WHY IT IS IMPOSSIBLE TO EQUATE THE IRREGULAR DEPOSIT WITH THE LOAN OR MUTUUM CONTRACT

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THE ROOTS OF THE CONFUSION
The attempts to legally equate the monetary irregular-
deposit contract with the loan or mutuum contract are partic-
ularly attractive to those who most benefit from banking prac-
tices (bankers and authorities). Indeed, in chapter 1, which
contained an explanation of the legal nature of both institu-
tions, we indicated that a loan implies the transfer not only of
ownership of the lent item, but of its full availability as well,
and therefore the borrower can make full use of it, by invest-
ing it, spending it, etc. Considering that this is ultimately what
a banker does when appropriating demand deposit funds, the
ideal legal solution for him is clearly to equate the irregular
deposit contract with the loan contract. Moreover, a worn-out
legal pretext has persistently been used to reinforce the argu-
ment for equating the two. Lax and superficial, it is as follows:
Since the irregular deposit contract consists of the deposit of
fungible goods, the very essence of which implies the
inevitable transfer of ownership of individual items deposited
(because they are indistinguishable from one another), the
deposit and the loan are naturally one and the same, as both
institutions entail the transfer of ownership.
In chapter 1 we saw that this line of reasoning is fallacious,
superficial, and abstruse. In fact, even if ownership is trans-
ferred in both cases, the two contracts still differ radically con-
cerning the availability of the item (an essential feature of the
contracts). Indeed, whereas in the loan contract full availabil-
ity of the item is transferred along with ownership, the very
essence of the irregular deposit contract demands that the
Attempts to Legally Justify Fractional-Reserve Banking                                   119
purpose of safekeeping or custody predominate. Accordingly,
although we might in theory consider that ownership is
transferred, in practice such a transference is negligible, since
the safekeeping or custody of the fungible good requires the
constant availability of the tantundem to the depositor. There-
fore, even if ownership were transferred in the same sense in
both institutions, an essential legal difference would still exist
between them: the contrast in availability.
It may come as a surprise that the jurists who have chosen
to equate the deposit contract with the mutuum or loan con-
tract have overlooked such an obvious difference. The associ-
ation between the contracts is so forced and the arguments so
weak that it is amazing that a certain group of theorists have
tried to defend them. However, their attempt has a historical,
theoretical explanation: the depositum confessatum, a legal arti-
fice which arose in the Middle Ages from attempts to avoid
the canonical ban on interest. Although we have already
shown that the canonical prohibition on interest and the
development of fractional-reserve banking shared very little
direct connection, the depositum confessatum acted as a strong,
indirect link between them. We already know that from the
time of Roman law, if a depositary violated the essence of the
deposit contract, based on safekeeping, and appropriated
deposits and was not able to immediately return the funds
when the depositor demanded them, then the depositary was
obliged to pay interest. Then, irrespective of any other foresee-
able civil or criminal actions (the actio depositi and the actio furti),
as is logical, an additional suit was filed to obtain interest for
late payment and the loss of availability to the depositor up to
the point when the depositary returned his funds.3Thus, it is
easy to understand how convenient it was in the Middle Ages
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Money, Bank Credit, and Economic Cycles
3As we know, the fact that the monetary irregular deposit is a deposit
contract means the actio depositi directa applies to it. Roman jurists devel-
oped this concept, which leaves it to the depositor to decide at any
moment when his deposit is to be returned to him. This availability is so
pronounced that the depositor’s claim is considered equivalent to the
ownership of the money deposited (since the tantundem of the deposit is
fully and immediately available to him).
to disguise a loan as a deposit in order to make the payment
of interest legal, legitimate and socially acceptable. For this
reason, bankers started to systematically engage in operations
in which the parties openly declared they were entering into a
deposit contract and not a loan contract. However, as the Latin
saying goes, excusatio non petita, accusatio manifesta (an unso-
licited excuse is tantamount to a self-accusation). Indeed, with
a true deposit it was not necessary to make any express decla-
ration, and such a declaration, when made, only revealed an
attempt to conceal a loan or mutuum contract. The purpose of
disguising a loan as a deposit was to evade the strict canoni-
cal prohibitions on interest-bearing loans and to permit many
true credit transactions highly necessary, both economically
and socially.
The depositum confessatum clouded the decidedly clear
legal boundaries between the irregular deposit contract and
the loan or mutuum contract. Whatever a scholar’s stance on
the canonical prohibition of usury, the depositum confessatum
almost inevitably led to the “natural” identification of deposit
contracts with mutuum contracts. To a theorist who wished to
discover and expose all violations of the canonical prohibition
and each case of concealment of interest, anything that
sounded like a “deposit” was sure to appear suspicious from
the start, and the most obvious and efficient solution from this
point of view was to automatically equate deposits with loans
and condemn the payment of interest in all cases, regardless of
the operation’s outer legal appearance. Paradoxically, the
more “liberal” moralists did not stop at defending the legal
existence of deposits and the consequent legitimacy of interest
for late payment; they went on to indicate that such deposits
were ultimately loans, and hence the banker could use or
invest the money. These authors sought not only to justify the
payment of interest, but also to legitimize an institution that
permitted the same acts of investment, or exchange of present
goods for future goods, that the loan contract had tradition-
ally made possible. Furthermore, this type of exchange was
quite necessary to industry and trade. Throughout the Middle
Ages, most jurists who commented on law texts held this posi-
tion. As we saw in the last chapter, it was also the opinion of
Attempts to Legally Justify Fractional-Reserve Banking                                   121
several members of the School of Salamanca, such as Luis de
Molina, who believed the monetary irregular-deposit contract
to be a “precarious loan” in which ownership of the money is
transferred to the banker (which we have seen is admissible in
the case of a deposit of fungible money), as well as full avail-
ability (which we know is impossible and contrary to the very
essence of the deposit).4
Moreover, as we have already seen, the Irish banker and
economist Richard Cantillon, in the civil and criminal suits
brought against him for misappropriating securities deposited
with him as fungible goods through an irregular deposit con-
tract during the wave of speculation generated in France by
John Law’s system, tried to defend himself using the only doc-
trinal justification that had at that point been developed in
favor of his position: that because the contract was for an
“irregular” deposit (i.e., the securities were considered fungi-
ble goods), a complete transfer of both ownership and avail-
ability took place. Thus, he could legitimately appropriate the
shares, sell them, and use them to speculate on the market
without committing any crime nor harming his depositors.5
The same legal line of argument used by Richard Cantil-
lon’s defense had been developed by scholars with respect to
the monetary irregular deposit (and not the irregular deposit
of securities). Consequently, if it is considered legally appro-
priate and justified to equate the monetary deposit contract with
the mutuum contract, the same would certainly be applicable,
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Money, Bank Credit, and Economic Cycles
4See Luis de Molina, Tratado sobre los cambios, edited and prefaced by Fran-
cisco Gómez Camacho, Disputation 408, 1022 d., p. 138. As we have seen,
Juan de Lugo shares Molina’s viewpoint, and Domingo de Soto does also,
though to a much lesser degree. All other members of the School of Sala-
manca, particularly Dr. Saravia de la Calle, being wise jurists true to
Roman tradition, were against fractional-reserve banking despite the
pressures they were subjected to and the practices they witnessed.
