Poverty: It's illegal causes and legal cure

Part First. By Lysander Spooner

BOSTON:

PUBLISHED BY BELA MARSH,

No. 25 CORNHILL.

1846.

Contents

Proposition I. 7

Proposition II. 8

Proposition III. 8

Proposition IV. 8

Proposition V. 13

Proposition VI. 17

Proposition VII. 23

Chapter I. Illegal Causes Of Poverty

The existing poverty would be rapidly removed, and future poverty almost entirely prevented, a more equal dis­tribution of property than now exists accomplished, and the aggregate wealth of society greatly increased, if the princi­ples of natural law, and of our national and state constitutions generally, were adhered to by the judiciary in their decisions in regard to contracts.

These principles are violated by the judiciary in various ways, to Wit:

1. In a manner to uphold arbitrary arid unconstitutional statutes against freedom in banking, and freedom in the rate of interest; thus denying the natural and constitutional right of the people to make two classes of contracts, which will hereafter be shown to be of vital importance, both to the general increase and to the more equal distribution of wealth.

2. In a manner to extend the obligation of certain con­tracts beyond their natural and legal limit, and hold men liable to pay debts no longer due; thereby condemning large numbers of men to perpetual poverty and destitution, by making their expired debts a burden upon their future acqui­sitions, and an obstruction to their obtaining credit for the capital necessary to the successful employment of their industry.

3. In a manner to reduce the obligation of the contracts of corporate bodies below their natural arid legal limit, and thus enable the privileged debtors, who have the means of payment, to withhold payment of debts actually due, and make themselves rich by making others poor.

4. In a manner to deny the legal rights of creditors, rela­tively to each other, in the property of their debtors; ena [*6] bling, and, in cases of insolvency, compelling debtors to swindle one portion of their creditors for the benefit of another; making it impossible for capitalists to determine, with any reasonable accuracy, the value of personal security for loans; rendering it unsafe for them to loan capital at all to mere laborers; and this preventing the natural and more equal diffusion of credit among all those poor men, who are in want of capital upon which to bestow their labor, and who, for the want of such capital, are compelled to sell their labor to others for a price much below the amount of its actual products.

These erroneous decisions of the judiciary are made, in some of the cases, in obedience to arbitrary and unconstitu­tional legislation; in others, through ignorance of the natural law applicable to contracts, where no special legislation has been had.

It will be the object of the following essays to establish the illegality of these various decisions, and to explain their effects in obstructing the increase and more equal distribu­tion of wealth.

But before proceeding to any legal discussions, let us state certain economical propositions, that arc obviously condu­cive, if not indispensably necessary, to the greatest aggregate increase, and most equal distribution of wealth, that can be accomplished consistently with the natural right of each man to the control of his own property. Having stated these propositions, we will then see whether those principles of natural and constitutional law, which our judiciary are bound to adhere to, would secure the establishment or reali­zation of the propositions themselves. [*7]

Chapter II. 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 wore 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, amid with very little regard to the actual value of each one’s labor iii producing it. And this fact is not the result- except iii 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 fellow­ men.

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, us he then would be, dependent upon his own labor, [*8] 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, lie labors with more zeal, skill, and physical energy, than when lie 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 may be 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 lie 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 loan 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 amid natural right to hire capital, upon which to bestow his labor. And, of consequence, they are nothing [*9] 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. interest- enough to pay for the risk of life, health, losses by 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 rate 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. [*10]

The consequence is that the loanable capital of society is monopolized almost entirely by those few, those very few, who wish to borrow, amid 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. Amid 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 lie 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 tine prohibition of the usury laws, cannot borrow it at all; that lie 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 [*11] 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 amid the profits made by A,) with but this abatement, viz., that he 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 his 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 amid 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. Amid the usury laws are the means by which he does it. [*12]

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, arc 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 result- else 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 bor­-[*13] row 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 amid amity 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 he could manage by his own labor alone, would not be tolerated, for the rea­son that it would lie 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 mire the usury laws, which allow one man to borrow enough to employ a hundred laborers upon, while they forbid 11w 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, wino is now 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 now 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 thugs, lie can obtain it. That he may obtain it at the lowest possible rate of interest, it is necessary that free banking be allowed. [*14]

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? 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. lie 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 [*15] 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.

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 suck 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 qualities, of such qualities, and of such persons, as it may chance that ho 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 under these circumstances, they not only suffer serious [*17] losses in the kinds and qualities of the commodities pur­chased, but the 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 tie 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 amount of cash to buy with. Free banking would 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 batiks, and then make his purchases for cash; and, having cash to purchase with, ho 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 under 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 mutable to pay it in full, he should pay to the extent of his ability; and that payment should be the end of that transac- [*18] tion. 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 he 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 lie 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. Thins creditor and debtor would be likely thenceforth to be more useful, both to themselves and soci­ety, under this arrangement, than under 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 not be given, if the legal obligation of debts were limited in this manner. But men would as lief give credit on this princi­ple, us 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 [*19] 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.