Banknotes and their vindication in eighteenth-century Scotland - by Kenneth G. C. Reid

Date read: 2024-04-10
Tags: Money | Bitcoin
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Key ideas: University of Edinburgh research paper by prof. Kenneth G. C. Reid, published in 2014. “The first banknotes in Scotland were issued in 1695 following the incorporation of the Bank of Scotland… In 1749 the case of Crawfurd v The Royal Bank considered, and settled, one of the key legal issues: whether the holder of a banknote took free from infirmities of title which affected those from whom it had been acquired.” (K. Reid)



The first banknotes in Scotland were issued in 1695 following the incorporation of the Bank of Scotland. In a country critically short of coin and vulnerable to changes in its value, they were an almost immediate success…

In 1749 the case of Crawfurd v The Royal Bank considered, and settled, one of the key legal issues: whether the holder of a banknote took free from infirmities of title which affected those from whom it had been acquired. In the litigation Mr Crawfurd sought to vindicate a £20 Bank of Scotland note which had gone missing in the post and turned up some time later in the hands of the Royal Bank of Scotland. The printed arguments of counsel which have survived provide a fascinating glimpse into a collision between orthodox property law on the one hand and the needs of commerce and the future of the banking system on the other.

According to the former, Mr Crawfurd’s victory was assured because no one can acquire title through a thief; according to the latter, the Royal Bank must prevail, for any other result ‘would be to render the Notes absolutely useless, and consequently would in a great Measure deprive the Nation of the Benefit of the Banks, which could hardly subsist without the Circulation of their Notes’.

In other words, a good (or an asset) cannot be money if it is not fungible. Bitcoin (in its current form), for example, is not fungible, so it’s unlikely to become money. It is a good store of value (for now) but to become money bitcoin needs to become fungible.

The ‘Old’ Bank and the ‘New’

The origins of paper money in Scotland lie in the establishment of the Bank of Scotland in 1695, a year after its English counterpart…

The first banknotes were issued on 1 April 1696, and already by July of that year the Bank had liabilities in notes of five times its holdings in coins. The results, in the early years, were perhaps unsurprising: notes came to be worth less than their face value and, beginning in 1704–05, there were periods where payment had to be suspended and note-holders offered interest instead of coin.

Nonetheless, by the time that the statutory monopoly given to the Bank of Scotland expired, in 1716, paper money was firmly established within Scotland as an equivalent of coin.

But in 1727, and in the teeth of the Bank’s opposition, a second public bank, the Royal Bank of Scotland, was established by Royal Charter and began to issue notes. Almost at once the ‘New’ Bank set out to break the ‘Old’ by accumulating its notes and making substantial and unpredictable demands for payment…

Litigation between the Banks followed. Yet the Old Bank survived and, as the New Bank issued more notes of its own, it became vulnerable in turn, leading to a suspension of hostilities.

Let me get this straight. They created the first central bank that had a monopoly on money printing. In the first 3 months of its operation, the bank printed 5 times as many notes as they had coins! They debased the notes so much that “there were periods where payment had to be suspended”.

After the monoply of the central bank expired, the second bank was created. “Almost at once”, to get rid of the competitor, the new bank decided to make a run on the old bank! Letigation followed.

While the litigation was taking place, the new bank, apparently, printed so many notes of their own, that they themselves “became volnerable” to a bank run, “leading to a suspension of hostilities.”

Can it be any more absurd and disturbing?

Crawfurd v. The Royal Bank - the most important banking case of the century and a crucial test for the viability of the new form of money

On 30 July 1748 Hew Crawfurd, a lawyer in Edinburgh, sent two Bank of Scotland £20 notes by post to William Lang, a merchant in Glasgow. The letter failed to arrive. Crawfurd’s missing notes were easily identifiable because, with the prudence characteristic of his profession and nation, he had kept a record of their numbers and signed his name on the back. Crawfurd notified the Bank of Scotland of the missing notes, ‘desiring that if any of them appeared for payment the same might be stopped till he should be apprised thereof’.