5See F.A. Hayek, “Richard Cantillon (1680–1734),” in The Collected Works
of F.A. Hayek, vol. 3: The Trend of Economic Thinking: Essays on Political Econ-
omists and Economic History, p. 159. See also the classic article by Henry
Higgs, “Richard Cantillon,” in The Economic Journal 1 (June 1891): 276–84.
Finally, A.E. Murphy, Richard Cantillon: Entrepreneur and Economist; and
the report by Cantillon’s lawyer Henri Cochin, Memoire pour Richard Can-
tillan.
mutatis mutandis, to all other deposits of fungible goods; and
in particular, to deposits of securities as goods indistinguish-
able from one another. Hence we must emphasize that any
possible doctrinal analysis against the legality of a complete
transfer of ownership and availability in an irregular deposit of
securities also ultimately constitutes a powerful case against
the use of a fractional reserve in the monetary irregular
deposit. The great Spanish mercantilist Joaquín Garrigues has
recognized this fact. He states:
The reasoning thus far leads us to the affirmation that when
a customer entrusts his shares to the bank he intends to con-
tract a bank deposit; however, immediately after making
this assertion, we become aware of another contract with a
similar financial purpose. This contract also involves the
entrusting to the bank of a fungible good (money) and
cashier services are provided by the bank. This—defenders
of the checking account will say—is another unique con-
tract which is not called a loan nor a deposit in bank docu-
ments and which has the same legal effects as the securities
current account; namely, the transference of ownership to
the bank and the bank’s return of the tantundem.6
Despite Garrigues’s forced and unconvincing attempt to
persuade us that these two deposits are different, it is obvi-
ous that both contracts of irregular deposits of fungible
goods (of money and of securities) are essentially identical,
and therefore if we accept the transfer of full availability of
the good in one case (the deposit of money), we must also
accept it in the other. Consequently, there is no denying the
legality of one (the deposit of securities) without denying the
Attempts to Legally Justify Fractional-Reserve Banking                                   123
6On this topic see pp. 194ff. in the “Dictamen de Joaquín Garrigues,”
included in the book, La cuenta corriente de efectos o valores de un sector de
la banca catalana y el mercado libre de valores de Barcelona, pp. 159–209. In
this remarkable book, many of the arguments against the thesis that full
availability is transferred in the irregular deposit of securities as fungi-
ble goods are therefore also directly applicable to criticism of the same
theory with respect to the irregular deposit of money as a fungible good.
We will incorporate these arguments into our study whenever appro-
priate.
legality of the other (the deposit of money).7In conclusion,
the legal arguments used by Cantillon in his defense were
derived from theories regarding the monetary irregular-
deposit contract, and if we consider them valid, then they also
justify Cantillon’s obvious swindling of his customers and the
host of irregular and fraudulent activities later performed in
connection with irregular deposits of securities in the other
countries, especially Spain. Catalonian bankers carried out
such fraud well into the twentieth century, and Spanish schol-
ars have correctly and unanimously recognized the dishonest,
criminal nature of their behavior.8
THE MISTAKEN DOCTRINE OF COMMON LAW
The doctrine equating the monetary irregular-deposit con-
tract with the loan or mutuum contract has also prevailed in
Anglo-Saxon common law, via the creation of law in the bind-
ing case system. At the end of the eighteenth century and
throughout the first half of the nineteenth, various lawsuits
were filed by which depositors, upon finding they could not
secure the repayment of their deposits, sued their bankers for
misappropriation and fraud in the exercise of their safekeep-
ing obligations. Unfortunately, however, British case-law
judgments fell prey to pressures exerted by bankers, banking
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Money, Bank Credit, and Economic Cycles
7The opposite would be an inadmissible logical contradiction; Florencio
Oscáriz Marco, however, makes such an error. He maintains that
deposits of bulk goods are not irregular deposits “because there is no
power to use them and even less to take them at will, only power to mix
them,” while in the case of deposits of another fungible good (money),
he mysteriously does consider there to be a transfer of power over use
and availability, a transfer converting deposits into “loans.” In addition
to this conceptual error, Oscáriz makes an error in terminology: he cites
the decision of the Spanish Supreme Court regarding a deposit of oil
made by some olive dealers (Spanish Supreme Court decision of July 2,
1948) in an analysis of the “unique case” of deposits of bulk goods. In
actuality the bulk goods deposit is the best model example imaginable
of a deposit of fungible goods or irregular deposit. See Oscáriz Marco,
El contrato de depósito: estudio de la obligación de guarda, pp. 110–12.
8See La cuenta corriente de efectos o valores de un sector de la banca catalana
y el mercado libre de valores de Barcelona.
customs, and even the government, and it was ruled that the
monetary irregular-deposit contract was no different from the
loan contract, and therefore that bankers making self-inter-
ested use of their depositors’ money did not commit misap-
propriation.9Of all of these court rulings, it is worthwhile to
consider Judge Lord Cottenham’s decision in Foley v. Hill and
others in 1848. Here the judge arrives at the erroneous conclu-
sion that
the money placed in the custody of a banker is, to all intents
and purposes, the money of the banker, to do with it as he
pleases. He is guilty of no breach of trust in employing it. He
is not answerable to the principal if he puts it into jeopardy,
if he engages in a haphazardous speculation; he is not
bound to keep it or deal with it as the property of his prin-
cipal, but he is, of course, answerable for the amount,
because he has contracted, having received that money, to
repay to the principal, when demanded, a sum equivalent to
that paid into his hands.10
Attempts to Legally Justify Fractional-Reserve Banking                                   125
9This type of ruling contrasts with the trend of sound judgments estab-
lished by the declaration that American grain depositaries acted fraud-
ulently in the 1860s when they appropriated a portion of the grain
deposits they were to safeguard and speculated with it on the Chicago
market. In response to this disconcerting event, Rothbard wonders:
[W]hy did grain warehouse law, where the conditions—of
depositing fungible goods—are exactly the same . . . develop
in precisely the opposite direction? . . . Could it be that the
bankers conducted a more effective lobbying operation than
did the grain men?
See Murray N. Rothbard, The Case Against the Fed (Auburn, Ala.: Lud-
wig von Mises Institute, 1994), p. 43. The same valid legal doctrine has
been evident in Spanish court decisions regarding bulk deposits of oil in
olive oil mills. (See the Spanish Supreme Court decision of July 2, 1948.)
10See the note on p. 73 of the book by E.T. Powell, Evolution of Money
Markets (London: Cass, 1966), and Mark Skousen’s comments on this
decision in his book, The Economics of a Pure Gold Standard (Auburn, Ala.:
Ludwig von Mises Institute, 1977), pp. 22–24. Two precedents of Lord
Cottenham’s decision were Sir William Grant’s ruling of 1811 in Carr v.
Carr and the judgment delivered five years later in Devaynes v. Noble. See
J. Milnes Holden, The Law and Practice of Banking, vol. 1: Banker and Cus-
tomer (London: Pitman Publishing, 1970), pp. 31–32 and 52–55.
