Saturday, 12 September 2015

Who owns money deposited at banks?

Bit of a minor semantic argument this, but Positive Money claimed yesterday that banks “own” the money that their customers deposit. And Richard Werner claimed likewise.

My counter argument was to ask where the law is that allows banks to refuse to return depositors’ money or refuse to honor cheques even when there is money in relevant accounts.

I’m claiming that banks only BORROW money from depositors, and they have approximately the same rights over that money as anyone who borrows anything from anyone else. For example, assuming the money goes into an instant access account, the bank has a very definite obligation to return the money to the depositor on demand, or honor a cheque drawn on the bank by the customer assuming there are funds in the depositor’s account.

Richard Werner answered by saying there are laws (unspecified) which mean the bank does not actually have an obligation to return the money on demand, but admits that the bank’s reputation would be trashed if it failed to return money on demand.

So I’m resting my case. Ownership means having total and complete control over something. But, banks (whatever the law may say) are in fact under an obligation to return money to depositors on demand and to honor cheques. And if you are IN POSSESSION of X while being under an obligation to return X to whoever you got X from on demand, then you do not have total and complete control of X. Ergo banks BORROW money from depositors. Banks to not “own” the money deposited with them. 

And now having stuck my neck out, I shall wait to see if it gets chopped off..:-)


  1. Ralph, you are right. The legal contract between a bank and a depositor is a "mutuum".
    "In ordinary cases of deposits of money with banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded."
    - Story, Joseph. 1832. Commentaries on the Law of Bailments.

    PM/Werner are merely right on one very narrow point, namely that bank deposits are not "bailments" - a bank depositor does not retain ownership of particular notes/coins/assets handed over to the bank for safekeeping.

    For an excellent exposition see Lord Keynes:

    Related are:
    Related to this issue, a major and very confusing part of PM's proposals is that all bank deposits would be outlawed except those deposited at the Central Bank. Under PM's proposal banks (other than the CB) would merely act as agents for the CB. Presumably in law there would be mutuum contracts between depositors and CB.

    Indeed, PM's Andrew Jackson says "the positive money system is not a full reserve system – people don’t own bank deposits which are then backed 100% by central bank reserves, instead they actually own the ‘reserves’ themselves".
    [Here PM seems to accept that in some sense depositors "own" their deposits.]

    None of the other proposals for Full Reserve banking suggest that all deposits should become liabilities of the CB.
    You were dead right (in the blog just referenced) to comment that this unique and weird feature of PM was "unnecessarily bureaucratic".

    PM attempted justification is the claim that Full Reserve banking "doesn’t necessarily stop banks creating money", whereas the PM proposal "does not suffer from this problem". Actually the reverse is the case, depending on how the proposals are implemented.

    1. KK,

      Crickey: you’ve done your homework. I shall think more carefully about contradicting KK in future!

      Re Lord Keynes, I have plenty of respect for him.

      Re Andrew Jackson’s claim that Pos Money’s system is not a full reserve system, he’s splitting hairs far as I can see. He seems to suggest that where people have accounts at commercial banks and that money is backed by reserves, that IS full reserve, while in contrast he claims Pos Money’s system involves depositors actually owning those reserves. Well I can’t see the difference. In the former case (where depositors allegedly don’t own reserves) and assuming the relevant commercial bank goes belly up, then those depositors have a right to those reserves. So effectively they do own those reserves. Or perhaps I’ve missed something.

      Next, I’m not sure about your claim that “None of the other proposals for Full Reserve banking suggest that all deposits should become liabilities of the CB.” William Hummel backs full reserve and argues that depositors who want to, should be able to open an account with the Fed. I can’t find the site where he says that right now, but his main site is here:

      Also Milton Friedman argued that depositors wanting total safety should be able to have accounts backed by reserves.

      As to whether that constitutes a “liability” of the CB is a tricky semantic question. Reserves or £10 notes are not a liability of the BoE in that the BoE is not obliged to give “£10 note holders” anything in exchange for their notes, so that’s not a liability in the normal sense of the word.

  2. A depositor owns something, but not the money. It owns a right to be paid the money back on demand. A good illustration of the practical difference in this legal distinction appears in the queuing outside Northern Rock in 2008. If the customer's "owned" their deposits, they would not have needed to panic.

    Carr v Carr established the principle that a bank "deposit" is not a deposit but a loan to the bank.

    1. “If the customer's "owned" their deposits, they would not have needed to panic.” If I lend you my car, and you fail to return it at the agreed time and date, that doesn’t stop me being the owner of the car, far as I can see.

    2. If you lend me your car.... that would be a loan, so yes, you would still own it. But when you put money in the bank, the law recognises that as a legal transfer of ownership to the bank in exchange for a mere promise to be paid back.


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