Chapter 3 : Economical Results from the Preceding Propositions
The last four of the preceding propositions assert the following principles, to wit:
1. The right of the parties to contracts to make their own bargains in regard to the rate of interest.
2. The right of free competition in the business of banking.
3. That the legal obligation of a debt, with specific exceptions, is extinguished by the debtor's making payment to the extent of his means, when the debt becomes due.
4. That the several creditors of the same debtor hold successive liens upon his property, for the full amount of their debts, in the order in which their debts respectively were contracted.
It will hereafter be shown that these several principles are legal ones, founded in natural and constitutional law, that is binding upon all our judicial tribunals, and incapable of being invalidated, or set aside, by any legislative enactinents that are within the constitutional power of any of our governments.
It has already been shown, in part, how these principles are adapted to the accomplishment of the following objects, to wit:
1. That of enabling each poor man to obtain, on credit, capital sufficient to employ his own hands upon.
2. That of enabling him to obtain this capital on the most advantageous terms as to interest, and in the most advantageous form for his use.
3. That of enabling him to obtain this capital on credit, without the risk of incurring an arrearage of debt in case of misfortune, or of miscalculation, on his part, as to his ability to pay in full.
4. That of enabling capitalists to loan capital to poor men, and hold the first lien upon it, in the hands of the debtor, for their payment; and without the risk of having the capital so loaned taken and applied, either by the law, or by the debtor, to the payment of debts to other men.
If such be the operation of these principles, it seems to follow, that, if they would not fully, they would yet very nearly accomplish the object of securing to every poor man, who was honest, industrious, and ordinarily skillful, the enjoyment of his right to labor to the best possible advantage, (by enabling him to obtain capital upon which to labor,) and also of his right to the possession of all the fruits of his labor, except what, in the nature of things, must be paid for the use of the capital upon which he labors.
If there can be any doubt as to such being the result of these principles, it can arise only from a doubt whether capitalists would loan their capital to laborers, or poor men, if the principles of law applicable to the loan, were such as have been described. This question, therefore, becomes important, viz., whether capitalists would loan capital to poor men under such circumstances?
The true answer to this question is, that, although they might not do it immediately, they yet would do it speedily-and for the following reasons:
1. It is obvious that, other things being equal, it would be much more safe for capitalists, especially when they loan on personal security, to loan their capital in small sums to a large number of individuals, who were each their own employers, than in large sums to a small number, who employed the labor of others. It would, for instance, be much more safe to loan fifty thousand dollars, in sums of five hundred dollars each, to one hundred men, who should each bestow their own labor upon it, than to loan the whole fifty thousand to one man, who should employ an hundred other laborers in the management of it. Each of the one hundred men would be more likely to repay the whole of his five hundred dollars, than the one man to repay the whole of his fifty thousand dollars. And why? Because a man can manage, with far less risk and waste, and with much more comparative profit, a capital of five hundred dollars, on which he expends his own, and only his own labor, skill, and calculation, than he can a capital of fifty thousand dollars, on which he is obliged to employ the labor of an hundred others, whose skill, industry, and economy he cannot stimulate to the same degree, to which they would be stimulated, when laboring for themselves. Small borrowers are also less likely to squander their loans in extravagant living, and in extravagant, fanciful, and hazardous enterprises, than large borrowers. The command of large borrowed capitals often intoxicates men with the conceit of their superior judgment in the management of property, or with a vain ambition for display, or with dreams of sudden wealth, or with a passion for magnificent schemes-the consequences of all which are told in deep, perhaps ruinous losses to their creditors. On the other hand, a man who borrows merely capital enough to employ his own hands upon, avoids this intoxication entirely. He thinks only of results, and of skill, industry, and frugality, as the means. The small borrower is therefore much more likely, than the large borrower, to be able to repay his loan. He is also much more likely to be willing to repay it. The temptation to fraud in his case is trivial, compared with that in the case of the other.
