“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 when interest was part of the contract) 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.
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.