Having found at least one reader (and what a reader!), in the person of the author of the excellent blog Social Democracy in the 21st century, who goes under the pseudonym “Lord Keynes”, I was encouraged to proceed with a second post. I’m lucky enough to be holidaying in some beautiful Greek islands at the moment. The downside is, however, that the Internet connections I’ve had access to were, to say the least, dodgy, so this post has been a long time in the making.

To recap, our subject is Murray Rothbard’s discussion of the origins of fractional reserve banking (Rothbard 2008, pp. 85 to 94), which seems to rest on the assumption that fractional reserve banking arose, in England, from, basically, fraud practiced by “money warehouses” (goldsmith bankers with whom gold or silver were deposited for safekeeping). Rothbard seems to have believed that the law was unable or unwilling to suppress such fraud because “bailment law scarcely existed until the eighteenth century” (Rothbard 2008, p. 89) whilst “deposit banking law was in even worse shape than overall warehouse law and moved in the opposite direction to declare money deposits not a bailment but a debt” (Rothbard 2008, p. 91). Between us, Lord Keynes and I have already provided enough elements to show that these assertions which, it seems to me, form the pillars of Rothbard’s thesis, are, from a legal historical point of view, sheer nonsense, but there is a lot more to be said.

Rothbard’s thesis completely disregards the fact that English Common law already very early distinguished between fungible commodities or assets, such as corn, wine, oil and, of course, money and deposits of non-fungible objects. In my previous post I provided a passage from Bracton, the 13th century English writer, which shows this distinction. Lord Keynes found an even earlier passage from Glanvill. Further, an earlier post by Lord Keynes clearly shows that English Common law was not being peculiar about this distinction but largely reflected which had already been the orthodoxy under Roman law, historically perhaps the first really developed legal system.

In the meantime, I have found further evidence in support of my position (which is also that of Lord Keynes). But first let’s clear up a small quibble that Lord Keynes has expressed about my earlier post: I had remarked that if I borrow a cup of sugar from my neighbour to bake a cake, that is a loan since I’m not going to return the very sugar I borrowed (which will go into my cake); but if I also take my neighbour’s cup in which to carry it, this is a bailment of the cup, since I’m supposed to return the very cup I took away. Lord Keynes, in his post linking to my own, observed: “I would suggest that if the cup is still the property of the person who lent it, this is better understood as what the Romans called commodatum (or a gratuitous “loan for use”), not bailment”. But this is a false distinction, at least as far as the English Common Law is concerned. Sir William Jones (1746-1794), an English lawyer (among other
things) of whom much more will be said later, defines bailments as “a delivery of goods on a condition, expressed or implied, that they shall he restored by the bailee to the bailor, or according to his directions, as soon as the purpose for which they were bailed shall be answered” [Jones 1828 (1781) p. 2]. A commodatum, according to his classification [Jones 1828 (1781) p. 35] and to that of Lord Holt in Coggs v. Bernard is just one of the several types of bailment and corresponds, it must be said, to the example I have given (where I borrow my neighbour’s cup to carry away the sugar I borrowed). In other words, I have given an example of both a bailment and a commodatum, the latter being simply a subdivision of the former.

Indeed, Lord Keynes’ qualification (“if the cup is still the property of the person who lent it”) gives an important clue as to the distinction between a loan and a bailment, since a loan involves a transfer, to the borrower, of property in the (fungible commodity or asset) loaned.

We can find this distinction already in Doctor and Student (dialogue 2, chapter 38): “A man may have of another by way of loan or borrowing money, corn, wine and such other things, where the same thing cannot be delivered if it be occupied, but another thing of like nature and like value must be delivered for it; and such things he that they be lent to, may by force of the loan use as his own, and therefore if they perish, it is at his jeopardy; and this is most properly called a loan. Also a man may lend to another a horse, an ox, a cart, or such other things as may be delivered again, and they by force of that loan may be used and occupied reasonably in such manner as they were borrowed for or as it was agreed at the time of the loan that they should be occupied”.

