem redderet, depositam ad usus proprios convertit, post moram in usuras quoque iudicio depositi condemnandus est.

“He who uses money deposited with him not sealed up, so that he should restore a tantundem, if he defaults [sc. in payment] must also be condemned in an action on deposit (actio depositi) to [sc. pay] interest.” (Digest 16.3.25.1; my translation).

In Roman law, if you deposited money unsealed or not contained in a box, it was not considered a bailment (or depositum regulare). It was either a mutuum (a loan for consumption) or in later law an irregular deposit (depositum irregulare), the latter being very much like a mutuum too.

In fact, the Digest 19.2.31 tells us quite clearly that when money was left unsealed with someone (and implicitly even a banker) it was not a bailment:

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).

Therefore the guilty party described in Digest 16.3.25.1 was not guilty of the “prior crime of theft.” Why? Let us look at the translation again:

Qui pecuniam apud se non obsignatam, ut tantundem redderet, depositam ad usus proprios convertit, post moram in usuras quoque iudicio depositi condemnandus est.

“He who uses money deposited with him not sealed up, so that he should restore a tantundem, if he defaults [sc. in payment] must also be condemned in an action on deposit (actio depositi) to [sc. pay] interest.” (Digest 16.3.25; my translation).

The money left on “deposit” is not a bailment, but an irregular deposit. The text does not say that the guilty party had committed “theft” in using the money, for Roman law allowed the holder of the money given as an irregular deposit to use that money as he pleased, just as in a mutuum contract. Despite Huerta de Soto, nor did Roman law require the banker to keep some amount of money equivalent to the initial deposit available for all depositors at all times. Fractional reserve banking was perfectly legal and acceptable.

The text is telling us that, if the party who owed the money defaulted in payment, he was also to be required by law to pay interest in compensation to the “depositor,” in addition to the principal sum owed (this is the significance of the Latin word quoque meaning “also” in the text), when he brought an action or law suit for recovery of the money (or “action on deposit”).

That is all the text says, and Huerta de Soto’s interpretation of it is wrong.


BIBLIOGRAPHY

Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala.

Scott, S. P. 1932. The Civil Law. Central Trust Co., Cincinnati.

Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique

Jesús Huerta de Soto is author of Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup, Auburn, Ala., 2012). It is one of those appallingly long Austrian tomes (like Human Action), whose sheer length seems designed to bludgeon the reader into submission.

But don’t be fooled by the length and prima facie scholarly tone of Money, Bank Credit and Economic Cycles: it is a terrible book, badly flawed.

In what follows I use and cite the 3rd edition of 2012 in a critique of Chapter 1.

You will need a basic understanding of the mutuum contract and the irregular deposit (depositum irregulare).

Huerta de Soto’s book seems to be the most recent and extensive treatise by an anti-fractional reserve banking Austrian. Reading it, I am struck by the many following errors in his interpretation of Roman contract law in Chapter 1 (and I have incorporated an earlier post here):

(1) Huerta de Soto misunderstands the nature of the mutuum contract. He defines the mutuum contract in these terms:

“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, economically or historically – should be limited to a specific time period. Certainly in ancient Roman and Anglo-American law there is no such restriction.

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 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 or 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 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.

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 in ancient Rome 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). 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 in Roman law was a callable loan, even callable immediately.

Let us turn to English law. We can cite the The Laws of England: Being a Complete Statement of the Whole Law of England (vol. 2; 3rd edn.; 1964) on the mutuum:

“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 explicitly states that, in the case of a mutuum contract, even a demand deposit in a fractional reserve bank, the loan can be repaid either at a fixed future date or on demand.

And it should be noted that, as early as the 18th century, the mutuum contract is also defined in the same terms as seen above by Thomas Wood (1661–1722), an English Doctor of Civil Law (New College, Oxford) and author of the leading work on English law in that era. In the 4th edition of A New Institute of the Imperial or Civil Law (1730; 1st edn. 1704), we have this definition of the mutuum:

“Mutuum (a Loan simply so call’d quod de meo tuum fiat [sc. “because let what is mine become yours”])

It hath no one particular name in the English Language.