Considering this type of ruling, it is not surprising that
Richard Cantillon fled from France to England, where financial
practices were much more lax, and as we have seen, court rul-
ings ended up defending the same line of argument he used in
his defense. In continental Europe, in contrast, the Roman legal
tradition still exerted great influence. Roman jurists had impec-
cably formulated the nature of the monetary irregular deposit,
basing it on the safekeeping obligation and the unlawfulness of
banks’ appropriation of deposited funds. Hence Richard Can-
tillon’s fear is understandable. He fled continental Europe at a
time when the Bank of Amsterdam was still operating with its
full prestige and a 100-percent reserve ratio.11Also, the concept
of irregular deposit began to return to its classical legal roots
(which outlawed fractional-reserve banking). It had already
become clear that all banking systems which had been based on
a fractional reserve had failed (i.e., the systematic failure of
European banks of the late Middle Ages, of banks in Seville and
Italy in the sixteenth and seventeenth centuries and the system
of Law in eighteenth-century France), and judges had regularly
pronounced rulings against bankers’ appropriation of funds on
deposit (and as we know, such decisions have even been made
well into the twentieth century in France and Spain).
We must emphasize that, at least with respect to the institu-
tion that concerns us (the irregular deposit), clearly the Anglo-
Saxon common law system has less effectively guaranteed the
defense of property rights and the correct regulation of social
interaction than the legal system of continental Europe. We do
not mean that the continental system in its latest version,
Kelsenian and positivist, is superior to the common law system,
only that the latter has often been inferior to Roman law. By
“Roman law” we refer to the evolutionary, customary system
based on the logical, exegetic, and doctrinal analysis of jurists of
the Roman classical school. To put it another way, in the Anglo-
Saxon common law system, past decisions are too binding,
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Money, Bank Credit, and Economic Cycles
11Incrediby, Cantillon does not mention in his Essai this then well-
known fact under the pretext that “he could not get the exact informa-
tion about . . . cash kept in the vaults to pay all deposits” (p. 407). It must
be assumed that the Essai was mainly written to facilitate Cantillon’s
defense in his lawsuits against his claimants.
judges being often more influenced by the specific details of
each case and by ostensible business activity than by the dis-
passionate, logical, and exegetic analysis which should be car-
ried out based on essential legal principles. In short the Anglo-
Saxon legal system depends excessively on precedents, while
the continental system, based on Roman law, rests on prece-
dents, sound doctrine, and juridical theory.
THE DOCTRINE OF SPANISH CIVIL AND COMMERCIAL CODES
A group of Spanish theorists has also tried to equate the
monetary irregular-deposit contract and the loan contract. Cit-
ing several articles in the Spanish Civil and Commercial Codes,
they claim the irregular deposit is not recognized as a separate
concept in Spanish legislation and therefore is no more than a
simple loan or mutuum contract. Nevertheless, not even Span-
ish positive law guarantees the association between the irregu-
lar deposit contract and the loan contract. On the contrary, such
a connection is very doubtful and uncertain, and in fact, the
majority of modern Spanish theorists have concluded, in keep-
ing with the classical construction, that even from the stand-
point of current Spanish positive law, the loan contract is one
thing and the irregular deposit contract quite another.
To justify equating the two types of contracts, theorists
have frequently referred to Article 1768 of the Spanish Civil
Code. This article states that
when the depositary has permission to use the good
deposited, the contract ceases to be a deposit and becomes a
loan or commodatum. Permission is not assumed, but must
be proven.
According to this article, if we were to understand use in its
most general and lax sense, then as all irregular deposit con-
tracts imply a transfer of ownership of the individual items
deposited and hence of the indistinct “use” of the fungible
good, the irregular deposit contract would always ipso facto
become a loan or mutuum. Although later we will examine the
different instances in which it could be considered that a “trans-
fer of use” takes place, for now it is enough to remember that,
as we saw in chapter 1, a general transfer of ownership and use
Attempts to Legally Justify Fractional-Reserve Banking                                   127
is one thing, but in light of whether or not the tantundem is con-
stantly kept fully available to the depositor, it is quite another.
To the extent that Article 1768 is only intended to distinguish
whether or not the tantundem is kept continuously available to
the depositor, it would be perfectly possible under Spanish pos-
itive law to recognize the existence of an irregular deposit con-
tract that is radically distinct from the loan contract. In fact Arti-
cle 1770 of the very Civil Code seems to suggest this second
interpretation. Indeed, this article stipulates that
the deposited good shall be returned along with all of its
proceeds and accessions. Should the deposit consist of
money, the same provisions established in Article 1724
regarding the representative apply to the depositary.
In other words, it seems the Civil Code itself allows for a
type of monetary deposit which is not a loan. As José Luis
Albácar and Jaime Santos Briz correctly point out,
When faced with such a discrepancy—we may even call it
an antinomy—between conflicting statutory provisions [the
“classical” and the “modern”], we should note that nowa-
days the more common idea seems to be that the mutuum
and the irregular deposit are different, to the extent that
some people believe that in these cases we are dealing with
a type of deposit, an atypical and complex concept: the
irregular deposit.12
The treatment the monetary irregular deposit receives in
the Spanish Commercial Code could also appear contradic-
tory and lend itself to both interpretations. In fact Article 309
stipulates that
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Money, Bank Credit, and Economic Cycles
12José Luis Albácar López and Jaime Santos Briz, Código Civil: doctrina y
jurisprudencia (Madrid: Editorial Trivium, 1991), vol. 6, p. 1770.
Navarra’s civil code, in law 554 at the end of title 12, also makes refer-
ence to the irregular deposit:
When in the deposit of a fungible good the depositary is
either expressly or tacitly granted the power to use the good,
the provisions established for the monetary loan in laws 532,
534 and 535 shall be applied.
As we see, the content of Article 1768 of the Spanish Civil Code is
repeated here almost literally.
whenever the depositary, with the consent of the depositor,
uses the goods deposited, either for himself or his business
activities, or in operations ordered by the depositor, the
rights and obligations of depositor and depositary shall
cease, in favor of the rules and provisions applicable to the
commercial loan, the commission or the contract carried out
instead of the deposit.
It seems, therefore, that some parallels exist between Arti-
cle 309 of the Spanish Commercial Code and Article 1768 of
the Civil Code. However, Article 307 of the Commercial Code,
which regulates cash deposits, states that
when cash deposits are made in unmarked currency or in an
open, unsealed package, the depositary shall be responsible
for their preservation and safety according to the terms
established in paragraph 2 of Article 306.
And Article 306, paragraph 2 reads as follows:
in the safekeeping of deposits, the depositary shall be
accountable for any damage to the deposited goods resulting
from malice or negligence, as well as from the nature of the
goods or defects in them, if in such cases he fails to take nec-
essary measures to avoid or repair the damage, notifying the
depositor as soon as the damage becomes obvious. (Italics added)
Thus, if we consider the last paragraph of Article 307
together with the second paragraph of Article 306, the Spanish
Commercial Code itself fully allows for the concept of the
monetary irregular deposit contract and imposes a very clear
safekeeping obligation on the depositary in the depositor’s
favor, and even requires that, should any damage occur to the
fungible money deposited, the depositary immediately notify
the depositor. Nevertheless, Article 310 of the Commercial
Code grants bankers a statutory privilege which legalizes the
appropriation of funds deposited with them. This article spec-
ifies that
regardless of the provisions laid down in the preceding arti-
cles, deposits made in banks, public warehouses, credit asso-
ciations or any other company shall be governed first by that
Attempts to Legally Justify Fractional-Reserve Banking                                   129
company’s statutes, then by the prescriptions of this code
and last by common law rules applicable to all deposits.
