John R. Commons
LEGAL FOUNDATIONS OF CAPITALISM
CHAPTER VII:
THE PRICE BARGAIN - CAPITALISM AND EXCHANGE-VALUE
Macmillan Company 1939 [January 1924], 225-282
II - Incorporeal Property – Encumbrances
III - Intangible Property – Opportunities
2. Commodity Tickets and Price Tickets
Sir Thomas Smith, in his account of the Commonwealth, barely mentions “citizens and burgesses” as “next to gentlemen,” yet it was these citizens and burgesses, who, since the reign of John, [1] had been obtaining collective powers and immunities, also known as “liberties,” and who, within a third of a century after Smith wrote, would, like the landlords, begin to be deprived of the monopolistic and governmental features of their franchises. The gild franchises of the merchants and manufacturers gave to them a “collective lordship” similar to the private lordship of the barons, for their gilds were erected into governments with their popular assemblies, their legislatures, their courts, their executives, and even with authority to enforce fines and imprisonment of violators of their rules. Their most important sovereign privilege granted by the King was that of binding all the members by a majority vote so that they could act as a unit. These merchants’ and manufacturers’ gilds, at the height of their power, were not only legalized “closed shops” but also legalized governments. Within their jurisdiction no person could compete who was not authorized by the gild, and within the gild no one could compete except on the terms of fair competition which their rules imposed. They maintained standards of quality of product and of qualifications of competitors designed both to protect the public and prevent destructive competition. [2] They even required members to share with each other the raw material and any exceptional good bargains that one might come across. They enforced the contracts of their members. Associated together they even gained control of the borough governments, and their chief men became mayors and aldermen.
1. GROSS mentions 24 charters granted to merchant gilds prior to 1215. GROSS, CHAS., The Gild Merchant 9-166 (1890).
2. Cp COMMONS, J. R., “The American Shoemakers,” 24 Quar. Journ. Econ., 39 (:909)7 Labor and Administration, 219 (1913).
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Thus the gilds were the spots, here and there, where capitalism had its origin. Surrounded by feudal landlords they obtained immunity as small peddlers and artisans only by obtaining from a feudal superior privileges which enabled them to act as units and to make and enforce their own by-laws. The gilds were Defensive Capitalism. But they grew in wealth and power. Their defensive privileges became exclusive privileges in proportion as markets and commerce advanced over militarism and agriculture and increasing numbers of people depended on buying and selling for a living, where formerly they depended on command and obedience.
Beginning in 1599, by that line of notable decisions referred to by Justice Field in the Slaughter House Cases, [1] the highest court of the common law, the King’s Bench, deprived them of their closed-shop privileges in so far as those privileges depended on enforcement of penalties by the King’s executives. In France they were abolished by the Revolution; in Germany they lived over to the nineteenth century; in England they lived on as voluntary organizations but without sovereign power physically to enforce their rules.
In 1599 the Merchant Tailors of London were the first to lose their legalized closed shop. The King’s Bench, in that year, declared that a by-law of the Tailor’s Society was unlawful in requiring every “brother” of the society to give to another brother who “exercised the art of clothworker,” at least as much of his cloth to be worked up as he might give to any clothworker not a member of the society, upon pain of forfeiting ten shillings, and providing enforcement upon his goods. This by-law, although authorized in the charter granted from early times to the Society and confirmed by successive Kings and Parliament, was nevertheless adjudged against the “common right and public good,” and “against the common law,” because, being a monopoly, it was “against the liberty of the subject,” and “against the commonwealth.” [2]
This argument was even more clearly and forcibly made in the Case of Monopolies, in 1602, at the close of Elizabeth’s reign. [3] This case concerned but one of the many patent monopolies which Elizabeth had granted for the upbuilding of the country, for the development of new resources and the encouragement of new importations from
1. Above, Chap. III, p. 46.
2. Davenanl v. Hurdis, Trin. 41 Eliz., Moor (A. B.) 576 (1599); commented on by Coke in Case of Monopolies, ix Co. 86 a, b.
