Sunday, September 2, 2012

Huerta de Soto on Banking in Ancient Rome: A Critique

The following points are a critique of the section on Roman banking in Chapter 2 of Money, Bank Credit and Economic Cycles:
(1) Huerta de Soto asserts that:
“Indeed, Roman argentarii [deposit bankers – LK] were not considered free to use the tantundem of deposits as they pleased, but were obligated to safeguard it with the utmost diligence.” (Huerta de Soto 2012: 53).
As we have seen in the previous post, there is no convincing evidence for this idea at all. First, Huerta de Soto’s idea that money left with a banker as a mutuum required a strict term/time limit is untrue: even the mutuum loan could be a loan callable on demand in Roman law.

Secondly, even the irregular deposit (depositum irregulare) of later Roman law did not require that the banker had to keep some equivalent amount of money for all depositors on hand at all times. In cases of mutuum loans or the irregular deposit, a tantundem was repaid at the time it was due or when the depositor/creditor demanded it.

(2) On p. 126 of Money, Bank Credit and Economic Cycles, Huerta de Soto asserts that
“In continental Europe [sc. in the 18th century], in contrast, the Roman legal tradition still exerted great influence. Roman jurists had impeccably formulated the nature of the monetary irregular deposit, basing it on the safekeeping obligation and the unlawfulness of banks’ appropriation of deposited funds. … Also, [sc. in continental Europe] the concept of irregular deposit began to return to its classical legal roots (which outlawed fractional-reserve banking)” (Huerta de Soto 2012: 126).
But we have already seen that neither Roman Classical jurists nor post-Classical/late Roman jurists defined the irregular deposit in the way that Huerta de Soto does.

And the idea that the Romans banned fractional reserve banking, or that it was illegal at Rome is utterly absurd.

Roman contract law either in the mutuum or the later irregular deposit (depositum irregulare) contract allowed fractional reserve banking, and the practice itself was clearly conducted during the Roman Republic and Empire without prosecution:
“Roman bankers did indeed lend – much of the extensive evidence was gathered by Andreau. It can also be demonstrated, in case it needs to be, that classical banks practised fractional reserve banking – for otherwise there would have been no need in the crisis of 85 B.C. to give the bankers of Ephesus ten years to pay back their depositors. We have no evidence as to how large their reserves were normally: according to De Roover, medieval bankers typically maintained a reserve ratio as high as 29–30 per cent.” (Harris 2006: 11).
There is not one shred of evidence that fractional reserve banking was illegal under Roman law or considered immoral at Rome.

(3) On pp. 54–55, Huerta de Soto briefly discusses the case of the banker Callistus (a future pope), who managed a bank and stole the funds, and was punished for this.

But the whole episode does not demonstrate that fractional reserve banking was illegal at Rome, nor that banks had to keep an equivalent in money for all irregular deposits they held. Callistus was corrupt, and his fraud is completely different from the normal, legal activities of fractional reserve banks.
I will end with the observation that one of the sources of Huerta de Soto’s unorthodox definition of the irregular deposit (depositum irregulare) appears to be the work of Pasquale Coppa-Zuccari (1873–1927), an Italian professor of civil law and business law who taught at the University of Urbino, the University of Siena, the University of Messina and University of Palermo from 1901 to 1910 onwards.

In particular, these two works are cited by Huerta de Soto:
Coppa Zuccari, Pasquale. 1901. Il deposito irregolare. Modena.

Coppa-Zuccari, Pasquale. 1902. “La natura giuridica del deposito bancario,” Archivio giuridico “Filippo Serafini”, n.s. 9: 441–472.
Now my Italian is not very good, but I suspect that an investigation of these works will reveal an equally flawed understanding of the irregular deposit, and may be the source of the questionable legal theory in Huerta de Soto’s book.


Huerta de Soto cites the following passage of Pasquale Coppa Zuccari on p. 16 (n. 15) of Money, Bank Credit and Economic Cycles to defend his view of the irregular deposit. I reproduce the Italian with my translation following:
“Conseguenza immediata del diritto concesso al deponente di ritirare in ogni tempo il deposito e del correlativo obbligo del depositario di renderlo alla prima richiesta e di tenere sempre a disposizione del deponente il suo tantundem nel deposito irregolare, è l'impossibilità assoluta per il depositario di corrispondere interessi al deponente.” (Coppa Zuccari 1901: 292 quoted in Huerta de Soto 2012: 16, n. 15).

“The direct consequence of the right granted to the depositor to withdraw the deposit at any time and the corresponding obligation of the depositary to return it at the first request and keep available to the depositor his tantundem in the irregular deposit [sc. is that] it is absolutely impossible for the depositary to pay interest to the depositor.”
So it appears that Coppa Zuccari also held the erroneous view that a banker taking irregular deposits had to keep money of the same amount available at all times. Whether Coppa Zuccari himself argued that this was the view of the Romans I cannot say, but what can be said is that Classical and post-Classical Roman law said no such thing.






  1. LK, following on from your previous posts, given that the mutuum contract did not have to have a fixed term what was the distinction between it and the irregular deposit that meant someone could express a preference?

    1. Mutuum was originally deemed for the benefit of the debtor, and in its bare form carried no interest, but was gratuitous (W. W. Buckland, 1963. A Text-Book of Roman Law from Augustus to Justinian [3rd edn.] Cambridge: "Mutuum, as a result, perhaps, of its origin, was gratuitous"). Interest was by additional stipulation (or stipulatio in Roman contract law).

      In contrast, irregular deposit (depositum irregulare was supposed to be in the interest of the creditor/depositor.

      Probably the most prevalent view is that the irregular deposit (depositum irregulare) was a later Roman legal invention to deal with the Greek concept of the parakatatheke, a broad term which can be a "bailment," "deposit," "trust," or "loan" (see H. T. Klami, 1986. “Depositum und Παρακαταθήκη,” in Hans-Peter Benöhr (ed.), Iuris professio: Festgabe für Max Kaser zum 80. Geburtstag. Böhlau, Vienna. 89–100).

      Greek law was not as well defined as Roman law, but when parakatatheke was, economically speaking, a loan it was still called "deposit."

      Irregular deposit, then, may be a Roman translation of parakatatheke.

      And it could be that unusual contracts by Romans played a role in its development too: e.g., an irregular deposit can have developed partly from instances where the money given to a banker, by mutual agreement, was technically a bailment until the banker decided to use it, when, again by mutual agreement, it then became his property and simply a loan (mutuum) by another name, with interest due to the "depositor"/creditor.

      If the banker had in fact not touched it when he became insolvent, then the money was still deemed a bailment and returned to the original depositor.

  2. How was Callistus' behavior "completely different"? Why was his behavior fraudulent?

    1. (1) de Soto claims that FRB was illegal at Rome and implies that Callistus was guilty merely for lending out his depositors's money.

      (2) in fact FRB was not illegal at Rome. Callistus stood accused of embezzling money: if he had lent the money out at interest in loans, but saw his loans go bad, he would have been guilty of failing to honour contracts.

      The latter (breach of contract) is very different from the former (embezzling money).

      The episode does not prove what Huerto de Soto thinks it does.