Probably it had been stolen and passed through several hands before being presented to the Royal Bank for payment, although the circumstances of its loss and re-discovery were never properly established. At first the Royal Bank was unaware of the note’s provenance, but when tellers from the two Banks met for a routine exchange of notes, in December 1748, the note was identified and Crawfurd informed

Who owned the note now, however, was a great deal less clear. When it became apparent that the note would not simply be released to him, Crawfurd asked the Bank of Scotland to raise an action of multiplepoinding, the normal procedure, now as then, for adjudicating competing claims to money or other property. And when the Bank refused, […], Crawfurd raised the action himself in the Court of Session in the name of the Bank.

Crawfurd’s claim was greeted by both Banks with dismay, even alarm

The Banks’ concern is easily understood. If holders of banknotes were vulnerable to infirmities of title of which they knew nothing, then this would indeed be ‘a barr to the circulation’ of notes and hence a threat to the whole idea of paper money. And even if that position could be resisted—even if bona fide holders took an unblemished title—there was the further difficulty of assessing the holder’s state of knowledge.

Crawfurd had marked the banknotes and advertised his loss. Must a holder be taken to know this and to realize its significance? ‘If’, the Banks reasoned

‘the writing upon notes and advertising the numbers in the Publick Prints should be found sufficient to interpel people from receiving such notes in payment it would be a mean of putting an intire stop to the circulation of notes and of opening a door for frauds by malicious and designing persons.’
This is, in my view, exactly the state of bitcoin today. The marking of bitcoin UTXOs as “dirty” by chain analyses companies is considered sufficient by centralized exchanges to prevent people from receivng (withdrawing) such bitcoin UTXOs. This practice is enforced by the government and is likely to be “a mean of putting an intire stop to the circulation of” bitcoin. The only way (that I see) to make this practice obsolete is to make bitcoin private by default on the base layer (like Monero, for instance). That would probably require a hard fork - an idea that is considered anathema by most bitcoin influencers and maximalists of today (2024)
Vindication of money

Although the fact of theft was not clearly established in Crawfurd v The Royal Bank, the case was argued and decided on the basis that the £20 note had indeed been stolen and was a res furtiva. That being so, the general rule was not in doubt: stolen goods could be vindicated by the person from whom they were taken, for no title could pass even to a bona fide acquirer without the owner’s consent….

It was true, Home conceded, that stolen coin could often not be reclaimed, but this was due to a deficiency of proof and not of law. If all coins looked the same, then victims of theft could not identify what had been taken. But in the present case the banknote had been numbered, and signed. It was indisputably the same note that Crawfurd had put into the post. It should be returned to him.

The response for the Banks was necessarily inventive. According to the Royal Bank’s counsel, James Erskine, in a key passage. Roman lawyers viewed money:

not as a corpus, but a quantitas quae usu consumebatur, by which Means they effectually withdrew it from being liable to the rei vindicatio, or affectable by the vitium reale, which was held to accompany all res furtivae; and upon this Principle it was, that pecunia furtiva mutuo data, pro re vendita numerata, creditori soluta, bona fide accipientis fiebant, because in all these Cases, they held them to be consumed …
The results, and the reasons

When Henry Home—by now Lord Kames—came to report Crawfurd v. The Royal Bank, he gave the result of the case in much the same words as, two decades before and as defeated counsel, he had scrawled on his own copy of Lord Strichen’s Report. The Judges, he wrote, were unanimous

that money is not subject to any vitium reale; and that it cannot be vindicated from the bona fide possessor, however clear the proof [of] the theft may be…. Mr Crawfurd had no claim to the note in question.

Thus was established the rule of bona fide acquisition of money in Scotland…

If Crawfurd was able to vindicate the banknote, no merchant could risk taking money in payment

without being informed of the whole History of it from the Time that it first issued out of the Bank or the Mint till it came to his Hand, which is so apparently absurd, that it seems hardly to merit a Consideration

And as banknotes would thus be rendered ‘absolutely useless’, this would ‘in a great Measure deprive the Nation of the Benefit of the Banks, which could hardly subsist without the Circulation of their Notes’.

Today, informing of a bitcoin UTXO History from the Time it was minted till it comes to your Hand (due to transparency of bitcoin ledger) is a relatively easy task. Thus, as mentioned above, it is possible to mark cerntain UTXOs as “dirty” (i.e. destroy fungibility) and render bitcoin useless as money.

It was in vain for Home to object that, just as people continue to buy goods despite the (slight) risk that they might be stolen and subject to vindication, so they would continue to accept money if the risks were the same.

