Deposits as Debts: The Peculiar Relationship between Bank and Depositor
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DEPOSITS AS DEBTS:
THE PECULIAR RELATIONSHIP
BETWEEN BANK AND DEPOSITOR
Zach Howe*
This Article analyzes the legal and historical development of banks'
power to loan deposits, a power that forms the foundation offractional-reserve
banking. The ability to loan deposits derives from their legal classification as
debts. This categorization differs from that of other fungible-good deposits,
which are considered bailments. To explain the law's treatment of bank deposits,
this Article looks to historical and legal trends that date back to sixteenth-century
England and follows those trends through nineteenth-century American
jurisprudence. Ultimately, the Article concludes that the courts correctly
classified deposits as debts, but erred in failing to require banks to disclose to
depositors that they were not, in fact, holding their deposits in safekeeping.
I. INTRODUCTION
The legality of most aspects of monetary policy in the United States has
long been settled. The Constitution affords Congress the power [t]o borrow
money on the credit of the United States and [t]o coin money, land] regulate
the value thereof. . . .' Interpreting these two clauses, the Supreme Court has
confirmed the federal government's power to charter a bank,2 tax notes issued by
state banks,3 issue paper money with legal tender status,4 and invalidate gold
clauses in private and public contracts.'
In analyzing the development of the federal government's manifold
powers over money, however, one power antecedent to most others is often lost
in the shuffle: the power to lend deposits. This power is the basis of money
creation through fractional-reserve banking.6 The power bears significance today
for numerous reasons, not the least of which is its relation to the Federal
Reserve's ability to influence the money supply.7 Currently, under the reserve
requirement set by the Federal Reserve, banks are only required to hold ten
* Simon Karas Fellow, Ohio Attorney General's Office. Adjunct Professor, Capital University Law
School. J.D., Harvard Law School, 2014. The author wishes to thank Professor Christine Desan at
Harvard Law School for her guidance and critique during the development of this article.
' U.S. CONST. art. I, § 8, cl. 2, 5.
2 See McCulloch v. Maryland, 17 U.S. 316, 400 (1819).
3 See Veazie Bank v. Fenno, 75 U.S. 533, 536 (1869).
4See Juilliard v. Greenman, 110 U.S. 421, 435 (1884); see also Knox v. Lee, 79 U.S. 457, 529
(1871).
1 See Perry v. United States, 294 U.S. 330, 346 (1935) (private contract); Norman v. Baltimore &
Ohio R. Co., 294 U.S. 240, 291 (1935) (public contract); Nortz v. United States, 294 U.S. 317, 323
(1935) (public contract).
6 See Timothy C. Harker, Bailment Ailment: An Analysis of the Legal Status of Ordinary Demand
Deposits in the Shadow of the Financial Crisis of 2008, 19 FORDHAM J. CORP. & FIN. L. 543,
560-62 (2014).
7 See id. at 559-62.](ViewImageLocal?handle=hein.journals/umkc84&div=48&collection=&method=preview&ext=.png&size=3)
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Deposits as Debts: The Peculiar Relationship between Bank and Depositor
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