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 he 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 lieu 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 an 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 “Proposition 6” 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. On 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 connexion 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 labor—as 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