3. Darcy v. Allein, Trin. 44 Eliz. (1602), 11 CO. 84 b.
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abroad.[1] Indeed, as Unwin has said of the similar monopolies granted by Elizabeth’s successors, James and Charles, “It was not merely that such grants seemed to afford the easiest way out of the Crown’s growing financial difficulties. The spirit of corporate monopoly which pervaded all classes engaged in commerce and industry, from the richest to the poorest, made it possible, perhaps with sincerity, to represent the grants, not as a hateful but unavoidable expedient for raising money, but as part of a great and beneficent scheme of national policy.” 2
Elizabeth had, however, yielded to the outcry against monopolies, had revoked the most unpopular patents, and left the rest to the decision of the judges. Darcy’s case was the monopoly of sale, manufacture and importation of playing cards. Popham, the Chief Justice, and the entire court declared that it was void, as against the common law and acts of parliament, for four reasons:
1. All trades which prevent idleness, “the bane of the commonwealth,” and increase the substance of themselves and families to serve the Queen when occasion requires, “are profitable for the commonwealth.”
2. “The inseparable incidents to every monopoly against the commonwealth” are, increase in price, inferior quality, and impoverishment of mechanics and their families, because “the patentee, having the sole trade, regards only his private benefit and not the common wealth.”
3. The Queen was deceived in her grant, for she intended it “for the weal public,” but “it will be employed for private gain of the patentee, and for the prejudice of the weal public.”
4. “It cannot be intended that Edward Darcy, an Esquire, and a groom of the Queen’s Privy Chamber, has any skill in this mechanical trade of making cards; . . . To forbid others to make cards who have the art and skill, and to give him the sole making of them who has no skill to make them, will make the patent utterly void.”
Thus the basic principle of the commonwealth, stated clearly by the chief justice of the common-law courts at this early day, was the principle - Let any person get rich in so far as he enriches the commonwealth, but not in so far as he merely extracts private wealth from the commonwealth.
Other similar decisions were given during this critical period. In 1519 Henry VIII had granted to the physicians of London a charter of
1. CUNNINGHAM , W. E. The Growth of English Industry and Commerce, x:58, 287n· (1903)
2. UNWIN GEORGE, The Gilds and Companies of London, 300 (1908).
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incorporation, confirmed later by Parliament, giving to them authority to pass upon the qualifications of physicians within the city and suburbs, and to prohibit the unqualified from practicing, on penalty of fine and imprisonment, prosecuted before the governors and censors of this company of physicians. Under this authority Dr. Bonham, in 1608, was imprisoned by agents of the company, and brought his action of false imprisonment. The court, Coke being then Chief Justice, decided that the censors and wardens had not that power, and, in this case he went to the extreme point of squarely overruling an act of parliament. For, said he, “in many cases the common law will controul acts of parliament and sometimes adjudge them to be utterly void: for when an act of parliament is against common right and reason, or repugnant, or impossible to be performed, the common law will controul it, and adjudge such act to be void.” [1]
This was followed by the Ipswich Tailors in 1615. [2] This society had been incorporated by Henry VII and confirmed by parliament in the year 1504, with power to make and enforce ordinances. The company brought an action in debt against a tailor who came to the town and practiced his trade without proof that he had served an apprenticeship for seven years, and without being admitted by the master and wardens as a sufficient workman. It was resolved by the court that, at common law, “no man could be prohibited from working in any lawful trade;” that the youth ought “to learn lawful sciences and trades which are profitable to the commonwealth;” that the restraint was “against the liberty and freedom of the subject,” and “all this is against the common law, and the commonwealth.”
Thus the common-law courts accomplished, in the case of the gilds, what they had accomplished in the case of the barons. They abolished the private jurisdictions with their private courts, [3] and the way was thenceforth open for them to build up, for the Kingdom, a common law of the price-bargain, just as they had built up a common law of the rent-bargain. The business man now, like the Yeoman and copyholders, could have his customs inquired into by the King’s justices, and his rights and privileges asserted against private jurisdiction of both gilds and barons. Capitalism entered upon its offensive stage, intent on controlling the government whose aid it had petitioned dur-
1. Bonham’s Case, 8 Co. II4 a, 118 a (1610).
2. I I CO. 53 a.
3. Certain decisions in the 18th century seem to have supported the claims of the gilds. See HOLDSWORTH, History of English Law, 1:352. They were abolished in 1853.
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ing its defensive period. Eventually its petitions became its rights. The next hundred years, until the Act of Settlement in 1700, was substantially the struggle of farmers and business men to become members of the Commonwealth, whereby they might have courts of law willing and able to convert their customary bargains into a common law of property and liberty. The King’s courts themselves had been impotent after Chief Justice Coke, the great champion of the common law, had been removed from office by King James in 1616, [1] and consequently the farmers and business men turned towards collective control through parliament, towards raising an army, and even, for a period of ten years, abolishing both King and House of Lords and converting the Kingdom literally into a commonwealth. Although the Kingdom was restored and the very name of Commonwealth stricken from the records, yet, after 1700, the courts were made independent of the King, and the common law of business was incorporated into the common law of agriculture. The name of commonwealth was moved to America, and, under new auspices, is resurrected in the Commonwealth of Australia.
