Chapter 2 : Economical Propositions
Proposition 1. Every man-so far as, consistently with the principles of natural law, he can accomplish it-should be allowed to have the fruits, and all the fruits of his own labor.
That the principle of allowing each man to have, (so far as it is consistent with the principles of natural law that he can have,) all the fruits of his own labor, would conduce to a more just and equal distribution of wealth than' now exists, is a proposition too self-evident almost to need illustration. It is an obvious principle of natural justice, that each man should have the fruits of his own labor; and all arbitrary enactments by governments, interfering with this result, are nothing better than robbery. It is also an obvious fact, that the property produced by society, is now distributed in very unequal proportions among those whose labor produced it, and with very little regard to the actual value of each one's labor in producing it. And this fact is not the resultexcept in a partial degree-of the superior mental capacities, which enable some men, consistently with honesty and fair competition, to compass more of the means of acquiring wealth than others; but it is the result, in a very important measure, of arbitrary and unjust legislative enactments, and false judicial decisions, which actually deprive a large portion of mankind of their right to the fair and honest exercise of their natural powers, in competition with their fellowmen. That such is the truth will be seen hereafter.
That the principle of allowing each man to have the fruits of his own labor, would also conduce to the aggregate increase of wealth, is obvious, for the reason that each man being, as he then would be, dependent upon his own labor, instead of the labor of others, for his subsistence and wealth, would be under the necessity to labor, and consequently would labor. The aggregate wealth of society would therefore be increased by just so much as the labor of all the members of society should be more productive than the labor of a part. It would also be' increased by the operation of another principle, to wit: When a man knows that he is to have all the fruits of his labor, he labors with more zeal, skill, and physical energy, than when he knows-as in the case of one laboring for wages-that a portion of the fruits of his labor are going to another. Under the influence, then, of this principle, that each man should have all the fruits of his own labor, the aggregate wealth of society would be increased in two ways, to wit, first, all men would labor, instead of a part only; and, secondly, each man would labor with more skill, energy, and effect, than hired laborers do now.
Proposition 2. In order that each man may have the fruits of his own labor, it is important, as a general rule, that each man should be his own employer, or work directly for himself, and not for another for wages; because, in the latter case, a part of the fruits of his labor go to his employer, instead of coming to himself.
Proposition 3. That each man maybe his own employer, it is necessary that he have materials, or capital, upon which to bestow his labor.
Proposition 4. If a man have not capital of his own, upon which to bestow his labor, it is necessary that he be allowed to obtain it on credit. And in order that he may be able to obtain it on credit, it is necessary that he be allowed to contract for such a rate of interest as will induce a man, having surplus capital, to Ioan it to him; for the capitalist cannot, consistently with natural law, be compelled to loan his capital against his will. All legislative restraints upon the rate of interest, are, therefore, nothing less than arbitrary and tyrannical restraints upon a man's natural capacity and natural right to hire capital, upon which to bestow his labor. And, of consequence, they are nothing less than arbitrary and tyrannical restrictions upon the exercise of his right to obtain all the fruits, that he honestly can obtain, from his labor.
The rate of interest, which the capitalist will demand, will depend upon a variety of circumstances, and especially upon the risk of loss attendant upon the loan-in other words, upon the character of the security offered by the borrower for the payment of the loan. This security and consequent risk will differ in the cases of different individuals. The legislation, therefore, that prescribes a fixed rate of interest, beyond which no contracts may go-especially if that limit be, as it usually is, the lowest at which capitalists will loan money on the most approved security-in effect deprives all those, who cannot offer the most approved security, of their right of hiring capital at all.
The great mass of those, who, by reason of not having the most approved security to offer, cannot borrow capital at all at six per cent., could yet, without difficulty, borrow enough to employ their own hands upon, (say from two to ten hundred dollars,) on the credit of their skill, industry, integrity, and ability, and of the value which their labor would add to the capital borrowed, if they were allowed to contract for seven, eight, nine, or ten per cent. interestenough to pay for the risk of life, health, losses by fire, theft, robbery, &c.; which risks it is perfectly right that the capitalist should be guarded against by an additional rate of interest.
The effect of usury laws, then, is to give a monopoly of the right of borrowing money, to those few, who can offer the most approved security. A man offering the most approved security, can obtain money at six per cent.; while another, whose security is not so acceptable, but who, nevertheless, could obtain money as readily at seven, eight, or nine per cent., as the other does at six, cannot now obtain it at all, simply because he is forbidden to contract for such a Tate of interest as would, in the average of loans, compensate capitalists for the additional risk or inconvenience attendant upon the only kind of security he has to offer.
The consequence is that the loanable capital of society is monopolized almost entirely by those few, those very few, who wish to borrow, and can offer the most approved security while the mass of those, who have not capital of their own, but who, if left free to make their own contracts, would be able to obtain a portion sufficient to employ their own hands upon, are now, for the want of capital on which to bestow their labor, compelled to sell their labor to those who have, by means of the usury laws, monopolized the capital. And they are compelled to sell their labor at such a price as will enable the employer to make a large profit upon their labor; or, in other words, enable him to put into his own pocket an important portion of the fruits of their labor. All this is the effect of the usury laws. The same laws that enable him to monopolize the loanable capital, enable him also to monopolize the labor of those who cannot borrow capital on which to bestow their labor.
