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 necessary—for 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 not 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 he 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 hands, 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 lion, 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 his family, 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