The nature of the “odious” privilege enjoyed by banks and
other similar associations is obvious. Even from the stand-
point of Spanish positive law, it could be argued that, accord-
ing to Article 306 (cited above) of the Commercial Code, any
person who is not a banker or similar professional and uses
the money entrusted to him through an irregular deposit
would violate the safekeeping obligation and therefore com-
mit the crime of misappropriation. Bankers, however, are
exempt from this possibility if their company’s statutes deter-
mine that they may use and appropriate depositors’ funds for
their own business activities. Nevertheless bank statutes and
contracts are not at all easy to understand. On the contrary,
documents of this type are usually ambiguous and confus-
ing,13which explains court decisions stating that Spanish
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Money, Bank Credit, and Economic Cycles
13Curiously Spanish banks, when specifying the general conditions for
their different checking account contracts, avoid using the word
“deposit” for fear of the legal repercussions of such a contract (espe-
cially charges of misappropriation). They also avoid the words “loan”
and “credit” because, although they would be legally covered if they
called monetary irregular deposits “loans,” it is obvious that business-
wise, it would be much harder to attract deposits from customers if
they were generally aware that in opening a checking account they
are actually loaning money to the bank rather than making a deposit.
Consequently, bankers prefer to maintain the current ambiguity and
confusion, since the existing contractual obscurity benefits them as long
as they enjoy the privilege of using a fractional-reserve ratio and are
backed by the central bank in the event of a liquidity crisis. However,
bankers’ own legal classifications of their operations sometimes give
them away. For example, the sixth general condition established by the
Banco Bilbao-Vizcaya for draft discounting reads as follows:
Regardless of the different accounts and operations of the
assignor, whether in cash, securities, collateral, guarantees or
another type of document representing them, and notwith-
standing the manner in which they are itemized . . . the bank is
authorized to offset them by the loans it chooses to contract for
any entitlement, including any type of deposit . . . this condi-
tion shall apply even to operations and loans which the
assignor holds against the bank prior to the current transaction.
positive law requires bankers to maintain continuously avail-
able to depositors the entire amount of their deposits (tantun-
dem); that is, to maintain a 100-percent reserve ratio. These
judgments (such as the Spanish Supreme Court decision of
June 21, 1928 and others cited in chapter 1) have been based
on case-law interpretations of Spanish positive law and have
been pronounced well into the twentieth century.
Finally we must mention Articles 7 and 8 of the Bank of
Spain’s bylaws, which concern deposits. The first two para-
graphs of Article 7 establish that “authorized offices may
receive deposits of local currency or of notes from the bank
itself.” Article 8 states that “the responsibility of the bank as a
depositary is to return the same amount in local currency as is
deposited in cash.” Article 10, which relates to checking
accounts, has more or less the same content:
Attempts to Legally Justify Fractional-Reserve Banking                                   131
Moreover, whereas the Banco Bilbao-Vizcaya, in reference to the
demand deposit represented by the so-called “savings passbook,” clas-
sified the latter as “the justificatory claim representing the right of the
holder to request and obtain full or partial repayment of the balance in
his favor,” the Banco Hispano-Americano went even further, establish-
ing that the passbook “constitutes the nominative and non-negotiable
document which is evidence of the holder’s ownership.” As we see, in
the latter case, the bank, without realizing it, attributes ownership sta-
tus to the deposit contract; incidentally, this classification is much closer
to the true legal nature of the institution (given the continuous avail-
ability in favor of the depositor) than that of a mere loan claim on the
deposited sum. On this subject, see Garrigues, Contratos bancarios, pp.
368–79, footnotes 31 and 36. Garrigues notes that private bankers do not
refer directly to monetary deposit contracts by name, but instead usu-
ally call demand deposits checking accounts, as revealed by an exami-
nation of deposit slips and general terms of accounts, as well as by bank
statements, balance notices, etc. Moreover, this reluctance to speak of
“monetary deposits” is evident even on bank balance sheets where there
is never any mention of such a heading and where monetary irregular
deposits are instead entered under “Checking Accounts” in the corre-
sponding liabilities column under “Creditors.” Thus from a legal and
contractual standpoint, with the consent of financial authorities,
bankers purposefully contrive to conceal the true legal nature of their
activities, especially from third parties and clients. The effects of the
confusion created by banks are studied by Jörg Guido Hülsmann in his
article, “Has Fractional-Reserve Banking Really Passed the Market
Test?” The Independent Review 7, no. 3 (Winter, 2003): 399–422.
the bank may open and manage checking accounts of cash
or securities for individuals or legal entities and duly repre-
sented corporations or organizations whose application is
confidentially reviewed by the institution and accepted. The
following may be deposited in ordinary cash accounts: legal
banknotes and coins, checks and other documents related to
other checking accounts . . . for each type of checking
account the bank will provide the checkbooks needed by the
account holder; and via the duly authorized checks, it will
pay the sums and return the securities to the debit of the cor-
responding balances. Against cash checking accounts the
following are also admissible: bearer, order, personal and
crossed checks.
As we see, these articles of the Bank of Spain’s bylaws, and
in general the statutes of all other banks, only regulate the
operation of monetary irregular-deposit accounts and check-
ing accounts from the standpoint of depositors, and they
always maintain the confusion and ambiguity regarding
whether such money is continuously safeguarded and kept
available by the bank or whether the bank is expressly
authorized by the depositor to appropriate funds and invest
them in personal business deals. We must turn to Article 180
of the Commercial Code to see the true original meaning of
Spanish commercial legislation on this point. Indeed, Article
180 specifies that “banks will keep cash in their vaults equiv-
alent to at least one fourth the sum of deposits and checking
accounts in cash and bills in circulation.” This ratio, which has
traditionally been used by the Spanish central bank as an
instrument of monetary policy and has been reduced to a cur-
rent 2 percent, is the culmination of the statutory privilege
enjoyed by the banking industry. Banking is the only institu-
tion expressly authorized by Spanish positive law to violate
the safekeeping obligations of the monetary irregular-deposit
contract, thus receiving permission to appropriate depositors’
money for bankers’ own use in investments and personal
business activities. Although the reserve requirement alone
keeps bankers from being criminals under the positive law in force in
Spain, it does not in the least compensate for the lack of legal
justification for the bank-deposit contract in its current form,
nor, as is logical, for the damaging economic effects on society
132
Money, Bank Credit, and Economic Cycles
of the violation of traditional principles of property rights
with respect to the monetary irregular deposit. In the follow-
ing chapters we will examine these effects (the distortion of
the productive structure; the generation of successive, recur-
rent stages of economic boom and recession; the promotion of
widespread malinvestment; the creation of massive unem-
ployment and the perpetuation of a privileged financial sys-
tem incapable of guaranteeing smooth economic develop-
ment).