To illustrate the operation of this principle, let us suppose that a capital of five hundred dollars is necessary to employ the labor of one man; that, under the usury laws, A, owing to the approved character of the security he has to offer, can borrow, and does borrow, at six per cent. interest, five hundred dollars capital more than he wants to employ his own hands upon; that B is a poor man, who cannot borrow capital at six per cent., and, therefore, owing to the prohibition of the usury laws, cannot borrow it at all; that he is consequently compelled to sell his labor to A, who has borrowed the necessary capital to employ his labor; that A buys B's labor for a year, and, after paying his wages, and the interest on the five hundred dollars on which he has employed B to labor, he (A) realizes one hundred dollars profit.
This probably is not an extravagant supposition; for it is probable that employers, who borrow their capital at six per cent., and manage their business judiciously, do generally realize at least an hundred dollars profit from the labor of each adult male laborer they employ.
Now it is plain that if B had been allowed to borrow, and had borrowed, (as he probably could have done,) this same five hundred dollars capital at nine per cent., and had then employed his own hands upon it, he could have put into his own pocket eighty-five dollars more of the fruits of his labor than he did when laboring for A for wages-for he could have had all the fruits of his labor, (that is, the amount both of his wages and the profits made by A,) with but this abatement, viz., that be must have paid three per cent. more interest for his capital than was paid by A. This three per cent. interest, on five hundred dollars, would be fifteen dollars-which, deducted from the hundred dollars that went into A's pocket as profit, leaves eighty-five dollars to go into B's own pocket, over and above the amount he received as wages when laboring for A.
This supposition illustrates fairly the operation of usury laws, in depriving the mass of men of the fruits of their labor. These laws give a monopoly of the loanable capital to a few individuals. These individuals, having a monopoly of capital, are able to take advantage of the necessities of all those who have not capital of their own, and are forbidden to borrow any, on which to labor. They thus compel them to sell their labor at a price that will give their employer a large slice out of the products of their labor. The laws themselves are the contrivances, not of the retired rich men, who have capital to loan- for they, of course, wish to carry their money to the largest and freest market -but of those few "enterprising" "business men," as they are called, who, in and out of legislatures, are more influential than either the rich or the poor; who control the legislation of the country, and who, by means of usury laws, can sponge money from those who are richer, and labor from those who are poorer than themselves-and thus make fortunes. And they are almost the only men who do make fortunes-for almost all fortunes are made out of the capital and labor of other men than those who realize them. Indeed, large fortunes could rarely be made at all by one individual, except by his sponging capital and labor from others. And the usury laws are the means by which he does it.
The reason given for usury laws is, that they protect the poor from the extortions of the rich. But this reason is a false one-for there is no more extortion in loaning capital to the best bidder, than in selling a horse, or renting a house to the best bidder. The true and fair price of capital, as of everything else, is that price which it will bring in fair and open market. And those who falsely pretend to be interested to prevent the rich extorting money from the poor, in the shape of interest on capital, are the very men who want nothing but an opportunity for themselves both to extort capital from the rich, and labor from the poor, that they may thus fill their own pockets at the expense of other men's rights. The protection they offer to the poor, is the protection of forbidding them to borrow capital on which to employ their labor, and thus compelling them to sell their labor at a price that enables the purchaser to make a large profit upon it; it is the protection, which, as in the case already supposed, would really extort from them eighty-five dollars of their labor, to save them from the pretended extortion of fifteen dollars in the shape of interest. Leave the rich and the poor to make their own bargains in regard to the interest of capital, and it is as certain as the laws of nature, that capital will find its way into the hands of those who are to perform the labor upon it. In fact, the usury laws impliedly admit that such would be the resultelse why do they prescribe such rates of interest as must necessarily confine all loans to a few individuals?
Of all the frauds, by which labor is cheated out of its earnings by legislation, and of all the monopolies established by legislation, probably no one is more purely tyrannical in its character, or more destructive at once of the natural right of individuals to make their own contracts, and of the just distribution of wealth, than that monopoly of the right of borrowing money, which forbids the mass of men to obtain capital, on which to bestow their labor, and thus compels them to sell their labor at a price far below the amount of its actual products.
The law, that allows all men, without distinction, to borrow capital, provided they can borrow it at six per cent. interest, is, in the equality of its operation, like a law that should allow every man perfect freedom to profess and enjoy his own peculiar religion, provided his peculiar religion was the particular arid only one that was allowed by the State to be professed and enjoyed by any one.
A statute, that should forbid one man to borrow, at any rate of interest whatever, more capital than lie could manage by his own labor alone, would not be tolerated, for the reason that it would be an infringement of men's natural rights to borrow all they could; yet it would not be half so unequal or pernicious, nor so unjust an infringement of individual rights, nor probably so destructive of the equal distribution of wealth, as are the usury laws, which allow one man to borrow enough to employ a hundred laborers upon, while they forbid the hundred laborers to borrow each enough to employ his own hands upon.