If money could be vindicated, counsel for the Bank of Scotland concluded, ‘no Man could be sure, that one Shilling in his pocket was his own, and both Banks might shut their doors’.

Mixing coins

As Home was quick to point out, Roman law seemed firmly on the side of Crawfurd. That much was plain from the opening of D. 46.3.78, a text of Iavolenus:

Should another’s coins be paid, without the knowledge or volition of their owner, they remain the property of him to whom they belonged; should they have been mixed, it is written in the books of Gaius [Cassius Longinus] that should the blending be such that they cannot be identified, they become the property of the recipient so that their [former] owner acquires an action for theft against the man who gave them.

Admittedly, the text allowed for an exception where money had been mixed and could no longer be identified….

For the Bank of Scotland, Wedderburn countered with a passage from Voet which built, not on Iavolenus’ opening rule, but on the exception for mixing:

This power of vindicating stolen property from a third party possessing in good faith fails nevertheless when stolen money has been paid by a thief to a creditor of his who receives it in good faith, or has been counted out by way of price for a thing sold, and has been either used up or mixed with other money; for cash is regarded as used up by the latter process: D. 46.3.78; moreover cash of another which has been used up in good faith by a creditor can neither be vindicated nor claimed in a personal action.

The underlying argument appears to be the following.

  1. According to Iavolenus, stolen money cannot be vindicated when it is has been mixed.

  2. Mixing is a form of consumption.

  3. Iavolenus’ rule is about consumption and not (merely) about mixing.

  4. Spending is a form of consumption. (4) Therefore when stolen money is spent it cannot be vindicated.

The doctrinal key is step (2) in which mixing (commixtio nummorum) is classified as a type of consumption (consumptio nummorum), an idea which can be traced back at least as far as the Glossators. Once this is accepted—and Iavolenus’ rule generalized to include all cases of consumption (step (3))—everything else falls neatly into place.

Iavolenus and Stair. Stair requires that the money be ‘not discernible from others of that kind’

At the time that Crawfurd was pled, in 1749, the only comprehensive account of private law in print was Viscount Stair’s Institutions of the Law of Scotland; and Stair, like Voet several decades later, offered his own treatment of Iavolenus’ text.

The passage by Stair is as follows:

[I]n fungibles and all such things as are not discernible from others of that kind, possession is generally esteemed to constitute property, which is most evident in current money, which if it be not sealed, and during its remaining so, is otherwise undiscernible, it doth so far become the property of the possessor, that it passeth to all singular successors without any question of the knowledge, fraud, or other fault of the author; without which commerce could not be secured, if money, which is the common mean of it, did not pass currently without all question, whose it had been, or how it ceased to be his; l. si alien. 78 ff. de solutionibus [D. 46.3.78]; and though that law is in the case of commixtion of money with another’s money, who was not owner of it, whereby it is esteemed as consumption of money commixed, yet that ground doth necessarily reach all money, as soon as it passeth to any singular successor by commerce, for thereby it is consumed in the same way.

If Stair’s text had been discovered in the Crawfurd case it would have saved the Banks’ counsel a great deal of trouble. Yet in one respect the text would not have helped. For, like Iavolenus (and unlike Voet), Stair requires that the money be ‘not discernible from others of that kind’; money which can be identified can be vindicated despite the good faith of the acquirer.

If Stair’s passage had been found by the counsel in Crawfurd, and followed, it would have been Crawfurd and not the Royal Bank who would have been entitled to the £20 note. Stair, of course, was writing in the context of metallic money which was indistinguishable unless ‘sealed’, by which Stair seems to mean collected in bags or other sealed containers. It is unknowable whether he would have maintained his position following the introduction, some thirty years later, of (distinguishable) paper money.

Let’s assume for the sake of argument, that bitcoin (BTC) and monero (XMR) are money. We know that bitcoin is distinguishable (not fungible) whereas monero is indistinguishable (fungible). Let’s also imagine that instead of the £20, 20 BTC and 20 XMR had been stolen from Crawfurd.

According to Stair’s passage, then, Crawfurd would have been entitled to the 20 BTC, which could have been vindicated from the acquirer (even if that 20 BTC had been mixed with other BTC) because BTC is distinguishable. However, Crawfurd would not have been entitled to the 20 XMR, which could not have been vindicated from the acquirer because XMR is indistinguishable.