CRITICISM OF THE ATTEMPT TO EQUATE THE MONETARY
IRREGULAR-DEPOSIT CONTRACT WITH THE LOAN OR
MUTUUM CONTRACT
Even though the doctrinal association between irregular
deposits and monetary loan or mutuum contracts is the per-
fect tool for justifying fractional-reserve banking, this associa-
tion is so awkward that the most prestigious experts in com-
mercial law have failed to accept it. Joaquín Garrigues,
though he seems to want to unreservedly defend the doctrine
of association, ultimately realizes that it is not justifiable, and
he concludes that, despite the possible positive-law arguments
(Article 1768 of the Spanish Civil Code and Article 309 of the
Spanish Commercial Code, both cited earlier) that could be
used to justify the association between the loan or mutuum
contract and the irregular deposit contract,
there are still some factors which lead one to continue consid-
ering the contract a deposit and not a loan (for example, the
free availability to the depositor, the fact that the depositor
initiates the contract, the limited interest, etc.).14
Curiously, Joaquín Garrigues does not expound on these
factors, mentioning them only in passing. Instead he immedi-
ately tries to construct the theory based on the reinterpretation
of the concept of availability, which we will study in the next
section. Nevertheless, considering what we covered in chapter
Attempts to Legally Justify Fractional-Reserve Banking                                   133
14Garrigues, Contratos bancarios, p. 363; italics added.
1, it would have been very interesting to know what Garrigues
could and should have said about the arguments against
equating the two contracts, a matter we will now consider in
greater depth.15
THE DISTINCT CAUSE OR PURPOSE OF EACH CONTRACT
The most significant and definitive argument in favor of a
distinction between the irregular deposit contract and the loan
or mutuum contract lies in the essential difference between the
cause or purpose of each. These terms refer to a fundamental,
134
Money, Bank Credit, and Economic Cycles
15Strangely, our top commercial law scholar rushes into an attempted
justification of fractional-reserve banking while preserving the concept
of the irregular deposit through the artifice of a redefinition of avail-
ability, without pausing first to examine the factors that make it impos-
sible to equate the irregular deposit contract and the loan contract. It is
as if Garrigues were ultimately aware that his redefinition implicitly
entails equating deposits and loan contracts—at least from the banker’s
(the recipient’s) perspective. For this reason it does not behoove him to
advance a detailed argument against equating deposits and loans,
because such an argument would backfire on the doctrine he later
defends. This attitude is quite understandable in a famed scholar whose
chief customers were the country’s banks and bankers and who would
therefore think twice before jeopardizing his prestige and academic
standing by questioning the legitimacy of such an influential institution
as fractional-reserve banking, which was rooted in practice and govern-
ment-endorsed. In addition, during the years when Garrigues was
developing his theories, he could only depend for support on an eco-
nomic theory which, paralyzed by Keynesian doctrines (see footnote 20
in ibid.), justified any system of credit expansion, no matter how expe-
dient, on the mistaken assumption that this would benefit “economic
activity.” During those years of doctrinal poverty in economics, the only
possible defense for the processes of social interaction against banking
practices would have been strict observance of the basic principles gov-
erning the irregular deposit, which unfortunately received very weak
support from mainstream theorists and were quickly abandoned.
Despite all of these adverse circumstances, the writings of Garrigues
and others who concentrate on the same topic, an unmistakable impres-
sion persists: that in order to justify the unjustifiable, theorists carry out
the most forced legal reasoning and maneuverings to disguise as legal
an activity that results from an unseemly, unlawful privilege granted by
the government.
legal motive (related to the so-called cause16of contracts)
which is closely connected with the parties’ distinct subjective
reason17for deciding to enter into one contract or another.
Therefore a perfect symbiosis exists between the subjectivist concep-
tion on which modern economic theory is based18and the legal point
of view that mainly takes into account the different subjective goals
of the parties in entering into one type of contract or another.
In chapter 1 we studied the essential, irreconcilable differ-
ences between the monetary irregular-deposit contract and
the monetary loan or mutuum contract. All of those differ-
ences could ultimately be traced to the distinct cause or pur-
pose of each contract. On one hand, the loan contract always
implies an exchange of present goods, the availability of
which is lost to the lender, for future goods, which the bor-
rower must return along with an added amount in the form of
interest, in payment for the inexorable loss of availability of
the present goods when they are transferred from lender to
borrower. On the other hand, in the monetary irregular
Attempts to Legally Justify Fractional-Reserve Banking                                   135
16See, for example, the legal treatment Jean Dabin gives the cause of
contracts in La teoría de la causa.
17For Antonio Gullón,
the equating of the irregular deposit with the mutuum is still an
artifice that conflicts with the true will of the parties. The deposi-
tor of money, for example, does not intend to grant a loan to
the depositary. Just as in the regular deposit, he desires the
safekeeping of the good and to always have it available. He
happens to achieve these objectives more easily with the
irregular deposit than with the regular deposit, since with the
latter he risks the loss of his deposit in the event of an
unavoidable accident, and he would bear the loss instead of
the depositary. Meanwhile, in the irregular deposit, the
depositary is the debtor of a type of good, which as such is
never lost. (Italics added)
Cited by José Luis Lacruz Berdejo, Elementos de derecho civil, 3rd ed.
(Barcelona: José María Bosch, 1995), vol. 2, p. 270.
18This subjectivist conception is the basis of the logic of action on which
all economic theory is constructed, according to the Austrian School of
economics, founded by Carl Menger. On this topic, see our article,
“Génesis, esencia y evolución de la Escuela Austriaca de Economía,”
published in Huerta de Soto, Estudios de economía política, pp. 17–55.
deposit, the objective or cause of the contract is radically dif-
ferent. In this case there is no exchange of present goods for
future goods, nor does the depositor have the faintest desire to
lose the immediate availability of the good deposited. Hence
the essential element in the irregular deposit contract is not, as
in the loan contract, the transfer of availability, but rather the
custody and safekeeping of the tantundem, which constitutes
the legal cause or fundamental purpose motivating the depos-
itor to enter into the contract. For this reason, there is no term,
and the funds are deposited “on demand;” that is, they can be
withdrawn at any time. If the depositor were informed that
the contract he plans to sign is a loan contract by which he
will grant a loan to the bank, and that therefore the money
will no longer be available to him, he would certainly not go
through with the contract as if it were a deposit, and he very
well might decide to keep his money. Thus, there is
absolutely no doubt that the cause or legal purpose of each
contract is radically different from that of the other, and that
attempting to mix them is like trying to mix oil and water,
given the essential difference between them.