What a change would be wrought upon the face of society, if each adult male laborer, who is DOW obliged to sell his labor, were to receive, during the prime of his life, eighty-five dollars annually of the fruits of his labor more than he does now; and if all older and younger persons, and females, who are Dow obliged to sell their labor, were also to receive a similar greater proportion of the fruits of their labor. Yet if the supposition before made be correct, what prevents such a result? If the abolition of the usury laws alone would not accomplish it, the abolition of these and the other tyrannical and unconstitutional restraints upon the freedom of industry, and men's rights of contract, hereafter to be pointed out, would, I think, certainly accomplish it, at least in the case of all honest, industrious, and ordinarily skillful laborers.
Proposition 5. The laborer not only wants capital, on which to bestow his labor, but he wants to obtain this capital at the lowest rate of interest, at which, in the nature of things, he can obtain it. That he may obtain it at the lowest possible rate of interest, it is necessary that free banking be allowed.
The correctness of this proposition will be seen, when it is; considered what banking really is. Banking is loaning one's credit, (for circulation as currency,) instead, of loaning money.
If a man can afford to loan money for six per cent. interest, he can certainly afford to loan his credit for three. And why 1 Because whatever profit a man makes by loaning his credit, is clear gain. It costs him nothing; for he, still enjoys the use of the houses, lands, or other property, on which his credit is based, in the same manner as if he had not loaned the credit based upon them. But the income, which a man derives from the loan of money itself, is obtained only by the sacrifice, or at the expense of the crops, rents, or other incomes, which he might derive from the lands, houses, or other property, which his money would purchase. If, therefore, a man can afford, for six per cent. interest on his money, to give up all' the crops, rents, and other incomes, which he might obtain from the lands, houses, or other property, which his money would purchase-, it is plain that for three per cent. he could afford to loan his credit, which costs him nothing but the risk and trouble attendant upon the loan, (which risk and trouble, by the way, are not materially, and, in general, perhaps no greater, than in the loan of money.)
It can hardly be said that there is any profit in loaning money itself; for the interest obtained is generally no more than a fair price or equivalent for the crops, rents, or other incomes, which the property that might be purchased with the money, would yield. But in the loan of credit, there is an actual profit of the whole amount that is received as interest, after paying the trouble and risk of banking.
It is clear, therefore, that if money can be loaned, as it now is, for six per cent. interest, credit could be loaned at two, three, or four per cent.
Since, then, all banking profit is a net profit without cost, and not, like the interest on money, an equivalent for the crops, rents, and other incomes of property, that the lender might have retained and enjoyed; and as the materials for banking credit are abundant, and almost superabundant, it is obvious that if free competition in banking were allowed, the rate of interest on banking credit would be brought very low, and bank loans would be within the reach of everybody whose business and character should make him a reasonably safe person to loan to. Probably every such person could borrow, at six per cent, capital enough to employ his own hands upon; and many would doubtless be able to borrow it for five, four, or even three per cent.
Suppose such were the result, and suppose five hundred dollars capital to be enough to employ each man's labor, the only difference between the annual income of a man, who should own his capital, and of one who should borrow his) would be barely the interest paid by the latter-that is, fifteen, twenty, twenty-five, or thirty dollars, according as he should pay three, four, five, or six per cent. interest. What a change would be rapidly wrought in the condition of mankind by a system that should supply all the destitute with the use of capital on such terms as these.
If free banking were allowed, the loanable credit could not be monopolized by a few borrowers, as the loanable money now is. The materials for banking credit are so immense, so nearly illimitable indeed, and exist in such a variety of shapes, and are distributed among so many proprietors, that it would be impossible to concentrate them, as money is now concentrated, in the hands, or bring them under the control of a few corporations, or confine the loans based upon them to a few favorite individuals.*1
Banking credit is the best kind of credit for the borrower-and for these reasons.
1. It is obtained at the lowest possible rate of interest.
2. It then enables the borrower to buy, at cash prices, whatever he wishes to buy.
3. Circulating like money itself, and divisible like money itself into small amounts, it enables the borrower to buy his commodities, or materials, in such quantities, of such qualities, and of such persons as it will be most for his interest to buy them-instead of his being compelled, as he is when he buys his commodities on credit, to buy them in such quantities, of such qualities, and of such persons, as it may chance that he can buy them on credit.
So great are the necessities of the poor for materials upon which to bestow their labor, and for the necessaries of life, such as food, clothing and fuel; and so great are the difficulties in the way of getting cash to make their purchases with, that they are compelled to make most of their purchases on credit; to make them of persons who do not wish to give them credit, and who will not give them credit, except at extravagant prices; and also often to buy commodities not the best adapted to their wants. In making their purchases tinder these circumstances, they not only suffer serious losses in the kinds and qualities of the commodities purchased, but they are also obliged to pay five, ten, fifteen, or twenty per cent. more for them, than they would have to pay if they had cash to buy with. Probably also the retailer (of whom many of their purchases are made) has himself bought his goods on credit of the wholesale dealer, and paid five, ten, or fifteen per cent. more than if fie had bought with cash. And this increased price, paid by the retailer, finally falls upon the consumer, in addition to the increased price which the consumer also pays on account of his own want of cash to buy with. Free banking wonld obviate almost entirely these enhanced prices of commodities, and these losses from the want of adaptation in the commodities to the wants of the purchasers; because, if free banking were allowed, almost everybody, who was worthy of credit at all, both retailer and consumer, could obtain it at the banks, and then make his purchases for cash; and, having ,cash to purchase with, he would be under no necessity to buy only such commodities as were best adapted to his wants.
