Every first-year law student learns: a valid contract requires consideration from both parties. Something for something. But in modern banking, there's a hole in this logic big enough to drive a truck through.
The Legal Definition
Three elements are required:
Both parties must be seeking something from each other. Not a gift or past action.
What's exchanged must have value in the eyes of the law. Actually worth something.
The consideration must actually be given or promised. Not theoretical.
UCC Consideration Requirements
The Uniform Commercial Code addresses consideration specifically for negotiable instruments:
UCC 3-303(b) explicitly creates a defense: if you weren't given adequate consideration, you have grounds to challenge the instrument. This is not a fringe theory — it's built into the code.
The Consideration Test Applied
Let's apply the consideration test to common scenarios:
You: Give $50
Merchant: Gives you goods worth $50
Both parties gave something of value. Valid contract.
You: Promise to repay $100 plus interest
Lender: Gives you $100 in gold-backed currency from their vault
Lender gave up actual pre-existing value. Valid contract.
You: Sign promissory note worth $300,000, pledge future earnings
Bank: Creates $300,000 deposit from your promissory note
What did the bank give up from its pre-existing assets? The money was created FROM your promise.
The Banking Consideration Question
As explored in Money Creation, modern banks don't lend existing money — they create deposits when you sign a promissory note. This raises the consideration question:
| Party | What They Gave | Pre-Existing Value? |
|---|---|---|
| You |
|
Yes — your future labor is real value |
| Bank |
|
Questionable — credit was created from YOUR note |
If the bank's "consideration" was created from your promissory note, then they gave you... what you already gave them. They monetized YOUR promise and returned it to you as a "loan."
This is the consideration paradox at the heart of modern banking.
Historical Case Law
Classical contract law is clear about what constitutes consideration:
"Nothing is consideration that is not regarded as such by both parties." — Philpot v. Gruninger, 14 Wall. 570 (1872)
Did you understand that the bank would create money from your signature? Did you regard bookkeeping entries as equivalent value to your 30-year commitment of labor?
"Consideration must be something of value in the eye of the law, moving from the plaintiff, or detriment to the defendant." — Black's Law Dictionary, 4th Edition
What "moved from" the bank that wasn't derived from what you gave them?
The Credit River Decision
One court directly addressed this question:
Justice Martin V. Mahoney ruled that the bank had failed to provide consideration because they created credit "out of thin air."
- The bank admitted creating credit from nothing
- No lawful money was transferred from the bank
- The mortgage contract was void for lack of consideration
- The foreclosure was denied
The bank's president testified: "The money and credit first came into existence when they created it."
This decision was not accepted as binding precedent and was largely suppressed. Courts since have declined to follow it. But it demonstrates that the consideration question has been raised — and in at least one case, was decided in favor of the borrower.
Why Courts Resist This Argument
Several legal doctrines make the consideration argument difficult to win:
If the bank qualifies as HDC, lack of consideration becomes a "personal defense" that may be cut off. HDC status immunizes against most consideration challenges.
Courts take "judicial notice" that banks lend money and that Federal Reserve Notes are valid currency. Challenging these assumptions is often dismissed as frivolous without examination.
31 U.S.C. § 5103 declares Federal Reserve Notes legal tender. Courts interpret this as making FRNs valid consideration by statute, regardless of how they're created.
Even sympathetic judges face the reality that accepting this argument would destabilize the entire banking system. Pragmatic concerns often override legal principles.
Practical Application
While direct consideration challenges rarely succeed in court, understanding this framework is valuable:
- You understand what actually happened
- You see the transaction clearly
- You make more informed decisions
- Knowledge creates leverage
- Banks may prefer to settle
- Loan mods become clearer
- Standing challenges
- Chain of title issues
- Procedural violations
- See the full picture
- Choose your approach wisely
- Attack procedure, not philosophy
The consideration argument provides understanding. Practical success often comes through other routes — procedural challenges, statutory violations, standing issues. But understanding consideration helps you see the full picture and choose your approach wisely.
The Fraud Connection
Related to consideration is the fraud defense under UCC Article 3:
Were you told that:
- Your signature would create the money?
- The bank would use your promissory note as an asset?
- You were providing the consideration for both sides?
- The "loan" was actually monetization of your promise?
If not, and if you had no reasonable opportunity to learn this, UCC 3-305 may provide a defense.