Noy‘s Maxims [Noy 1677 (1641), p. 91] is also helpful in this respect: “If money, corn, wine, or such other things, which cannot be re-deliver’d, be occupied on borrowed, if it perish, it is at the peril of the borrower. But if a horse or a cart, or such other things, as may be used and delivered again, be used in such manner as they were lent, if they perish, he that oweth them shall bear the Ioss, if they perish not through the default of him that did borrow them, or that he did make a promise at the time of delivery to re-deliver them safe again. lf they be occupied in any other wise then according to the lending, in what wise soever it perish if it not in default of the owner, he that did borrow them shall be charged with them in law and conscience”.

The passage above from Noy also gives a significant clue as to why treating a deposit of money (or a fungible commodity such as e.g. wheat) as a loan rather than a bailment was in fact advantageous to the lender, a point that Rothbard seems to have completely missed. In the case of a loan, there was no question of the lender escaping from the obligation to repay through some chance act or accident. Once I have paid my $1,000 to the bank, I have a claim on the bank for that amount and the bank can’t escape repayment by pleading that, five minutes after I made my deposit, its branch was robbed and the actual notes I had deposited were carried away by the robbers. Too bad for the bank, if that was the case! It can be seen from the above passages that matters were thought to be different in the case of a bailment: it seems at least probable that a bailee could escape the obligation to restore what had been bailed if he did not in any way contravene the terms of the bailment and took care of the thing in question in the same way he looked after his own things. In other words, returning to the example in which I borrow sugar in a cup from my neigbour and positing a case where, before I have a chance to restore my neighbour’s cup, there is a violent earthquake and all sorts of crockery, including the cup, is broken in my house, the Common Law, such as it was in the 17th and 18th centuries, might well mean that I don’t have to buy my neighbour another cup. But I would still have to return the sugar I borrowed even if it proved completely useless to me, for example if the cake I used it in was spoiled through no fault of my own, say because my oven malfunctioned.

What I have said above concerning the distinction between a loan and a bailment is also confirmed in Jones [1828 (1781) pp. 63, 101-102]. Jones’ text on the law of bailments was extremely popular with lawyers both in England and in the US and went through several editions. It may also be that his contribution, in a distorted way, led to Rothbard’s remarks, quoted above, on the law of bailment which was non-existent or, alternately, in bad shape, before the 18th century.

David Ibbetson in an essay entitled “Sir William Jones as a Comparative Lawyer”, [Murray (ed.), 1998, p. 40] writes: “[Jones] was lucky with his choice of bailment. The subject was undoubtedly obscure and in an mess86. Bracton had dealt with it in the thirteenth century in a decidedly romanesque way; there were a few cases in the early fourteenth century Year Books which required substantial glossing to make them comprehensible; and since English law before the sixteenth century was far more a science of asking questions than of giving answers there was plenty of scope for the speculative lawyer like Jones to graft his own answer on to the issues raised by the texts. The topic had been aired in Southcote’s case in 1601, glossed on two separate occasions by Coke with more learning than precision,87 and finally treated in a desultory way by Blackstone. It was, and indeed still is, in truth something of a Cinderella of the common law, far more susceptible to constructive moulding by the intelligent lawyer than many areas of English law88“. In support of his “obscure and in a mess” remark, Ibbet writes in his footnote 86: “The point is well made in the review of [Jones’] book by J. Touchet in Monthly Review 66 (1785), 298″. The other footnotes cite: “87 E. Coke, Reports Fourth (1604), 83b; E. Coke, Commentary upon Littleton
(1628), 89″ and “88 N.E. Palmer, Bailment (2nd edn., London, 1991)”.

