Further Essays in Economics
Leon Maclaren



WHERE land is all enclosed, labourers will not normally provide the funds with which to purchase from other undertakings the tools and equipment they need for their industry. The claim on the product which goes in wages being already at the level of the least labourers are willing to accept, he will be an exceptional labourer who will provide for himself the chief items of equipment he needs to work with.

The tenant of the undertaking is often in a similar position. If the landlord's claim presses against him, as it often does, to its maximum extent, his claim too to the product of the undertaking is reduced to the least he is prepared to work for.

The claim enjoyed by tenant and labourer to the net product of the undertaking being thus at a minimum, the claim to be exchanged for capital goods must of necessity be that of one or more of the secondary claimants.

In such conditions, most tenants can only obtain equipment and tools for their undertaking by borrowing; and they must borrow in effect the claim to the wealth their undertaking has produced in order to exchange it for the capital goods they require.

When the largest claims upon industry are in private hands, it will be the private "investor" from whom the tenant must borrow. Where taxation has become the biggest secondary claim, the government will clearly be the most important source of funds.

In certain undertakings, however, the tenant may himself be able to supply at least some of the claim necessary to exchange for capital equipment. Where the landlord's claim is restrained by the terms of an agreement of long standing or by legislation, or where the tenant has had a freehold upon the land for long enough to overcome and absorb the claim of those he bought out, the tenant's profit may be more than a minimum, and he may be able to set aside some of the surplus to pay for tools and equipment.

But he is unlikely to be able to provide the whole of his equipment in this way. Where equipment is bought with wages, each labourer has to supply enough merely for himself, whether in the form of individual tools or in the form of a share in larger tools used by him in conjunction with others. But where the tenant provides equipment, he provides it for all his servants, who may number hundreds or thousands, or even tens of thousands. However swollen his profit, it will be beyond the resources of any tenant to equip ten thousand men, and beyond the resources of most to equip even hundreds. Accordingly he must borrow.

It will be seen that the question of who supplies the funds for this purpose is a question of claims. There are the capital goods produced by other undertakings waiting to be bought. If wages claim most of what is produced, it is from wages that funds to buy the goods must come. If the tenant claims more than the minimum share in profit, he can supply the claim to exchange for capital goods. But if his profit is at a minimum, and wages are low, only the secondary claimants have the necessary claim to be exchanged. Which secondary claimants provide the funds therefore depends on which make the greater claim on the product of the undertaking. When taxation took little, private persons were in general the moneylenders to industry. In days when taxation claims much, the government becomes the chief source of funds to industry for these purposes.

Tools and equipment are an obvious necessity to industry, and if it is the tenant who provides them, he must have them at all costs. Moreover if he is to produce effectively and efficiently, the machinery he acquires must be extensive and reasonably up-to-date. There will in fact be competition between tenants to equip their undertakings properly; and this competition will force those operating on the minimum of profit into the hands of secondary claimants with money to lend; for they must keep up with their more fortunate competitors who can afford to buy capital equipment out of their more ample profits.

In the result, where land is all enclosed, a creditor on a loan of money is able to claim interest because of the great need of tenants in productive undertakings. In order to work productively men must have tools and equipment. To get these they need funds. The measure of their need is the interest they are prepared to pay.

Interest arises upon a loan of money and is peculiar to that transaction. It emphasises the distinction between the relationship of debtor and creditor where it arises in the ordinary course of trade and where it arises on a loan of money. Monopoly apart, traders meet each other on an equal footing. Both desire to trade; both rely on trade to allow them to carry on their individual specialist occupations. They are mutually dependent. In contrast to this, the relationship between debtor and creditor upon the loan of a claim on wealth is one of domination and submission. Such debtors are apt to enter into the most onerous agreements, and again and again the law has intervened to protect borrowers from the consequences of their own agreements, on the ground (rarely specifically acknowledged) that they do not undertake such obligations freely.

Centuries ago the Court of Chancery developed the equitable doctrine which permits no clog on the Equity of Redemption. No matter what agreement he has entered into, no borrower is allowed to give land as security for his loan without having the right, which is strictly safeguarded, to recover his security on repayment of the money, no matter how late in the day. These provisions are now contained in statutory form in the Law of Property Act, 1925, but were developed as legal rules by the practice of the courts. Parliament has frequently intervened to protect the borrower against the lender as in the Bills of Sale Act (covering loans on the security of chattels), the Pawnbrokers' Act (covering loans on the security of pledges), the Moneylenders' Act (whereby interest at more than 48 per cent per annum by a professional moneylender is deemed to be excessive unless he proves otherwise), and the Hire Purchase Act (dealing with loans on the security of goods purchased).

Just as the labourer, after the enclosure of land, does not supply his own tools and equipment or his own share of tools and equipment used jointly with other labourers, so also he does not pay the interest on the loans necessary to equip his industry. The labourer will rarely be willing to undertake the burden of interest out of a wage which is the least labourers are prepared to accept. But in addition to this, his credit is not usually sufficient to enable him to borrow even if he were prepared to pay the interest. Those who live by wages are not credit-worthy for this type of loan.

Even the tenant, who is often a labourer of more than usual ability in certain directions, has difficulty in assuming the burden which the necessity of borrowing at interest places upon him. He borrows not merely to equip himself, but to equip the labour of large numbers of men. He incurs heavy rentals or land prices, heavy taxation and rates, which are quite beyond his personal means. All this he does in the expectation that in the outcome he may gain a narrow margin of profit. Only this narrow margin stands between him and disaster.