It would probably be a moderate estimate to suppose that the poor suffer an average loss-including the losses on price, quality, and adaptation to their wants-of fifteen or twenty per cent. on all their purchases, over what they would pay tinder a system of free credit currency. Supposing their purchases to be from two to four hundred dollars a year, their losses, at the rate mentioned, would be from thirty to eighty dollars annually-an amount sufficient, if lost, to keep them poor; or, if saved, to give them a competency.
Proposition 6. All credit should be based upon what a man has, and not upon what he has not. A debt should be a lien only upon the property that a man has before and when the debt becomes due; and not upon his earnings after the debt is due. If, therefore, a man be able to pay a debt when it becomes due, he should pay it in full; if unable to pay it in full, he should pay to the extent of his ability; and that payment should be the end of that transaction. The debt should be no lien upon his future acquisitions.
The only exceptions to this rule should be, 1, where the debtor, previous to the debts becoming due, has dishonestly squandered or misapplied the means, which be should have retained for the payment of his debt; and, 2, where he has omitted to do something, which he was plainly bound to do, towards putting himself in a condition to pay. But if he have been honest and faithful in the performance of everything, that, on his part, he was bound to do, the debt should be binding only to the extent of his ability at the time the debt should become due. And this, it will be seen hereafter, in the chapters on the legal nature of debt, is the whole legal obligation of a debt in any case; and, in the case of most debts, it is also the whole moral obligation.
Under the operation of this principle, nearly all debts would be settled at once on their becoming due; and be then settled finally and forever. The creditor would then know what he had got, and would have no occasion to spend any further time, thought, or money, in harassing the debtor by attempts to get more. And the debtor, on his part, would know that he was a free man; and would at once engage in the best employment he could find, without being liable to be disturbed or obstructed by his former creditor, in the prosecution of it. Thus creditor and debtor would be likely thenceforth to be more useful, both to themselves and society, tinder this arrangement, than tinder the opposite one, which makes the creditor the enemy of the debtor, and incites him to an expensive, cruel, perpetual, destructive and generally profitless war upon him, his family, and his and their industry.
It may be supposed by some, that credit would Dot be given, if the legal obligation of debts were limited in this manner. But men would as lief give credit on this principle, as on any other, if they were to understand, when the contract was made, that such was its legal effect; and if they were also to be at liberty to make their own bargains in regard to the rate of interest -for they would then charge an additional interest sufficient to cover the additional risk, if any, that they might suppose to result from this principle, And it would be far better for debtors to pay a slight additional interest, and have the benefit of this principle, than to make their contracts under all the liabilities of the Opposite one. The payment of a slight additional interest would be equivalent to paying a slight premium for being insured against the calamity of an arrearage of debt and perpetual poverty, in case of any miscalculation or misfortune on their part.
But the probability is, that the risk to creditors would be no greater, not even so great, under the operation of this principle, as it is without it-and for these reasons.
1. This principle would bring about a general practice of short credits, and prompt settlements; which, for a variety of reasons, too obvious to need enumeration, are altogether safer and better for both debtors and creditors.
2. The debtor, under this principle, has a much stronger motive than he has under the opposite one, to the practice of honesty, industry, and frugality, and-if unable to pay the whole of his debt-to the payment of the most that it is in his power to pay, when the debt becomes due. For he knows that he can thus not only cancel his debt, at its maturity, and be free from it forever, but save his character and credit also. But under the principle of perpetual liability, whenever a man finds that he has made an error in his calculations, and that it will be impossible for him to pay his debt in full, that no exertion on his part can save him from an arrearage of debt, he is apt to think and feel that he is ruined, not only in his present fortune, but in his future credit and prospects. He therefore becomes disheartened, ,and perhaps idle, prodigal, and dishonest- saying to himself. "I may as well die for a large sum as a small one." So far as this feeling operates upon the debtor-and that it will operate to a greater or less extent upon all debtors is inevitable-the creditor suffers a corresponding percentage of loss on his debt-a loss that, under the opposite principle, would have been saved.
But when a debtor contracts a debt with the knowledge that, at its maturity, all that can be required of him by his creditor, will be, that he shall have practiced integrity, industry, and frugality, and that he shall make such payment as the practice of these virtues may have enabled him to make, and that, under these circumstances, Dot only his debt will be canceled, but his character and credit saved, he has the stimulus of all these motives operating upon him during the whole period from the time the debt is contracted, until it becomes due. And when a man is governed by these motives, during the whole period mentioned, he will almost uniformly be able to pay, at their maturity, all such debts as were prudently contracted; unless he meet with some unusually hard fortune. And even in the case of hard fortune, he would still be able generally to pay the greater part of his debt; for it is not often, if ever, that a man, in the short interval between the time of contracting a debt, and the time the same debt becomes due, meets with such heavy misfortunes as to swallow up everything in his hands.