I have read the short review of Jones [1828 (1781)] in the Monthly Review and it is true that the reviewer there complains that “so important a branch of jurisprudence” has “been so long and so strangely unsettled in a great commercial country; and that, from the reign of Elizabeth to the reign of Anne, the doctrine of bailments should have produced more contradictions and confusion, more diversity of oppinion and inconsistency of argument, than any other part, perhaps, of judicial learning”, but gives no further clue as to where exactly the trouble lay. I am not, of course, suggesting that Rothbard had seen Ibbetson’s essay. Still, the reference to Palmer (1991) in the next footnote (a text I have not consulted) seems to indicate that there is a general impression amongst legal writers that early bailment law was “a mess”, and it is not impossible Rothbard picked up that impression and distorted it into the remark that “bailment law scarcely existed”.

Even assuming that bailment law was in a mess (on which more in an instance), this is not equivalent to saying that bailment law was inexistent. Indeed, it is very difficult to see how a society which recognises private property could function without some sort of rules about the temporary transfer of possession and/or use of a thing by its owner to another, about the recovery of that same thing by the owner and about responsability (or the absence of it) if the object in question is destroyed or suffers damage.

But what was it exactly that led Ibbetson and, in all probability, other authors to describe bailment law, at least such as it was in the 18th century as “a mess”? Let’s look at it more closely. Ibbetson’s first citation of Coke (at footnote 87) is, in fact, to Coke’s report of Southcote’s case, (1598) 4 Co Rep 83; 76 ER 1061, which I also mentioned in my previous post. In Southcote’s case, in Coke’s own words, “Southcote brought detinue [an old form of action] against Bennet for certain goods, and declared, that he delivered them to the defendant to keep safe; the defendant confessed the delivery, and pleaded in bar that after the delivery one J. S. stole them feloniously out of his possession: the plaintiff replied, that the said J. S. was the defendant’s servant retained in his service, and demanded judgment,& c”. This, then, is a case about the extent of the bailee’s liability and on whether he can escape liability if the goods entrusted to him are stolen by his own servant (apparently, in that case, he did not). According to Coke, this was because “the plaintiff delivered the goods to be safe kept, and the defendant had took it upon him by the acceptance upon such delivery, and therefore he ought to keep them at his peril, although in such case he should have nothing for his safe keeping. So if A. delivers goods to B. generally to be (a) kept by him, and B. accepts them without having any thing for it, if the goods are stole from him, yet he shall be charged in detinue ; for to be kept, and to be kept safe, is all one (A). But if A. accepts goods of B. to keep them as he would keep (b) his own proper goods, there, if the goods are stolen, he shall not answer for them”. Consequently, Coke advises, at the end of his report: “Nota reader, it is good policy for him who takes any goods to keep, to take them in speciaI manner, scil. to keep them as he keeps his own goods, or to keep them the best he can at the peril of the party; or if they happen to be stolen or purloined, that he shall not answer for them; for he who accepteth them, ought to take them in such or the like manner or otherwise he may be charged by his general acceptance. So if goods are delivered to one to be delivered over, it is good policy to provide for himself in such special manner for doubt of being charged by his general acceptance, which implies that he takes upon him to do it”. There you have 16th century advice on what to put in your small print! In the same report Coke also discusses the conditions, and extent, of the bailee’s liability if the bailment is a pawn (a thing given in security of a loan) or it concerns a chest locked, whose key is taken away by the bailor. It is important to note that, in that case, according to Cooke, the bailee’s responsibility is, again, less extensive: “in that case, if the goods are stolen, B[the bailee] shall not be charged” writes Coke. The second citation of Coke by Ibbetson (Commentary upon Littleton, 89) restates more or less the same doctrine.

It is apparent even from the reprint of Coke’s report in the English Reports that what he wrote was far from settled doctrine. The annotation to the report by later commentators (it is to those annotations that the letters in parentheses direct, in the passage I have given) make that clear. Note A, for instance, states: “That a general bailment and a bailment to be safely kept is all one was denied to be law by the whole Court” and there is a reference to an edition of the report in Coggs v. Bernard.