Alleviation of these difficulties faced by the tenant has come from the invention of the limited liability corporation. This, although now a creature of statute, was formed by the practice of lawyers long before the first Companies' Acts. The growth of limited liability dates from the first big enclosures of land in the 16th century. It became common practice following the last great enclosures of the 18th and 19th centuries.

The principle of limited liability is that the fictitious personality of a corporation is put between the tenant and his creditors so as to preserve his personal fortune. Its whole structure is calculated to facilitate lending and borrowing and the payment of interest. The fictitious being undertakes all the liabilities and, of course, can only pay out of its limited funds. It is an institution especially constructed by lawyers to meet the exigencies of the economic situation. Different conditions would produce quite different institutions.

Before land enclosure it was practical for the Church to condemn money-lending as sinful and for the law to visit penalties upon it. Following enclosure, however, this was practical no longer. It was now necessary for a man to equip not merely his own labour but that of the landless men he employed. To do this he had to acquire the necessary funds from others. In short, he had to borrow - and at interest. In such circumstances, to declare money-lending immoral and unlawful only drove it underground, and sent the rate of "interest" (now used as a euphemism for "usury") soaring. It was inevitable, therefore, that the prohibition against money-lending should gradually fall into disuse after the enclosure of land. As the new system of financing industry became more general, and as the number of labourers a single employer had to equip increased, so did money-lending become more respectable. In later days it even began to appear as a benefit conferred upon society. People began to think that a man who lends his claim to what is produced provides work for those who produced it. In this way money-lending (now by another euphemism called "investing"), became highly respected and developed into a highly organised business. Money-lending and the taking of interest can never again be successfully prohibited by religious teaching and legal sanctions until the conditions which gave rise to it cease to be general.

The changed attitude to borrowing affects the labourer too. Although not normally prepared to borrow to equip his industry, he is prepared to resort to borrowing as a way out from low wages. Long after borrowing to equip industry had become common practice, the labourer began in the mid-19th century to borrow to buy a house, and was encouraged in this by Building Societies founded in some instances by church and charitable bodies. In the 20th century he borrows through Hire Purchase to raise his material standard of living with wireless, television and even a motor-car.

In this he imitates his master. But the older attitude to debt dies hard. His grandfather still believed that he should "neither a borrower nor a lender be", although in his day borrowing by tenants for business purposes had already been approved for centuries. Better-paid labourers in the middle class of society still abhor Hire Purchase. But like other borrowing and lending it is gradually becoming respectable.

There is good reason for the resistance to borrowing that has had to be overcome amongst labourers. The labourer borrows to acquire now what it would take him a lifetime to get by saving. Sometimes he may borrow to get out of a financial scrape. He must in either case repay out of his wages, which do not rise because he has borrowed. He is therefore limited in the amount he can borrow, and the interest he pays is an irrecoverable deduction from his wages. His furniture costs him, say, £120 instead of £100, because he buys on Hire Purchase terms. The tenant on the other hand is not limited in this way. If he is successful, he repays out of the extra production of his labourers both the capital sum and the interest. It is true that he too will pay more. His machine costs £12,000 instead of £10,000 after interest has been added. But he will never pay personally. If he is unsuccessful, the money must be recovered (if at all) from his company in liquidation.

Borrowing is always a burden to the labourer. It is always a burden to industry. But it is not necessarily a burden to the tenant. He may well borrow far more than he could ever repay himself, and by using the loan to float or to extend a business, he will not merely repay the loan and interest, but will obtain an increase in his profit. He may not, of course. But the rich prospect makes the venture the more attractive, and brings about the changed attitude first of tolerance and then of active approval of money-lending.

As this system of financing industry by debt becomes more general, it grows increasingly difficult for men to be their own masters, unless they can establish an undertaking of their own in conformity with the general practice. The only way a man can escape when land is all enclosed from the narrow confines of the law of wages is by gaining some share of rent for himself, and borrowing may well be his only way of achieving this. Once established as a rent receiver, the servitude of debt is offset by the profit he can make by its means.

But the servitude implicit in debt has far-reaching social results. The creditor-debtor relationship arising on a loan of money is one of domination and submission. For ordinary folk it entails that they are more dependent than ever before on an employer. To be unemployed even for a short period is to be hard pressed by creditors in respect of house, furniture, wireless-set and the like. The employer in his turn finds his dependence upon money-lenders nearly complete.

This condition is the result of poverty. Men borrow because they have no claim to the wealth they produce, and they deem it so important that they are willing to submit to the servitude of debt to obtain it. With the maldistribution of wealth this situation from being unusual and exceptional becomes general. It is now inevitable that this secondary servitude should be the general lot where the primary servitude of landless men depending on those who control land is the basis of social relationships.

Where land enclosure gives rise to small tenants working in primitive conditions with poor equipment but working for themselves, the power of landlords to press their claims to the most tenants can afford causes these claims to rise in good years. When lean years follow, the tenant finds himself suddenly unable to pay his way and meet his landlord's claim. It is at this time that he is apt to fall into debt by pledging his next year's crop in advance; and in this way small tenants fall into the hands of money-lenders, who gain enormously in wealth and influence. This situation has been common in certain parts of India and in places like the West Indies.

Where, on the other hand, the enclosure of land leads to the establishment by entrepreneurs of large well-equipped undertakings, people with the special ability to raise funds for the equipment of industry gain special pre-eminence in society. The control of industry falls into the hands of such men acting as servants of those who subscribe the funds. As the system gains sway it becomes increasingly difficult for enterprising men to set up on their own. More and more have to seek employment with the skilful entrepreneur. Thus to their dependence on those who control the land is added the dependence of these latter upon those who control the funds. In short, the condition of economic servitude is intensified.

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