3. If this principle of law were acted upon, we should have no insolvent or bankrupt laws, as now, discharging men from their contracts arbitrarily, without regarding whether they have been honest or dishonest, prudent or profligate, frugal or extravagant, fortunate or unfortunate. Under the present system, insolvent and bankrupt laws are indispensable to save honest debtors from hopeless and perpetual poverty and want. Yet as these laws apply to large numbers of debts, instead of a single one, it is impossible that they should make such discriminations between the honest and dishonest, the frugal and the extravagant, the fortunate and the unfortunate debtor, as would be made in the case of a single debt, debtor, and creditor. The consequence is, that under the present system, creditors have, and can have, little other security for the honesty of their debtors, than what the principles and interests of the latter may afford. But under the other system, the debtor would be held liable, on each debt, to the scrutiny of his creditor; and would fail of a release from his liability, if dishonesty, profligacy, or extravagance were proved against him.
Which of these two systems affords the best securities to creditors, it hardly needs further argument to demonstrate.
4. Under the present system, debtors, under certain circumstances, are almost compelled, by the necessities of their condition, to wrong their creditors. For instance-a debtor, before his debt becomes due, finds that it will be out of his power to pay the whole of his debt at the time it becomes due. He knows that this arrearage will be a burden upon his future acquisitions, and that, if he suffer it to become known, it will also be an obstacle to his obtaining such further credit as may be necessary for the successful prosecution of his industry. But his debt not being yet due, and his insolvency not having yet come to light, he has still a credit in the community. He avails himself of this credit in the desperate hope to retrieve his fortune, and save his credit; or, if this cannot be, with the intention of putting as far off as possible the evil day of open insolvency and ruin. He adopts the principle that he will never stop payment so long as his credit is available. (And public opinion justifies him in adopting this principle. The public generally regard a man as a fool, or a coward, who submits to open insolvency so long as he can get credit.) He, therefore, makes new debts to pay old ones; borrows money at ruinous rates of interest; makes desperate moves in his business; every struggle to extricate himself only sinks him deeper in the mire; finally he gets to the end of his credit; his race is run; the insolvent laws come in to settle the matter; and his whole arrearages of debt, and the consequent losses of his creditors, are perhaps ten, twenty, or fifty times greater than they would have been, if he had settled with his first creditor, by paying all he had to pay, when be first found that he was in arrears. Which of the two systems, then, is the best for creditors, as a class?
5. Creditors, as a class-men who have money and capital to loan-have an interest that their customers, the borrowing class, should cancel their debts, by paying what they can, as soon as they find themselves in serious arrears, not only for the reason that their arrears will then usually be many times less than when settlements are postponed, as now, to the latest possible period, but because the debtors will then become good and safe customers to the money lenders again.
6. The principle, that a debt is obligatory only to the extent of the debtor's means when the debt becomes due, would nearly, if not wholly, put an end to a class of contracts, that are immoral and fraudulent, in intent, if not in law, on the part of the creditors, and which ought never to be enforced against debtors. These contracts are of this kind. An old and experienced man takes advantage of the inexperience and the sanguine anticipations of a young man, to sell him property at enormous prices, giving him credit for the whole, or a part, but well knowing, from his own superior judgment and experience, that the young man will not at all realize his anticipations, or even realize enough from the property to cancel his liability. But he sells the property to him on the calculation that the latter will be able to pay at least the real value of the property; and that, as for the balance, he is a young man, he will be able to work it out; or his friends will pay it for him; or the possession of this property will enable him to get credit of others, and thus he will be enabled to pay this debt by throwing an equivalent amount of loss upon somebody else. Such contracts are plainly immoral and fraudulent, on the part of the creditor, both towards the debtor, and towards others*2-although their immorality and fraud are of a character not susceptible of being legally proved and defeated in particular cases. The only way of defeating them seems to be, to adopt the principle that no contract is binding beyond the limits of the debtor's means.
But it is unnecessary, in this place, to go into a detail of all the benefits, that would result to both debtors and creditors from the adoption of the principle, that a debt is a lien only upon the debtor's means at the time the debt becomes due. These benefits are obviously of the most important character. And we shall hereafter see that the principle is one of natural law, which all courts, without the aid of legislation, and in defiance of all legislation, are bound to maintain and carry into effect.
Proposition 7. Creditors should have liens upon the property of their debtors, in the order in which their debts are contracted; (with same exceptions hereafter to be named;) and the creditor having the first lien, should be paid in full, before the second receives any portion of his debt. And this principle should apply to all the creditors respectively -each prior creditor having a right to full payment, before a succeeding creditor can receive anything. And it should be held legally fraudulent in a debtor, (except in cases hereafter mentioned,) to pay a subsequent creditor to the prejudice of a prior one.
These principles are just in themselves-they are the principles of natural law-and the effect of them would be much better, for both debtors and creditors, than those that now prevail.