2. In the case of small loans to a large number of individuals, each individual is not only more likely, for the reasons already given, to repay the loan, than the single individual is in the case of a large loan, but there is this further security, which is of great consideration with capitalists, who loan money, viz., that in cases of misfortune or fraud on the part of a debtor, the loss is small, not ruinous. If the hundredth debtor fail to pay, the ninety-nine are still solvent. The capitalist is not ruined. He loses but one per cent. of his whole capital. But in the case of the large loan, if the debtor fail, the creditor is ruined, or seriously injured-simply because he has embarked a large freight in one ship.
Capitalists understand these principles, as we see in the case of insurance companies, which act uniformly on the policy of taking a large number of small risks, in preference to a few large ones.
3. There is still another consideration in favor of small loans to a large number of individuals, who are their own employers, over large loans to a small number, who employ the labor of others. It is this. The labor of individuals, who labor for themselves alone, being, for the reasons already given, much more productive, economical, and profitable, than the labor of hirelings, individuals could afford to pay a higher rate of interest-much higher if it were necessaryfor the little capital that each man needs to employ his own hands upon, than they can for capital on which to employ the labor of hirelings.
The higher self-respect also, which a man feels, and the higher social position he enjoys, when he is master of his own industry, than when he labors for another, would induce him, if it were necessary, to pay even such a rate of interest for capital as would cut down the net profits of his labor to the same amount that he would receive as a laborer for wages.
The inevitable result of these principles would be that the class of employers, who now stand between the capitalist and laborer, and, by means of usury laws, sponge money from the former, and labor from the latter, and put the plunder into their own pockets, would be forced aside; and the capitalist and laborer would come together, face to face, and make such bargains with each other, as that the whole proceeds of their joint capital and labor would be divided between themselves, instead of being bestowed, in part, as now, as a gratuity, upon an intermediate intruder. The capitalist would not only get all he now gets as interest, and the laborer all he now gets as wages, but they would also divide between themselves that sum which now goes into the, pockets of the employer. What portion of this latter sum would go to the laborer, and what to the capitalist, would depend upon the circumstances and bargains in each particular case. The probability is that for the first few years after these principles went into operation, capitalists would ask and obtain a pretty high rate of interest. The competition among laborers, in their bids for capital, would produce this effect. But as the general safety of the system should be tested, and as laborers should gradually make accumulations, which would serve as some security for loans, and as the business of banking should be increased, the rate of interest would gradually decline, until -probably within ten or twenty years-capital would go begging for borrowers, and the current rate of interest would probably not exceed three or four per cent. And all the proceeds of labor and capital, over and above this interest, would go into the pockets of the laborer.
There obviously would be little or no risk in loaning capital to the generality of laborers, if the lender could hold the first lien upon the capital loaned; for industry, guided by ordinary skill and judgment in the application of labor, is almost certain to add more value to the capital employed than is necessary for the comfortable subsistence of the laborer. The cases, where it would fail of doing this, are few, and even in those few cases the deficiency would be very small. The principal risk, then, in loaning to a poor man, would be the risk of his death, and of loss in winding up his affairs. But this risk could be guarded against by the debtor's keeping his life insured. The cost of keeping his life insured for an amount equal to the capital be hired, would not ordinarily be more than one, or at most two per cent. upon that capital. And he would thus accomplish the double purpose of giving his creditors a guaranty for their loans in case of his death, and of securing something for the support of his family.
The risk of loss to the creditor, from the death of his debtor, is now made altogether greater than it otherwise would be, by those laws that give to a deceased debtor's family, (at the discretion of a Probate Judge,) the whole, or a part, of the effects in his bands, in preference to applying them to the payment of his debts. Such laws are as injurious towards debtors, as a class, as they are unjust towards creditors. They virtually forbid capitalists to loan capital to a poor man, under penalty of being compelled to contribute the amount of such loans to the support of his family, in case of his decease. Such absurd and dishonest legislation defeats the very object it professes to have in view. Instead of its accomplishing the purpose of compelling creditors to support the families of Poor men, it only serves, as a general rule, to deter capitalists from becoming the creditors of poor men at all. Thus the laws not only fail of providing for a poor man's family after his death, but they contribute largely to make it impossible for him, while living, to borrow capital upon which to labor, and thus to make any accumulations of his own for their support.