Theorists who attempt to equate the irregular deposit con-
tract with the loan contract fail to realize that their doctrinal
stance ignores the true cause or purpose motivating the con-
tracting parties to enter into a contract. And no matter how
many relatively empty statements they make about the equiv-
alence of the two contracts, they inevitably come up against
the same legal wall: the radical, essential difference between
the legal cause behind each contract. Therefore, they can go no
further than to state that each of the parties to the monetary
bank-deposit contract thinks it is entering into a “different”
contract. In other words, depositors hand over money as if mak-
ing a deposit, and bankers receive it as if it were a loan. Yet, what
kind of contract has two essentially distinct legal causes? Or
to put it another way: How is it possible that both parties to
the same contract simultaneously intend to retain the avail-
ability of the same sum?19Indeed, depositors clearly turn
136
Money, Bank Credit, and Economic Cycles
19Francisco Belda, following the example of Luis de Molina and Juan de
Lugo, believes he resolves this contradiction with the facile, superficial
over their money with the desire to retain full availability of
the good turned over (monetary deposit “on demand”),20
while banks accept deposits not with the aim of keeping 100
percent of the tantundem in their possession at all times, but
rather with the intention of using most of what they receive on
deposit to make personal loans and investments. This “dual
availability” could not possibly be ignored by Garrigues, who
logically finds it very disquieting and confusing with respect
to legality.21As a matter of fact, for Garrigues the most out-
standing feature of monetary bank deposits in their current
version (which does not require a 100-percent reserve) is dual
availability: the deposited goods are simultaneously available
to both the bank and the customer. He adds that
Attempts to Legally Justify Fractional-Reserve Banking                                   137
assertion that “each of the two has the perfect right to view the opera-
tion from the angle which most behooves him.” However, Belda fails to
realize that, as there is an essential difference and a contradiction
between the causes motivating the parties to enter into the contract, the
problem is quite another: it is not that each party views the contract as
most behooves him, but rather that the fulfillment of the aim or cause of
one party (the investment of funds by the banker) prevents the success-
ful fulfillment of the aim or cause of the other (the custody, safekeeping
and continual availability of the money). See Belda, S.J., “Ética de la
creación de créditos según la doctrina de Molina, Lesio y Lugo,” pp.
64–87. See also Oscáriz Marco, El contrato de depósito: estudio de la
obligación de guarda, footnote 83, p. 48.
20The fact that depositors sometimes receive interest in no way detracts
from the essential purpose of the deposit (the safekeeping of money).
Since interest is attractive, the unsuspecting depositor will jump at the
offer of it if he still trusts the banker. But in the case of a true deposit, the
depositor would enter the contract even if he were not to receive any
interest and had to pay a safekeeping fee. The essential nature of the
contract is not altered by the unnatural payment of interest to deposi-
tors, and only indicates that bankers are making undue use of the
money placed with them.
21Significantly, the only theoretical reference cited by Garrigues in his
book, Contratos bancarios, is Keynes’s Treatise on Money, which he expressly
mentions at least twice in the main text (pp. 357 and 358) and twice in the
footnotes (pp. 352 and 357, footnotes 1 and 11, respectively). With such a
theoretical basis, the confusion evident in Garrigues’s entire discussion of
the irregular deposit is hardly surprising. It seems as if his remarkable
legal instinct were pointing him in the right direction, while the economic
treatises he was reading on banking were leading him astray.
this dual availability is precisely the reason it is difficult to
formulate a legal description of the contract, because avail-
ability in favor of the depositor, a key feature of deposits,
harmonizes poorly with availability in favor of the bank.22
Rather than to say it is difficult to formulate a legal
description of the contract, it would be more accurate to say
such a description is legally impossible, given the radical differ-
ence between the cause or purpose of the two types of legal
transactions. Therefore, it is not that one instance of availabil-
ity “harmonizes poorly” with the other, but that the two
instances are mutually exclusive on a fundamental level.23
Joaquín Garrigues’s uncertainty is even more obvious when in
a footnote24he cites the rulings of the Court of Paris which we
covered in chapter 1. These court decisions support a strict
safekeeping obligation and a 100-percent reserve ratio for
banks, which Garrigues calls “surprising assertions.” What is
surprising is that Garrigues does not realize that his own analy-
sis leads inevitably to the conclusion that the two contracts are
different and that it is therefore impossible to equate in any
138
Money, Bank Credit, and Economic Cycles
22Garrigues, Contratos bancarios, p. 367; italics added. It is surprising that
Garrigues has not realized that in economic terms, dual availability
means “it becomes possible to create a fictitious supply of a commodity,
that is, to make people believe that a supply exists which does not
exist.” See William Stanley Jevons, Money and the Mechanism of Exchange
(New York: D. Appleton, 1875 and London: Kegan Paul, 1905), p. 210.
Convincing the public of the existence of a fictitious stock of fungible
goods is definitive proof of the illegitimacy of all irregular deposits (of
fungible goods) in which a fractional-reserve ratio (any ratio under 100
percent) is allowed.
23Garrigues, demonstrating his characteristic gift of expression, con-
cludes that in this contract “the banker counts on the money as if it were
his, and the customer counts on the money even though it is not his.”
The solution to this apparent paradox is very simple, because although
the customer has ceased to own the money, he retains the right to
demand the custody and safekeeping of the tantundem by the banker at
all times; that is, a 100-percent reserve ratio, in keeping with the essen-
tial, ontological legal nature of the monetary irregular-deposit contract,
which we covered in chapter 1. See Garrigues, Contratos bancarios, p.
368.
24Ibid., footnote 31 on pp. 367–68.
way the irregular deposit contract with the loan contract.
Upon reading Garrigues’s treatment of monetary bank-
deposit contracts, one inevitably gets the impression that Gar-
rigues himself suffers from a rather “guilty conscience” for
carrying out such a forced legal analysis to try to justify the
unjustifiable: the supposed existence of a monetary irregular-
deposit contract which legally, and in accordance with legal
principles and logic, permits the banker to freely use the
goods deposited; in other words, fractional-reserve banking.
THE NOTION OF THE UNSPOKEN OR IMPLICIT AGREEMENT
Also inadmissible is the argument that Article 1768 of the
Spanish Civil Code suggests that in irregular deposit contracts
a type of “implicit or unspoken agreement” exists by which
depositors authorize bankers to use money on deposit. This
course of reasoning is unacceptable mainly because Article
1768 speaks of permission “to use the good deposited,” and
we know that it is not the power to use the good that makes
the monetary-deposit contract an irregular deposit contract.
This authorization is inherent in all deposits of fungible
goods, the very nature of which prevents them from being
handled individually. In a sense, a transfer of ownership
results, which in turn implies authorization for the depositary
to use the goods. Nevertheless, we have already seen that this
transfer of ownership and of power to use the deposited
goods should be understood in a general sense. If it is not pos-
sible to track the individual units deposited, then we may cer-
tainly consider there to be a transfer of ownership and of
power to use the specific items deposited. However, as is log-
ical, this is perfectly compatible with a continuous 100-percent
reserve requirement; that is, the custody and safekeeping of
the tantundem and its availability to the depositor. This consti-
tutes the banker’s essential obligation and is the foundation of
the deposit contract’s essential purpose. To put it another way,
the characteristic, essential nature of the irregular deposit con-
tract is not determined by the transfer of authority to use the
goods, but by the fungible nature of the items deposited and
by the contract’s purpose. A transfer of authority to use
deposited goods may occur independently of an irregular
deposit, and this is indeed what happens, for example, in the
Attempts to Legally Justify Fractional-Reserve Banking                                   139
mutuum or loan contract. As we know, the legal cause or pur-
pose of this contract is radically different (it entails not only
the transfer of ownership and power to use the goods, but also
the transfer of the availability of the goods, which is simulta-
neously lost to the lender). Therefore, and according to Coppa-
Zuccari, the claim that supposed authorization (express or
tacit) from the depositor converts the irregular deposit contract
into a loan or mutuum is both unnecessary and inaccurate. It is
unnecessary in the sense that all irregular deposit contracts,
due to their very nature, involve the transfer of ownership
and of the power to use the good (which is compatible, as is
logical, with the fundamental obligation to maintain 100 per-
cent of the tantundemin reserve). And it is inaccurate, since even
though the power to use the deposited good is transferred, in
no way does this alter the original purpose of the contract,
which is none other than the custody and safekeeping of the
tantundem.25In fact, three logical possibilities exist with respect
to the supposed authorization (express or tacit) to use the
deposited good. Let us consider each one separately.