That they are just in themselves, as between creditors, is obvious from the fact, that a personal debt, as, for instance, a promissory note, or a book account, is, in equity, a lien upon all a debtor's general property, in very nearly the same manner, except in form, that a mortgage is a lien upon a specific parcel of real estate. The second creditor, therefore, in a personal debt, stands in the same relation to a prior creditor, with reference to the general property of the debtor, that a second mortgagee does to a prior one, with reference to a specific parcel of real property, on which they both hold mortgages. He, in effect, takes a second lien upon the debtor's general property; and he, of course, takes it, subject to the incumbrance of the prior lien, which is entitled to be first satisfied.
One great obstacle in the way of capitalists loaning capital to poor men, under our present system, is, that the creditor holds no claim upon the capital he himself has loaned, or its proceeds, for the security of his debt, in preference to subsequent creditors. If be could hold the first lien upon the capital loaned, and upon the value that should be added to it by the labor of the borrower, it would then generally be safe to lend capital to men who were destitute of any other property.
It is a great defect in the doctrine of liens, as now administered, that it in general recognizes the principle of lien only in relation to specific articles of property; which articles can be used by the debtor, but cannot be exchanged by him for any other property better adapted to his use. This principle does not enable a borrower to give his creditor security upon money, which his creditor loans to him to be employed in business, and which must be exchanged, and perhaps pass through half a dozen different forms before it is repaid to the creditor. What is wanted in order to secure a creditor for money, which he has loaned to be employed by the debtor in business, or for property of any kind which he sells on credit, and which the debtor is to be permitted to convert into property of another kind, is, that he (the creditor) should have a prior right, over any subsequent creditor, to the proceeds of that money, or other property, into whatever shape it may afterwards be converted by the debtor. And this object can be accomplished only by adopting the general principle, that a prior creditor has a prior lien upon the general property of his debtor, for the full satisfaction of his debt.
If A loan capital to Z, when Z is free of debt, it is certainly right that A should be paid out of the proceeds of the capital he himself has loaned, in preference to anybody else. It is therefore right that his debt should be a lien upon that capital, or its proceeds, in the hands of Z; and that Z should have no Tight, without the consent of A, to dispose of it, or its proceeds, to the prejudice of A, for the benefit of any third person. And he should have no more right to dispose of it, to the prejudice of A, for the benefit of a subsequent creditor, than for the benefit of any other person.
If, therefore, B subsequently give credit, or loan capital to Z, before the debt of A is paid, (or has expired for want of payment,) he gives him credit subject to all the disadvantages of the prior lien that A has upon the property of Z. And this prior lien, which A has upon the property of Z for the capital first loaned to him, will be a lien also upon the capital loaned him by the subsequent Creditor, (B,) unless B, at the maturity of A's debt, shall be able to prove that particular portions of the debtor's property, still remaining distinguishable from the rest, are parts, or proceeds of the specific capital loaned to him by himself, (B.) That is, the first creditor, when his debt becomes due, will have a prima facie lien upon all the property in the hands of the debtor; and the burden of proof will be upon the subsequent creditors to show that specific portions of the property, which can still be distinguished from the debtor's general property, were loaned to the debtor by themselves, and were therefore not included in the first creditor's lien. All those portions of the subsequent loans, or their proceeds, which shall have become indistinguishably mixed with the first loan, or its proceeds, or which the subsequent creditors shall have no legal proof to distinguish from the first loan, or its proceeds, will be held absolutely liable for the satisfaction of the first creditor's debt.
This principle, of the priority of rights on the part of creditors, will be more fully illustrated hereafter, in the chapters on the legal nature of debt; and the principle will then be shown to be a legal one, which courts are bound to carry into effect. In this place, I shall only point out some of the economical results, that would flow from its adoption.
1. One of these results would be that it would be safe for a capitalist to loan capital to a poor man, if the latter were but free of debt, were a man of integrity and frugality, of ordinary capacity for business, and were engaged in a business that was ordinarily profitable; because the capitalist would have a lien for his debt, not only upon the capital itself, that he had loaned, (or its proceeds,) but also upon all the value that should be added to it by the labor of the debtor. If, for instance, a capitalist should sell to a shoemaker, on credit, two hundred dollars' worth of leather, or
should loan to him two hundred dollars of money with which to buy leather, to be wrought by the latter into shoes, be would hold a lien, in preference to any subsequent creditor, not only upon the leather itself, but upon the shoes manufactured from that leather. All the additional value, that should be given to the leather by its being wrought into shoes, would add so much to the creditor's security for his debt.