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. In the case of Money, Silver may be repaid tor Gold, unless the Creditor is to be damnified by it; for it shall be understood to be the same kind of Money when it is of the same” (Wood 1730: 212).

So even in the early 18th century in the law of the United Kingdom the mutuum is a loan repayable upon demand: a specific and strict time period (or term) for the loan is not required, though obviously the mutuum can involve a fixed term or a set date for repayment by contract.

Over a century later in America in 1848, a case is recorded in the Court of Appeals of the State of New York, involving Benjamin C. Payne, Executor vs. William Gardiner. In this case, the American court defined the mutuum in relation to deposit banking:

“In cases of mutuum the party borrowing was not held to pay interest upon the money lent; but in cases of irregular deposit, interest was due by the depositary, both ex nudo pacto and ex mora. This distinction between the two classes of deposit, as to interest, is not recognized by our law. The depository being liable in each for interest, in the event of a breach of duty.

A deposit of money with a bank or private person is what is known in the civil law as a mutuum or irregular deposit—the distinction between the two kinds of deposit not being recognized by the common law.

When money is borrowed, and no time of payment is fixed by the contract of loan, the debt, as already stated, is instantly due, and an action may be brought without demand — the bringing of the action being a sufficient demand to entitle the lender to recover. (Chitty on Contracts, 734; Norton v. JEUam, 2 M. & W. 461.)

Even if the debt is by the terms of the agreement to be paid on demand, yet no special demand is necessary; the money being due without it.” (Tiffany 1865: 168).

“In Story on Bailments (p. 66 § 88), it is said that ‘in the ordinary cases of deposits of money with banking corporations or bankers, the transaction amounts to a mere loan or mutuum, or irregular deposit, and the bank is to restore not the same money but an equivalent sum whenever it is demanded.’” (Tiffany 1865: 169).

So American law follows English law on the mutuum: a loan under such a contract can be repaid on demand, without a specific time being set.

(2) The Classical Roman jurists include Gaius (c. 115–180 AD), Papinian (142–212 AD), Ulpian (c. 170–228), Paul (fl. 228–235 AD), and Modestinus (fl. 250 AD).

In later Roman law by the time of Justinian, there appears to have been a type of contract that modern scholars call the depositum irregulare (or irregular deposit), a term invented by the fifteenth century jurist Jason of Maino. This contract, when involving money, allowed the transferral of ownership (dominium) of money deposited in a bank to the banker. Thus the money could be used by the bank and lent out to provide a return in interest for the “depositor,” and the “depositor” received back the same quantity (or tantundem) of money, not the same money itself that had been deposited (Zimmermann 1990: 215–216). Note how the word “deposit” is highly misleading here, because the irregular deposit is very much like a mutuum (a loan for consumption).

Indeed, in the time of the Roman jurists Ulpian (c. 170–223 AD) and Papinian (142–212 AD), it appears that the depositum irregulare was merely considered to be a type of mutuum, and it may well be that the whole legal concept of depositum irregulare is a development of later legal theorists, unknown to jurists of the second or third century AD (Oudshoorn 2007: 135–136). Admittedly, there are a number of dissenting modern legal scholars these days who do think that the Classical Roman jurists recognised the depositum irregulare (Evans-Jones and MacCormack 1998: 133), but even if so, it was almost the functional equivalent of the mutuum, and the question is still controversial.

The depositum irregulare (or irregular deposit) is sometimes also called the “improper deposit” or “general deposit” in modern legal terminology, and as a legal concept has been most influential on the civil law systems on Continental Europe, rather than in Anglo-American law.

Now Huerta de Soto has a very questionable definition of the irregular deposit. He asserts that the classical Roman jurists

“had already recognized the irregular deposit contract, understood the essential principles governing it, and outlined its content and essence as explained earlier in this chapter.” (Huerta de Soto 2012: 26).