Lord Keynes has dones a post about Coggs v. Bernard and the case even has its own Wikipedia page, so I need not repeat the facts here. The issue there, again, was the extent of the bailee’s responsibility, in a case where he had not received any remuneration for his services (what, in legal parlance, is termed “consideration”) but where he was negligent in his treatment of the goods bailed. The speeches in Coggs v. Bernard also throw doubt on Coke’s reporting of Southcote’s case and, in particular, his assertion that “to be kept, and to be kept safe is all one” (i.e. that a bailee, unless he stipulates otherwise, upon taking a bailment of goods, implicitely undertakes to keep them safe). Further, having reread the report of the case (2 Ld. Raym 909; 92 ER 107) I note that the judges there cite and discuss at least ten relevant cases from the Year Books, which were, at the time, at least 150 years old. This of course, makes further nonsense of Rothbard’s assertion that “bailment law scarcely existed until the eighteenth century”

I’m not sure if it is fair to call bailment law, such as it was at the time of Coggs vs. Bernard, “a mess”. Bailment, such as defined by Jones (see above) is a broad umbrella term that covers a number of very disparate real-world economic situations. What’s more, those different situation may be divided across a number of lines which may cut each other: you could have bailments were a fee is payable (to be further divided between those where payment is to the bailor, e.g. where goods are hired or let out and those where payment is to the bailee, e.g. where goods are surrendered to be transported) and bailments where no money changes hands. In the former case, it seems reasonable to expect that whoever receives a payment might also bear the risk of accidental damage to the goods. He could use part of his fee to purchase appropriate insurance. There can also be a distinction between a bailment where the bailee is supposed to do something to, or with, the goods bailed (e.g. transport or repair them) and cases where he is only meant to keep them. In the former case, it is reasonable to expect that, whether he receives payment or not, the bailee should exhibit appropriate care and attention in whatever he is doing. This is the gist of Coggs v. Bernard: the bailee undertook to transport casks of brandy and should have transported them properly. The fact that he would not receive a fee for his troubles was beside the point. It is also reasonable to expect the bailee’s responsibility to be stricter where he has contravened instructions he was given, or undertakings he has accepted, when receiving the goods. Even where the bailor had to do nothing but keep the goods without remuneration, there is a further question: is he to be held to the standard of care of a reasonable man, or is it sufficient if he exhibits the same amount of care (however deficient) he exhibits when taking care of his own things. Finally, a bailment might also involve goods given as security for a lawn (a pawn), a case which raises further questions. I’m not really sure that all the complicated questions these different situations throw up can readily be answered even today, after more than 300 years of legal development and refinement.

But be that as it may, one thing is for certain: none of the above complications arises in the case of a debt. That is why, in the case of a deposit of fungible goods (or of money), it is a lot more advantageous for the depositor to consider that such a deposit gives rise to a debt, rather than a bailment. In a comment in one of his latest posts Lord Keynes cites the speech by one of the judges in the 1845 Arkansas case of Dawson et al. vs. the Real Estate Bank, who makes just that point: “where money, not in a sealed packet, or closed box, bag or chest, is deposited with a bank or banking corporation, the law presumes it to be a general deposit, until the contrary appears; because such deposit is esteemed the most advantageous to the depositary“. The banks themselves have understood that, too: in the subprime mortgage craze, the toxic bonds were issued by independent companies and the banks, who sold those bonds to their clients, acted as mere agents of these shell companies. When the crash came, the holders of the bonds would have been all too happy to be considered depositors of the banks; indeed, I suspect that most of the cases you will find arising from this debacle will have been brought by people trying more or less to achieve that. But the banks refused to accept any responsibility for the losses incurred and pointed the clients in the direction of the shell companies, whose assets, in the meantime, had mostly become worthless.