There is no justice, or even appearance of justice, in such laws. If A have loaned capital to B, and taken a note for it, he, in equity, holds a lien upon that property for his debt. It is unreasonable to expect him to loan his capital to a poor man on any other condition. And there is no more reason why he should be compelled to support the debtor's family, by losing his lien, in case of the debtor's decease, than there is why any other particular individual should be compelled by law to support them by gifts from his own pocket. If, under these circumstances, a debtor die, leaving his family destitute, they must depend, for their support, upon their own labor, and the assistance of relatives and friends, or upon such provision as the public make, by general taxation, for the support of all who have no other means of subsistence. There is no justice in compelling those few individuals, who may have befriended, or loaned capital to the debtor, in his lifetime, to assume the burden of supporting his family after his death, by giving up to them their lien on the capital they have loaned him. If a poor man wish to provide for his family, in case of his death, he should keep his life insured. He will thus provide for his family, and his creditors too.
One object of these laws is to throw upon the creditors of a deceased person a burden, that might otherwise fall upon the public at large. But their effect is to create ten times as much pauperism as they prevent-because they deter capitalists from loaning capital to poor men, and thus prevent the latter from making such accumulations, in their lifetimes, as they otherwise might, for the support of their families after their death.
It will be shown, in a subsequent chapter, that all legislation, of the kind mentioned, which destroys a creditor's lien, on the effects of his, debtor, in order to give them to the debtor's family, is unconstitutional and void.
If the risk of loss to the creditor, by the death of the debtor, were obviated in the manner now suggested, and if the prior creditor held a prior lien upon the property of his debtor,, there would be little or no danger in loaning capital to poor men, in amounts sufficient to employ their own hands respectively.
The risk of the debtor's success in business would be small-as small as the risk of success can be in any business, in which capital is hazarded-because the business, in which each debtor would employ his borrowed capital, would be such as both himself and his, creditor should have approved- inasmuch as the creditor would not of course loan his capital to a poor man, unless he should have first ascertained the business in which it was to be employed, and satisfied himself that it was a safe one. The business, therefore, in which each debtor would employ his borrowed, capital, would be such as commended itself, (in its prospects of profit,) to the judgments of both debtor and creditor. Such business would ordinarily be more safe than that, in the planning of which the judgment of only one person had been consulted.
The risks from fire, theft, sickness of the debtor and hisfamily, and other extraordinary misfortunes, would be no greater than those to which property is always liable, and would be guarded against by the creditor by the rate of interest.
The only remaining risk, to the creditor, is that of the frugality and industry of the debtor.
There are undoubtedly persons, who, if they could borrow money, would be idle and prodigal so long as it lasted, with little regard either to the rights of their creditors, or to their own subsequent interests. But such persons are very few, and their prodigal habits generally become so publicly known that capitalists would be in very little danger of loaning money to them through ignorance of their characters.
But the mass of men, when they have, in their hands, the means of bettering their condition, are zealous to do it; and if they could borrow capital, on which to bestow their labor, and could have all the fruits of their labor except what they should pay as interest, they would almost universally exert themselves, both by industry and frugality, to make such accumulations as would place themselves beyond the reach either of poverty, or of dependence upon loans from others. And where such exertions were made, they would be successful, with but few exceptions; and those few exceptions would generally be the result only of some such unusual misfortune as property and business are always liable to. In few or no cases would any considerable portion of the loan be sunk by mismanagement, or erroneous judgment, on the part of the debtor-for as loans would usually be made for no longer than three or six months each, there would not be opportunity for much waste of capital, unless by mismanagement that was so gross as to be culpable, or by misfortunes Of Tare and extraordinary character. In all other cases, then, capitalists would either obtain the whole of their loans with interest, or at least the greater part of their loans. The probability is, that in the aggregate of loan-, the whole amount of losses would not be one fifth, or even one tenth as great as capitalists stiffer under the present system. The system, as a system-at least during the first few years of its operation-would be altogether better for capitalists than the present one-for the losses would be less, and the rates of interest higher. Competition on the part of borrowers would produce this result.
But it is to be understood that this state of things-this competition among borrowers, arising from poverty on the part of so large a portion of the community as are now poor-could continue but a short time. Most of them-particularly
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