The principal drawback upon this security is this, viz., that the taborer and his family must have their subsistence out of the proceeds of their labor-in other words, from the sale of the shoes manufactured. The amount of this drawback will depend upon the number, health, economy, and industry of the debtor's family. In the case of a young man, just setting out in life, with a wife, and without children, the necessary cost of a frugal subsistence, such as a prudent and reasonable person would be satisfied with, (at least until he had accumulated capital enough of his own to, employ his own hands upon,) would probably not consume even one half the value that would be added to the capital by his labor. In the case of larger families, a large proportion of this value would be consumed. But in few or none, unless it were in case of sickness, would it be so nearly consumed as to impair the creditor's security. This is evident, from the fact that laborers now support their families simply 'upon the wages they receive for their labor, although their wages do not amount to more than one bait, two thirds, or three fourths of the value, which- their labor adds to the capital on which they are employed, (the rest going into the pockets of their employers.) If, then, they were to have-as, when they were their own employers, they would have-the whole of the value that should be added to the capital by their labor, they could not only subsist as well as they do, now, but have considerably more than enough beside to repay the capital borrowed, with interest-because the capital borrowed will itself be sufficient to repay the loan and interest, if but six, seven, eight, nine, or ten per cent., (,according as the rate of interest may be,) shall be added to its value by the laborer. Any laborer, having ordinary capacities, could add this amount of value to two, three, or five hundred dollars capital, and still have nine tenths of the whole value or proceeds of his labor left, with which to subsist himself and family. And these nine tenths of the -whole value or proceeds of his labor, (when he had two, three, or live hundred dollars capital to work with,) would unquestionably amount to much more than he would receive as wages, when he sold his labor to an employer.
The other drawbacks on the security mentioned, (in addition to the subsistence of the laborer and his family,) are the risks of the health and life of the borrower, and the risk of accidents by fire, &c. These risks, on the aggregate of loans, would be small, and would be guarded against by creditors, by small additional rates of interest, (if usury laws were abolished,) by life insurance, and by insurance on the capital against fire. The costs of guarding against all these risks would amount to no more than a small addition to the rate of interest on the capital, and, being thus provided for, would interpose no serious impediment to the loan of capital to poor men.
One principal, if not insuperable obstacle, in the way of loaning capital to poor men, in the present state of things, is that the -creditor has no legal security that the debtor will not contract other debts afterwards, and that the capital, which be has loaned to him, will not be applied, either by the ,debtor himself, or by the insolvent laws, to the payment of these debts to other men. This obstacle would be entirely removed by the adoption of the principle of the prior right of the prior creditor.
2. Another result of this principle would be the general distribution of credit. A capitalist, about to loan money, would be very cautious of loaning to a person already in debt for capital borrowed of others-lest the capital loaned by himself should become indistinguishably mixed with that borrowed of the prior creditors, and be devoted, in whole or in part, to the payment of such prior creditor's ,claims He would, therefore, seek for borrowers who were free of debt, that he might at least hold a secure lien upon the capital, which he himself should loan to them. The principle would thus obviously prevent the accumulation of large credits in the hands of single individuals. And by preventing large accumulations of credit in the hands of single individuals, it would promote the distribution of the same aggregate amount of credit, in smaller parcels, among a larger number of individuals. And the same aggregate amount of credits, that now exist in the community, if properly distributed, would probably put into the hands of nearly or quite every laborer in the country ail amount of capital sufficient for him to employ his own hands upon.
This principle of the prior right of the prior creditor would be no obstacle to banking, nor to a banker's paying a second note while a prior one was still in circulation-because a banker's notes are payable on demand, and are due immediately on their being issued. If, therefore, the holder do not present them when due, (that is, if he do not present them immediately on their being issued,) such omission is a voluntary waiver, on his part, of his right to priority of payment, and allows the banker to pay his notes in the order in which they are presented for payment. The same principle would apply to all other debts that were not demanded when due.
Again; although this principle, of the prior right of the prior creditor, would be an obstacle in the way of a debtor's getting a second credit, (unless of the same creditor,) before a prior one had become due, it would be no such obstacle after the former one had become due, even though he should have been unable to pay the first credit in full-because, at the maturity of the first credit, he would-if the principle of I I Proposition 6 11 be correct-cancel it by paying to the extent of his means, which would leave him thenceforth a free man.
The result of the two principles stated in propositions 6 and 7, viz.) 1, that a debt is binding upon a debtor only to the extent of his means; and, 2, that a prior creditor has a prior lien on his debtor's property, would be to induce capitalists individually to seek out separate laborers, of capacity, industry, and integrity, who were free of debt, and furnish them respectively with what capital their business should require; and thus save borrowers from the necessity of getting credit, as they do now, in petty parcels, of several different persons. That such would be the result is obvious - because, 1, a capitalist would prefer, as a general rule, not to become the second creditor of a debtor; and, 2, as capitalists would not wish to become the second creditor of a debtor, it would be indispensable, as a general rule, that the first creditor should advance capital enough to enable the debtor to prosecute his business advantageously, else he might lose a part of what he should loan him. The debtor, having a right to cancel his debt, by paying to the extent of his means, would do so whenever the creditor should refuse to furnish sufficient capital to enable him to prosecute his business profitably. And the creditor, when he should see that his debtor was using capital advantageously, would choose to advance to him whatever might be necessary, because such advance would be a profitable investment of his capital. Oil the other hand, whenever he should find that his debtor was not using capital advantageously, he would withhold any further advances, and, at the maturity of the credit given, close the connection with as little loss, if any, as possible, by accepting payment to the extent of the debtor's means, in full discharge of the debt.