The three cases I analysed in my previous post (Carr v. Carr, Sleech’s case, which is part of the larger case of Devaynes v. Noble and is often cited under that reference and Foley v. Hill and Others; Lord Keynes has also posted extensively on the first and third of those cases), also reinforce this point: in none of them was there even an attempt to argue that the deposit gave rise to a bailment. The existence of a debt was (unsuccessfully) contested for entirely different grounds: in Carr v. Carr, so as the deposit might pass to a different heir than the one entitled to debts; in Sleech’s case, so as to argue that the fact that Miss Sleech did not withdraw her deposit for a full eight months after hearing of the death of one of the partners of the bank was enough to bar her from claiming against the deceased’s partner’s estate; finally, in Foley v. Hill and Others, so as to avoid the invocation of the Statute of Limitations.

Considering that a deposit of a fungible commodity (or money) gives rise to a debt makes economic sense also, I think: let’s forget money for a moment, and let’s concentrate on a fungible commodity, say the sugar of my example. If you think about it for only a moment, you will find that if you happen to have a pound of sugar that you have no immediate use of but which you would, nevertheless, like to keep at your immediate disposal, you can do no better than entrusting it to a business that has a constant and regular use for sugar, say your local pastry shop. They use sugar and they are sure to have (or be able to get, given reasonable notice) an equivalent quantity of sugar to return to you when you need it. Further, they need incur no special costs for storing your sugar (which will simply replace a quantity they would have bought anyway for their use), there is a constant turnover in the sugar they use so you need not worry about your sugar being, say, eaten by mice or going bad in a damp storage room and, finally, since they will be making a modest profit by your deposit (which will save them the cost of buying an equivalent quantity of sugar for their use) they might share this profit with you, either in the form of “interest” augmenting the quantity of sugar you are entitled to claim back the longer you leave it with them, or in the form of other perks, say a free croissant every now and again! You might ask: what if they’re untrustworthy? But that is not an appropriate question: if they are, you would not leave your sugar with them, even if they were instructed never to touch it; they might well ignore that injunction. If they are untrustworthy, you don’t deal with them: the point is, that if they are trustworthy and you thus decide to deal with them, it makes much more sense to let them use your sugar as part of their usual stock, rather than instruct them to keep it apart and not touch it.

What then is the rationale behind the Austrians abhorrence of fractional reserve banking? It seems to me to be no more than an irrational idea that, somehow, hoarding is better than using a commodity in the manner that it was intended to be used, thereby reproducing that commodity and making a profit besides. Perhaps that explains the Austrians preference for gold and such valuable metals: unlike other commodities, gold is not likely to deteriorate if hoarded, even for a very long time. Still, this does not make hoarding it any more sensible. After all, as J. M. Keynes pointed out, it makes no economic sense to expand considerable resources in digging out gold and bringing it to the surface, if all you’re going to do with it is to bury it again in the vaults of some bank. Such logic also disregards the fact that, perhaps, the most valuable economic input, labour, cannot be “saved”, except to a very limited degree: if I take a day off during the working week, I can perhaps make up for it by working during the weekend. But if I take two weeks off, it is impossible to make up for it by working round the clock the week after. Quite simply, the labour I would have expanded during the two weeks I have taken off, or the greatest proportion of it, is lost forever.

I think I’ve written more than enough for a single post, so I’d better stop her and start researching my next post, in which I hope to examine the development of the law concerning deposits of fungible commodities, such as wheat. I’ve already found some leading cases, but I’d like to see if there’s anything older before I write it all up. Watch this space!


Sir William Jones, “An Essay on the law of bailments”, with comments by William Nichols, Esq. and William Halsted, Jun. Esq., published by O. Halsted and J. Grigg, Philadelphia, 1828 (based on the 3rd London Edition; originally published in 1781)

Christopher St. Germain “Dialogus de fundamentis legum Anglie et de conscientia” (1528), known as “Doctor and Student” after the titles of the two interlocutors, a doctor of divinity and a student of the laws of England, a barrister.

William Noy, “On the Grounds and Maxims of the Laws of this Kingdom” (referred to as “Noy’s Maxims”), 4th ed. 1677 (first published 1641).

Alexander Murray (Editor), “Sir William Jones, 1746-1794: A Commemoration”, Oxford University Press, 1998.