First, we may suppose that the vast majority of depositors
are not aware that by depositing their money in a bank, they at
the same time authorize the banker to use the money for his
own profit in private business deals. It is certain that when the
overwhelming majority of depositors make a demand
deposit, they are under the honest impression that they are in
fact doing just that: entering into an irregular deposit contract,
the essential purpose of which is to transfer the custody or
safekeeping of their money to the banker. In all cases, the
banker simultaneously receives the money as if it were a loan
or mutuum; that is, he considers that the full availability of the
good is transferred to him and that he is therefore authorized
to use it in his own business deals. It is obvious that the cause
or purpose of each party’s participation in the contract does
not coincide with the objective of the other party: one enters
into the contract believing it to be a deposit and hands over
the money based on that assumption, and the other receives
the money as if it were a loan or mutuum and based on that
140
Money, Bank Credit, and Economic Cycles
25Coppa-Zuccari, Il deposito irregolare, p. 132.
idea invests it. Hence, this is a clear case of error in negotio,
which is an error concerning the nature of the transaction and
renders it completely void.26To many this conclusion may
appear extreme or disproportionate, but it is difficult to arrive
at any other if we base our analysis on the legal arguments
and principles inherent in the contracts we are studying.27
Second, let us now assume that a certain group of bank cus-
tomers (or for the sake of argument, all of them) enter into a
deposit contract aware and fully accepting that banks will
invest (or loan, etc.) a large portion of the money they deposit.
Even so, this knowledge and hypothetical authorization does
not in any way detract from the essential cause or purpose of
the contract for these customers, whose intention is still to
entrust their money to the banker for safekeeping; that is, to
carry out a monetary irregular-deposit contract. In this case,
the contract the depositors believe they have finalized is
impossible from a technical and legal standpoint. If they allow
the banker to use the money, then it can no longer be available
to them, which is precisely the essential cause or purpose of
the contract. Moreover, in chapter 5 we will see from the per-
spective of economic theory that in a fractional-reserve bank-
ing system the massive signing of contracts and the “law of
large numbers” cannot possibly ensure the fulfillment of all
depositor requests for full repayment of deposits. At this time,
we will delay going into detail on our thesis, except to say that
it rests on the acknowledgment that the current banking sys-
tem generates loans without the backing of real savings. These
loans in turn foster the foolish investment of resources and
give rise to unwisely-invested business assets which are either
Attempts to Legally Justify Fractional-Reserve Banking                                   141
26See Hernández-Tejero Jorge, Lecciones de derecho romano, pp. 107–08.
Hernández-Tejero himself provides the following example, which is
perfectly applicable to the case we are dealing with: “If one person
entrusts to another a good on deposit, and the person receiving the good
believes the transaction to be a mutuum or loan, then neither a deposit
nor a mutuum exists.”
27Furthermore, it is obvious that permission or authorization to use the
good cannot be assumed but must be proven in each case. It seems
unlikely that in most demand deposit contracts entered into by individ-
uals such proof would be possible.
worthless or of limited value and therefore incapable of bal-
ancing the corresponding deposit accounts on bank balance
sheets. Consequently, bank insolvency tends to recur, banks
being repeatedly unable to meet their obligations (without the
external support of the central bank).
In addition, if for the sake of argument we assume that the
law of large numbers is applicable to banking, then in the
presence of a fractional reserve the deposit contract clearly
becomes an aleatory contract.28In such a contract, delivery of
services by the bank is in any case an uncertain event which
depends upon circumstances particular to each case. The con-
tract’s uncertainty stems precisely from the possibility that
depositors of a percentage of deposits exceeding the reserve
ratio will attempt to withdraw their deposits and hence be
unable to do so. The first to arrive would be able to retrieve
their money, but those arriving after a certain point would not.
Surely not even the depositors of this second hypothesis
intend to enter into an aleatory contract subject to the risk we
have just described. Therefore, the most logical conclusion in
this second case is either that the contract does not exist, since
its purpose is impossible (without a 100-percent reserve ratio,
it is impossible to insure that the banker will always be able to
meet his obligations), or that the supposed authorization from
the depositors lacks legal validity, because the essential objec-
tive is still the safekeeping of the good, and this inevitably and
obligatorily requires the custody of 100 percent of the tantun-
dem.29
142
Money, Bank Credit, and Economic Cycles
28On aleatory contracts see Albaladejo, Derecho civil II, Derecho de obliga-
ciones, vol. 1: La obligación y el contrato en general, pp. 350–52. It is impor-
tant to emphasize that the fact that there is an aleatory nature to the
monetary irregular-deposit contract with a fractional reserve in which
the law of large numbers is fulfilled (in fact impossible) is only second-
ary to the other points we raise against such a contract.
29The popular reaction of Argentinian citizens against the banking cri-
sis of 2001 and the subsequent blockade of all their demand deposits
(known as corralito) is a perfect empirical illustration of the true safe-
keeping purpose of bank deposit contracts and of the impossibility of
fractional-reserve banking (without a lender of last resort).