By the latter clause, Huerta de Soto seems to mean that Roman classical jurists defined the irregular deposit contract in the terms he himself describes it on pp. 4–20. But Huerta de Soto’s definition of the irregular deposit (depositum irregulare) includes these two characteristics that are highly dubious:

(1) there is no interest on the money “deposited” in the irregular deposit, and
(2) the bank is required to keep what Huerta de Soto misleadingly calls a tantundem always available in full for all holders of irregular deposits.

These two aspects make Huerta de Soto’s definition of the irregular deposit utterly unorthodox. He cites certain Spanish legal sources and Spanish legal scholars for his definition, but it is clearly eccentric and aberrant, certainly with respect to Roman law and Anglo-American law.

Huerta de Soto’s assertion that the classical Roman jurists defined the irregular deposit in the way he does (and perhaps in the way certain Spanish legal scholars do) is untrue.

First, as we have seen above, the question whether the classical Roman jurists even had a concept of the “irregular deposit” is intensely problematic (Zimmermann 1990: 217): many scholars think that the irregular deposit (depositum irregulare) was not even recognised by the classical Roman jurists (Schulz 1951: 520), who interpreted “deposit” banking in terms of the mutuum contract. Some scholars also feel that many of the texts in Justinian’s Digest from earlier jurists that seem to refer to the irregular deposit are interpolated and hence unreliable (Schulz 1951: 520).

Secondly, contrary to Huerta de Soto, the irregular deposit by the time of post-Classical Roman law in Justinian’s Digest regularly paid interest (Buckland 1963: 470):

“the so-called ‘irregular’ deposit primarily concerned deposits of money upon the terms that the recipient - often but not necessarily a banker - was bound to restore not the same coins but an equivalent, ownership of the deposit being transferred to him. As he was owner the depositee could use the money, in which case it was usual to pay interest on it to the depositor. There are clearly similarities between this contract and mutuum.” (Evans-Jones and MacCormack 1998: 133).

Thirdly, there was absolutely no obligation that the banker had to keep a tantundem always available in full for all holders of irregular deposits at all times. If Huerta de Soto were correct, then no institution taking irregular deposits could ever be a bank or pay interest: it would be the equivalent of a mere warehouse facility. Yet even in late Roman law the irregular deposit paid interest.

In short, Huerta de Soto’s definition of the irregular deposit is at variance with Roman law.

(3) Jesús Huerta de Soto cites Justinian’s Digest 16.3.24 and argues that whenever anyone made an irregular deposit of money in Roman times, he received a written certificate or deposit slip. In fact, the relevant passage of the Digest says nothing of the sort. Here it is in full:

“Lucius Titius to Sempronius
Greeting: ‘I notify you by this letter written by my own hand, that the hundred pieces of money which you loaned to me this day, and which have been counted by the slave Stichus, your agent, are in my hands, and that I will pay them to you on demand, when and where you desire me to do so.’ The question arises whether any increase by way of interest is to be considered? I answered that an action on deposit will lie, for what is the loaning of anything for use but the depositing of it? This is true, if the intention was that the very same coins should be returned, for if it was understood that only the amount should be paid, the agreement exceeds the limits of the deposit. If, in the case which has been stated, an action on deposit will not lie, since it was only agreed to pay the same sum, and not the identical coins, it is not easy to determine whether an account of the interest should be taken. It has, in fact, been established that, in bona fide actions, it is the duty of the judge to decide that, with reference to interest, only such can be paid as the stipulation provides for. But is contrary to good faith and the nature of a deposit, that interest should be claimed before the party who granted the favor by receiving the money, is in default in returning it. If, however, the agreement was that interest should be paid from the beginning, the condition of the contract shall be observed.” (Digest 16.3.24).

This text merely refers incidentally to a letter that Lucius Titius wrote to Sempronius, by which the former informed the latter of the money he had received from him: there is absolutely nothing here to lead us to infer that, when someone made an irregular deposit of money, that person regularly or formally received a written certificate or deposit slip in Roman times.

(4) On pp. 29–30, de Soto commits a quite clear error:

“[sc. Digest 16.3.24] … reveals the immediate availability of the money to the depositor and the custom of giving him a deposit slip or receipt certifying a monetary irregular deposit, which not only established ownership, but also had to be presented upon withdrawal.

