About Your Bank Deposits...

Who owns the money you hold on account at your bank...?

In PARLIAMENT this Wednesday, the MP for Clacton, Douglas Carswell, with support from my co-director here at the Cobden Centre, Steve Baker, the Member for Wycombe, introduced a Ten Minute Rule Bill seeking dramatic reform of the UK's banks, writes Toby Baxendale.

The bill was brought in with no objections, and the next reading will be on the 19th of November. You can read the full text of Carswell's speech at TheyWorkForYou. Steve Baker has been promoting its ideas on his CentreRight blog, which also carries a survey – conducted on our behalf by ICM – showing great confusion on the part of the British public concerning the legal relationship between banker and customer.

The current state of the law? The key case is Carr v Carr 1811 (reported in Merivale (541 n) 1815 – 17). A testator in making his bequest said "whatever debts might be due to him…at the time of his death", the key question in this case being whether "a cash balance due to him on his banker's account" passed by this bequest. The Master of the Rolls, Sir William Grant held that it did. He reasoned that it was not a depositum; a sealed bag of money could be, but this generally deposited money could not possibly have an 'earmark'.

Grant concluded on this point:

"When money is paid into a banker's, he always opens a debtor and creditor account with the payor. The banker employs the money himself, and is liable merely to answer the drafts of his customers to that amount."

For the legal scholars among you, Vaisey v Reynolds 1828 and Parker v Merchant 1843 both affirmed this position.

In Davaynes v Noble 1816 it was argued in front of Grant that a banker is a bailee rather than a debtor. Rejecting that argument, Grant said "money paid into a banker's becomes immediately a part of his general assets; and he is merely a debtor for the amount."

In Sims v Bond 1833 the Chief Justice of the Queens Bench Division affirmed in judgment "sums which are paid to the credit of a customer with a banker, though usually called deposits, are, in truth, loans by the customer to the banker."

The House of Lords, then the highest court in the land, had its say on the matter in Foley v Hill and Others 1848, duly reported in the Clerk's Reports, House of Lords 1847-66 (pages 28 and 36-7). In summary, the appellant in 1829 opened a bank account with the respondent bankers. Two further deposits we added in 1830 and in 1831 interest was still added. In 1838 the appellant brought proceedings against the respondent bankers seeking recovery of both the principle and interest. The counsel cleverly tried to argue that it was the duty of the respondent bankers to keep all the accounts up to date at all times and thus there was more to this relationship than that of debtor and creditor.

In judgment, the Lord Chancellor Cottenham said the following:

"Money, when paid into a bank, ceases altogether to be the money of the principal; it is by then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it.

"The money paid into a banker's is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker's money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places.

"The money placed in 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 hazardous speculation; he is not bound 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, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.

"That has been the subject of discussion in various cases, and that has been established to be the relative situation of banker and customer. That being established to be the relative situations of banker and customer, the banker is not an agent or factor, but he is a debtor."

Thus the settled position of the law is that when you deposit, the bank becomes the owner of the money deposited and you become a creditor to the bank.

The Carswell Bill, in contrast, seeks to align the law with what people actually think happens: that they deposit money and it is theirs. It also seeks to allow savers to save in a term deposit, by which they knowingly and indeed willingly allow the bank to lend their money to borrowers. This relationship will then be that of a depositor lending to the bank and the bank being the debtor to the lender.

The honesty of this approach is refreshing indeed. The economic consequences are that credit granted to borrowers is from real savings and the leveraging of loans (multiple on-lending of the same deposit) that has caused such financial destruction ceases to happen. Real savings lent to borrowers will produce goods and services, and once the loans are repaid, the lenders will be in a position to buy the goods and services. This will have the very positive effect of smoothing out the credit-induced boom and bust cycle, providing us with greater sustainable financing.

Credit created out of nothing only supports activities that could not get funding out of real saved resources. Think of all those nutty Dot.Com projects, and more recently the nutty finance projects embarked upon.

With its second reading now booked, this Bill for Honest Money can become a major taking point in the banking reform debate.

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