A natural incompatibility exists between the legitimate
irregular deposit contract, the purpose of which is the custody
or safekeeping of the deposited goods, and the authorization
for depositaries to use for their own profit the money they
receive. These depositaries (bankers) take in funds they agree
to return as soon as requested by checking-account holders,
but once the bankers have received the money, they make
investments, grant loans and enter into business deals that tie
it up and under various circumstances actually prevent its
immediate return. The supposed authorization, either express
or tacit, for bankers to use money on deposit is of little impor-
tance if the essential purpose of the contract, the deposit of
money for safekeeping, continues intact. In this case the sup-
posed authorization would be irrelevant, due to its incompati-
bility with the contract’s purpose, and it would thus be as legally
null and void as any contract in which one of the parties authorizes
the other to deceive him or accepts in writing self-deception to his
own detriment. As the great Spanish expert in civil law, Felipe
Clemente de Diego, so appropriately states, an irregular
deposit contract in which the depositary is allowed to main-
tain a fractional-reserve ratio and hence can make self-inter-
ested use of a portion of deposited funds is a legal aberration,
since at a fundamental level it conflicts with universal legal
principles. For Felipe Clemente de Diego, there is no doubt
that this contract
has the disadvantage of leading us to the discovery of a
monster which, by its very nature, lacks legal viability, like
humans with devastating malformations (monstrua prodi-
gia), whom Roman law did not grant legal status. Article 30
of the Spanish Civil Code expresses a more moderate ver-
sion of the same concept: “For civil purposes, only fetuses
with a human figure will be reported as born. . . . “ For every
being has its own nature, and when this is not found in the
being itself, but is drawn from others more or less similar to
it, the being’s true nature appears to flee and vanish and
ceases to envelop it, reducing it to a monstrous hybrid bor-
dering on a non-being.30
Attempts to Legally Justify Fractional-Reserve Banking                                   143
30“Dictamen del señor de Diego (Felipe Clemente)” in La cuenta corri-
ente de efectos o valores de un sector de la banca catalana y el mercado libre de
valores de Barcelona, pp. 370–71. It is true that Felipe Clemente de Diego
makes this comment in response to the argument of bankers who
wished to defend the validity of the contract of irregular deposit of secu-
rities, with a fractional-reserve ratio, in which the depositary would be
permitted to freely use the deposited goods, like in the monetary irreg-
ular-deposit contract. Yet as we have already mentioned, the arguments
for and against either institution are identical, as both are contracts of
the irregular deposit of fungible goods, whose legal nature, cause, pur-
pose and circumstances are the same. Pasquale Coppa-Zuccari also
highlights the contradictory nature of the monetary bank-deposit con-
tract which, in the form in which it has been “legalized” by govern-
ments, is neither a deposit nor a loan, “La natura giuridica del deposito
bancario,” Archivio giuridico “Filippo Serafini,” Modena n.s. 9 (1902):
441–72.
It would be difficult to express more accurately and suc-
cinctly the fundamental incompatibility and the insoluble
logical contradiction between the monetary irregular-deposit
contract and the loan contract. Clemente de Diego concludes
by criticizing
attempts to convert that radical opposition (between the
irregular-deposit contract and the loan contract) into a sin-
gle unit that would make up a new contract, which would
neither be one nor the other, but instead would be both at
the same time; this is impossible, as its terms are mutually
exclusive.
Such a contract is simply ontologically impossible.
To conclude our comments on this second possibility, we
must add that the contradiction is so obvious that bankers, in
their contracts, general conditions, and forms, are always
reluctant to specify the precise nature of the agreement and of
the safekeeping obligation they acquire, and whether or not
they have been authorized by the depositor to invest
deposited funds for their own profit. Everything is expressed
in a vague and confusing manner, and therefore it would not
be rash to claim that depositors’ complete and perfect consent
is missing, because the ambiguity, complexity and obscurity
of the contract undoubtedly deceive customers, who in good
faith believe they are entering into a true deposit contract. If
144
Money, Bank Credit, and Economic Cycles
the value and efficacy of surrendering a good depend on the
procedure or document accompanying the action, then it is
clearly important that the procedure or contract be well-
defined and appropriately named, that its conditions be
well-regulated and that both parties be aware of the legal
consequences of these conditions. To fail to clarify or fully
specify these details indicates a remarkable ambiguity on the
part of bankers, and in the event that adverse legal conse-
quences result, their weight should fall on the bankers’ shoul-
ders and not on those of the contracting party, who with good
faith enters into the contract believing its essential purpose or
cause to be the simple custody or safekeeping of the money
deposited.
Third and last, we may suppose that, if this is the deposi-
tors’ real desire, they could change their original plan to make
an irregular deposit of money and instead enter into a
mutuum or loan contract in which they agree to the loss of
availability of the good and to its transfer to the banker for a set
term in exchange for interest. This would constitute a true nova-
tion of the contract, which would change from an irregular
deposit to a loan. The novation would be subject to general
legal regulations regarding this type of contractual modifica-
tion. This is a fully legitimate legal possibility which is little
used in practice. Moreover, paradoxically, when novations
take place in banking their purpose is usually the opposite. In
other words, what undoubtedly begins as a mutuum or loan
contract, although it is called a “time” deposit because it
involves the real transfer of availability of the good to the
banker for a set term or time period, on many occasions
becomes an irregular deposit contract via the corresponding
novation. This is what happens when bankers, in order to
maintain their resources or attract more, either publicly or pri-
vately, and either verbally or in writing, offer the holder of a
“time” deposit account the possibility of withdrawing his
money at any time with very little or no financial penalty. To
the extent that account holders make these “time” deposits
(which are clearly loans) with the subjective and primary goal
of depositing the money for safekeeping, then a monetary
irregular deposit clearly takes place, regardless of its external
appearance. Furthermore, insofar as the contract’s fundamental
Attempts to Legally Justify Fractional-Reserve Banking                                   145
cause or purpose is the exchange of present goods for future
goods plus interest, a true time “deposit” takes place. From a
legal standpoint, this is unquestionably a mutuum or loan
which can later be changed to or substituted for by a monetary
irregular deposit through an express agreement between the
parties.31
In short, whichever way you look at it, the monetary irreg-
ular-deposit contract cannot be equated with the mutuum or
loan contract. The two are essentially incompatible, and the
existence of the demand deposit in fractional-reserve banking,
despite its being a “monster” or “legal aberration,” can only
be accounted for insofar as it was initially tolerated and later
deliberately legalized by those exercising political power.32
Nevertheless, the fact that such a “monstrous” (according to
Clemente de Diego) legal institution plays a role in the course
of human interaction inevitably produces damaging economic
and social consequences. In the following chapters we will
explain why fractional-reserve banking is responsible for the
crises and recessions that repetitively grip the economy, and
this will constitute an additional argument against the legiti-
macy of the bank-deposit contract, even when both parties are
in perfect agreement. Furthermore, this explains the impossi-
bility of at all times guaranteeing the repayment of these
deposits without the creation of a whole government super-
structure called the central bank. Once this organization has
146
Money, Bank Credit, and Economic Cycles
31We do not support the doctrine that time “deposits” are not loan or
mutuum contracts from the legal perspective, since both their economic
and legal natures reflect all the fundamental requirements we studied in
chapter 1 for a loan or mutuum. Among the scholars who attempt to jus-
tify the theory that time “deposits” are not loans, José Luis García-Pita
y Lastres stands out with his paper, “Los depósitos bancarios de dinero
y su documentación,” esp. pp. 991ff. The arguments García-Pita y Las-
tres offers here on this topic fail to convince us.
32That is, fractional-reserve banking conflicts with traditional legal prin-
ciples and only survives as a result of an act of coercive intervention
found in a mandate or governmental statutory privilege, something that
other economic agents cannot take advantage of and which expressly
states that it is legal for bankers to maintain a fractional-reserve ratio
(Article 180 of the Spanish Commercial Code).
established a monopoly on the issue of paper money and
declared it legal tender, it has the function of ensuring the cre-
ation of all the liquid assets necessary to satisfy any immediate
need private banks may have for funds. In chapter 8 we will
study the resulting emergence of a centralized monetary pol-
icy, which like all attempts to coordinate society through coer-
cive measures (socialism and interventionism), and for the
same reasons, is ultimately doomed to failure. Indeed, central
banks and governmental monetary policy are the main cul-
prits in the chronic inflation which in varying degrees affects
western economies, as well as in the successive and recurrent
stages of artificial boom and economic recession which cause
so many social upheavals. But first, let us continue with our
legal analysis