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 others2—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 some 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 he 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 right, 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