I want to examine here Rothbard’s assertion that the legal status of fractional reserve banking demand deposits was only firmly established as a mutuum in a “first fateful case … decided in 1811”:
“Thus, in England, the goldsmiths, and the deposit banks which developed subsequently, boldly printed counterfeit warehouse receipts, confident that the law would not deal harshly with them. Oddly enough, no one tested the matter in the courts during the late seventeenth or eighteenth centuries. The first fateful case was decided in 1811, in Carr v. Carr. The court had to decide whether the term ‘debts’ mentioned in a will included a cash balance in a bank deposit account. Unfortunately, Master of the Rolls Sir William Grant ruled that it did. Grant maintained that since the money had been paid generally into the bank, and was not earmarked in a sealed bag, it had become a loan rather than a bailment. Five years later, in the key follow-up case of Devaynes v. Noble, one of the counsel argued, correctly, that ‘a banker is rather a bailee of his customer’s funds than his debtor . . . because the money in . . . [his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up.’ But the same Judge Grant again insisted—in contrast to what would be happening later in grain warehouse law—that ‘money paid into a banker’s becomes immediately a part of his general assets; and he is merely a debtor for the amount.’”The belief that Carr v. Carr was the “first fateful case” establishing such an idea is utterly false.
If we turn to the work of Arthur Browne (c. 1756–1805), the Irish jurist and Regius Professor of Civil and Canon Law at Trinity College (Cambridge), we see that the mutuum contract with respect to money was already English legal practise before Carr v. Carr and is described by Browne in an 1802 treatise:
“Mutuum.]—Was the loan of consumable goods, of money, wine, corn, and other things that might be valued by number, weight and measure, and were to be restored only in equal value and quantity, and not the same specific and identical things. The absolute property was transferred to the borrower, i. e. they were lent for consumption, but he was answerable for their value, and therefore must bear the loss if they were destroyed by wreck, pillage, fire, of other inevitable misfortune. Though the specific thing was not to be restored, yet something must be restored of the same nature, as well as of the same quantity and value; wine could not be returned for oil, or corn for wine: if it was, it was not a mutuum, but an exchange—not a nominate, but an innominate contract. To illustrate this contract still further, living animals could not be the object of a mutuum, because equal numbers might be of different value. The mutuum is a contract of borrowing; it is intrinsic in its nature, that it should be gratuitous without price or reward; if they followed, it would be changed into another contract, that of hiring; yet by special agreement there might be interest on it, but that was foreign to its nature, and did not spring from it.” (Browne 1802: 349–350).English law and banking practice in fact distinguished bailments from mutuum loans certainly from Elizabethan times, but probably since the 1066 Norman conquest (Selgin 2011: 14). The earliest goldsmith notes from demand deposits, which were the forerunners of private bank notes, were negotiable credit/debt instruments that could be presented for commodity money on demand (and bearing the clause “I promise to repay upon demand ...”), not certificates of bailment (Selgin 2011: 11).
Moreover, English and indeed general European civil laws in various nations were based on Roman law, where the mutuum was also understood as a loan where ownership of the money passed to the bank, and it is clear that what we would now call demand deposit fractional reserve banking was conducted in the Roman Republic and Empire under the law of mutuum contracts (Gamauf 2006; Zulueta 1953: 149).
Browne, Arthur. 1802. A Compendious View of the Civil Law, and of the Law of the Admiralty, Being the Substance of a Course of Lectures Read on the University of Dublin (2nd edn.; vol. 1), J. Butterworth, London.
Gamauf, R. 2006. “Mutuum,” in H. Cancik and H. Schneider (eds), Brill’s New Pauly: Encyclopaedia of the Ancient World (Vol. 9), Brill, Leiden. 382–383.
Melton, Frank T. 1978. “Goldsmiths’ Notes, 1654–1655,” Journal of the Society of Archivists 6.1: 30–31.
Rothbard, M. N. 2008. The Mystery of Banking (2nd edn), Ludwig von Mises Institute, Auburn, Alabama.
Selgin, G. “Those Dishonest Goldsmiths,” revised January 20, 2011
Zulueta, Francis de. 1953. The Institutes of Gaius Part 2, Clarendon Press, Oxford.