The essential obligation of depositaries is to maintain the tantundem constantly available to depositors. (Huerta de Soto 2012: 29–30).

But we have already seen that Digest 16.3.24 does not establish at all that the depositor received a written certificate or deposit slip when money was left on irregular deposit or even regular deposit (or bailment).

Huerta de Soto’s statement that the “essential obligation of depositaries is to maintain the tantundem constantly available to depositors” when applied to Roman law is utterly wrong and confused, as I have also noted above.

Huerta de Soto has imported questionable legal definitions of the irregular deposit from the various Spanish legal scholars that he cites which do not apply to Roman law, or indeed to Anglo-American contract law. Frankly, I doubt whether his definition of the irregular deposit even applies to interpretations of that concept in many other Continental European civil law systems either.

A tantundem applies to the mutuum loan or irregular deposit (depositum irregulare), and is the quantity of fungible goods of the same value, quality or amount returned to the creditor when he (1) requests repayment (as in a callable loan) or (2) when his loan is due (as in a loan with a set term/time limit). Despite Huerta de Soto, the debtor is not obliged to maintain a “tantundem constantly available to depositors” at all: he is only obliged to repay a tantundem when he is asked or when the debt is due.

On p. 35, Huerta de Soto makes the very same error:

“However, the [sc. medieval] codes do not include the important clarifications made in the Corpus Juris Civilis to the effect that, though ownership is “transferred [sc. in the case of the irregular deposit],” the safekeeping obligation remains, along with the responsibility to keep continually available to the depositor the equivalent in quantity and quality (tantundem) of the original deposit.” (Huerta de Soto 2012: 35).

Huerta de Soto is wrong. The Medieval codes did not include any such “clarifications” because they did not exist in Roman law, even in the post-Classical period. In Roman law, no such obligation occurred in the case of the irregular deposit: it was in essence the functional equivalent of a mutuum, and the tantundem was required to be paid when due or (if it was in the contract) on demand. The banker was not obliged to engage in some safekeeping obligation in which he had to “keep continually available to the depositor the equivalent in quantity and quality (tantundem) of the original deposit.”

On p. 31 and p. 34, Huerta de Soto misuses the word tantundem again: he applies the term tantundem to a regular deposit (depositum regulare or bailment), where it is inappropriate.

(5) On pp. 30–32, Huerta de Soto conflates the terms of the regular deposit (depositum regulare) with irregular deposit (depositum irregulare).

All in all, Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles has incredible and shocking errors. And this is just the first chapter.

BIBLIOGRAPHY
Buckland, William Warwick. 1963. A Text-book of Roman Law from Augustus to Justinian (3rd edn.). Cambridge University Press, Cambridge.

Evans-Jones, R. and G. MacCormack. 1998. “Obligations,” in E. Metzger (ed.), A Companion to Justinian’s Institutes. Cornell University Press, Ithaca, N.Y. 127–207.

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.

Huerta de Soto, J. 2012. Money, Bank Credit and Economic Cycles (3rd edn.; trans. M. A. Stroup). Ludwig von Mises Institute, Auburn, Ala.

Oudshoorn, J. G. 2007. The Relationship Between Roman and Local Law in the Babatha and Salome Komaise Archives: General Analysis and Three Case Studies on Law of Succession, Guardianship and Marriage. Brill, Leiden and Boston.

Schulz, F. H. 1951. Classical Roman Law. Clarendon Press, Oxford.

Tiffany, J. 1865. Reports of Cases Argued and Determined in the Court of Appeals of the State of New York (vol. II), Weare C. Little, law Bookseller, Albany.

Wood, Thomas. 1730. A New Institute of the Imperial or Civil Law (4th edn.), J. and J. Knapton, London.

Zimmermann, Reinhard. 1990. The Law of Obligations: Roman Foundations of the Civilian Tradition. Juta, Cape Town, South Africa.

Huerta de Soto on the Mutuum Contract: A Critique

Jesús Huerta de Soto defines the mutuum contract in these terms:

“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.


BIBLIOGRAPHY

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.