The operation of these principles, therefore, would be the establishment of a sort of partnership relation between the capitalist and laborer, or lender and borrower-the former furnishing capital, the latter labor. Out of the joint proceeds of this capital and labor, the laborer would first take enough for an economical subsistence while performing the laboras it would be necessary that he should, in order that he might perform it. On all the remaining proceeds the capitalist would hold a lien for the amount of capital loaned, and also for such an amount of the increased value given to it by the labor, (say six, seven, eight, nine, or ten per cent.,) as should have been agreed on between them, under the name of interest.
This quasi partnership between the capitalist and laborer, by which the latter is made sure of his subsistence while laboring, and by which the capitalist is made to risk his capital on the final success of the enterprise, without any claim upon the debtor in case of failure, is the true relation between capital and labor, (or, what is the same thing, between the lender and borrower.) And why? 1. Because capital produces nothing without labor; and it is impossible that the laborer should perform the labor, without having his subsistence meanwhile. For these reasons, it is right that the subsistence of the laborer, while bestowing his labor upon the capital, should be the first charge upon the joint proceeds of the capital and labor."*3
2. It is right that the capitalist should be made to risk his capital on the final success of the enterprise, without having any claim upon the debtor in case of failure, (that is, when the debtor performs his part in the enterprise honestly and faithfully;) because, beyond this point, the capital must be risked by somebody, (the capitalist or laborer,) in every enterprise. And inasmuch as profit (in the shape of interest) is as much the object of the capitalist, in furnishing the capital, as (in another shape) it is of the laborer in furnishing labor, it is as much right that he should take the risk of losing his capital, as it is that the laborer should take the risk of losing his labor, (that is, all over and above his subsistence.) The risk is then fairly divided between them; whereas it would not be, if the laborer were to risk both his labor and the capital. If the profit is to be divided in case of profit, the loss ought to be divided in case of loss. It is sufficient to make the enterprise a joint one, if the profit is to be divided in case of profit. And if it be a joint enterprise, it is as much right that the risk of loss should be jointly borne, as that the chance of profit should be jointly enjoyed.
But this joint risk, between the capitalist and laborer, or lender and borrower, as to the final result of an enterprise, in which the labor of the one and the capital of the other are to be jointly employed, for their joint profit, is not only right as between the immediate parties, but it is also right and expedient on general principles of economy-and for this reason, viz., that when both capitalist and laborer are interested in the risks and results of an enterprise, the enterprise will then have the benefit of two heads, instead of one, in judging of its feasibility and probable results, and also in deciding upon the best plan of execution. Injudicious enterprises will then be more Iikely to be avoided; and less labor and capital will, therefore, be wasted on such enterprises than now are. When a capitalist loans money to a laborer, and knows that he will have a claim on the subsequent earnings of the laborer for any capital that may be sunk in the enterprise, he (the capitalist) does not look, for himself, into the merits of the enterprise as he would if he knew that his ultimate security for his capital depended solely upon the success of the enterprise, instead of depending also upon the subsequent earnings of the laborer.
*1 One of the greatest-probably the greatest-of all the evils resulting from the existing system of privileged corporations for banking purposes, is that these incorporations amass, or bring together, and place under the control of a single directory, the loanable capital that was previously scattered over the country, in small amounts, in the hands of a large number of separate owners. If this capital had been suffered to remain thus scattered, it would have been loaned by the separate owners, in small sums, to a large number of persons; each of whom would thus have been supplied with capital sufficient to employ his own hands upon, with the means of controlling his own labor, and thereby of securing to himself all the fruits of his labor, except what he should pay as interest. But when all this scattered capital is collected into one heap, and placed under the control of a single directory, it is usually loaned in large sums, to a few individuals-generally to the directors themselves and a few other favorites. It probably is not loaned to one tenth, one twentieth, or one fiftieth as many different Persons, as it would have been if it had been suffered to remain in its original state, and had been loaned by its separate owners. Individuals, instead of borrowing one, two, three, or five hundred dollars to employ their own bands upon, as would be the case but for these incorporations of capital, now borrow fives, tens, and hundreds of thousands of dollars, upon which to employ the labor of others. This process of concentration, monopoly, and incorporation, by means of which one man, a director, or a favorite of a bank, is enabled to borrow capital enough to employ the labor of ten, twenty, or an hundred men, of course deprives ten, twenty, or an hundred other men of the ability to borrow even capital enough to employ their own hands upon. Of consequence it compels them to sell their labor to him who has monopolized the capital. And they must sell their labor to him at a price that will give him a profit-generally a large profit. That is, they must sell it for much less than the amount of wealth it produces. In this way ten, twenty, or an hundred men are literally robbed of an important portion of the fruits of their labor, solely that a single monopolist may be gorged with wealth. It is thus that the legislation, which creates these large incorporations of privileged bankers, operates to plunder the many of the fruits of their labor, and pamper the few with the spoils.(Return)
*3 If the capitalist were to hire his labor, instead of the laborer hiring the capital, the subsistence of the laborer would still be as much a charge upon the capital, as it is when the laborer hires the capital, and makes his own living the first charge upon ,the joint proceeds of the capital and labor.(Return)
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