Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Attempts to Legally Justify Fractional-Reserve Banking 125customs, and even the government, and it was ruled that themonetary irregular-deposit contract was no different from theloan contract, and therefore that bankers making self-interesteduse of their depositors’ money did not commit misappropriation.9 Of all of these court rulings, it is worthwhile toconsider Judge Lord Cottenham’s decision in Foley v. Hill andothers in 1848. Here the judge arrives at the erroneous conclusionthatthe money placed in the custody of a banker is, to all intentsand purposes, the money of the banker, to do with it as hepleases. He is guilty of no breach of trust in employing it. Heis not answerable to the principal if he puts it into jeopardy,if he engages in a haphazardous speculation; he is notbound to keep it or deal with it as the property of his principal,but he is, of course, answerable for the amount,because he has contracted, having received that money, torepay to the principal, when demanded, a sum equivalent tothat paid into his hands. 109 This type of ruling contrasts with the trend of sound judgments establishedby the declaration that American grain depositaries acted fraudulentlyin the 1860s when they appropriated a portion of the graindeposits they were to safeguard and speculated with it on the Chicagomarket. In response to this disconcerting event, Rothbard wonders:[W]hy did grain warehouse law, where the conditions—ofdepositing fungible goods—are exactly the same . . . developin precisely the opposite direction? . . . Could it be that thebankers conducted a more effective lobbying operation thandid the grain men?See Murray N. Rothbard, The Case Against the Fed (Auburn, Ala.: Ludwigvon Mises Institute, 1994), p. 43. The same valid legal doctrine hasbeen evident in Spanish court decisions regarding bulk deposits of oil inolive oil mills. (See the Spanish Supreme Court decision of July 2, 1948.)10 See the note on p. 73 of the book by E.T. Powell, Evolution of MoneyMarkets (London: Cass, 1966), and Mark Skousen’s comments on thisdecision in his book, The Economics of a Pure Gold Standard (Auburn, Ala.:Ludwig von Mises Institute, 1977), pp. 22–24. Two precedents of LordCottenham’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. SeeJ. Milnes Holden, The Law and Practice of Banking, vol. 1: Banker and Customer(London: Pitman Publishing, 1970), pp. 31–32 and 52–55.