It will thus be seen that the notion of a commonwealth, as expounded by Sir Thomas Smith in the middle of the sixteenth century, differed from the notions of the Wealth of Nations expounded by Adam Smith’s followers, more than by Adam Smith himself, in the eighteenth and nineteenth centuries, in that it explicitly included both the economic and the political aspects in a single concept. It was a notion both of common-weal and of participation in that weal through the possession of rights and the corresponding power to enlist the officials of government in one’s behalf. The classical economists tended to separate the wealth of nations from the commonwealth, making the wealth of nations identical with the prosperity of but a single class within the commonwealth, the business men, upon whom all other classes depended for prosperity. But the notion of a commonwealth which arose with Thomas Smith in the sixteenth century and led to the two revolutions of the seventeenth century was a notion of participation by each freeman in both the government and the wealth of the nation. The difference between Thomas Smith’s notion and the notion of Coke, Selden, Littleton, the common-law lawyers and their successors of the seventeenth century, extended only to the degree to which merchants, manufacturers and farmers
1. GARDINER, S. R., History of England, 1603-1642, 3:27 (1890).
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should actively participate in the commonwealth along with barons, monopolists, gilds and the other beneficiaries of the King’s prerogative. The literal “commonwealth” of 1640 went further and abolished both the monarch and the House of Lords. The reaction which followed gave to the landlords an even more powerful participation than they had before, and it has required more than two additional centuries and the growth of the then inferior merchants and manufacturers into the new world-power of capitalism to bring attention back to the original notion of the commonwealth as it struggled for recognition in the reigns of Elizabeth, James and Charles.
Yet the original participants in the King’s prerogative were trying to do what needed to be done, and had to be done in other ways when the power of the prerogative to protect them was weakened. The abolition of the legal power of the gilds required the courts both to take over the rules of fair competition and to enforce the contracts which had grown out of their customs and had been enforced in their own courts. We shall see how, in 1580 and 1620, the common-law courts began to take over, and to enact into law for the whole of England, certain of the regulations of the gilds whose private authority they were then abolishing. The first of the goodwill decisions enforcing a contract to sell a going business (1620) and the first of the trade-mark decisions enforcing a claim for damages against the use of a competitor’s name in business (1580) were but the legal adoption on a national scale of the very rules of fair competition which the gilds adopted within their own exclusive membership. The court which abolished the power of the gilds began to take over the work of the gilds. Their private jurisdiction became a public jurisdiction. And the very customs which the gilds endeavored to enforce within their ranks became the customs which the courts enforced for the nation. The monopoly, the closed shop, and the private jurisdiction were gone, but the economics and ethics remained. Much later, in the modern commonwealth, other functions of the gilds, such as protection of the quality of the product and the qualifications of practitioners, have also been taken over by courts or legislatures. Beside the chartered gilds there were other less formal courts at the fairs where merchants came with their goods (piepoudre) and there were the practices of merchants in drawing bills of exchange upon each other calling for money, which the common-law courts, at about the same period, began to take notice of and to interpret according to the customs of
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merchants. The common law became the law of property, liberty and business.
But neither business expectations nor the expectations aroused by the law of property and liberty could expand as long as the prerogative of the monarch was above the common law. The struggle, begun with Magna Carta, did not reach its crisis until the rise of protestantism and commerce. The former asserted a new right, the right to equality, liberty and security of worship, the latter the right to equality, liberty and security of business. Business could not be free and secure while the prerogative exercised capricious control, especially over currency, franchises and rents.
Arbitrary alterations of the currency were not repeated after Edward VI, [1] and money thenceforth became a comparatively reliable standard of value and medium of exchange, a universal representative of the value of products, a trusted instrument of inducement and compensation, and therefore a solid foundation for the credit system. Franchises were not taken from the personal control of the monarch until the victory of parliament in the civil wars and not completely until the Act of Settlement in 1700, which confirmed the Case of Monopolies of 1602 and the Statute of Monopolies of 1624. Taxes were not made certain until, after 1689, they could be levied only by consent of Parliament. By these measures business, based on predictable prices, was permitted to develop unhampered by arbitrary interference of the sovereign.
Even these stabilizing reforms of currency, franchises and rents, which prepared the way for a business economy based on prices, could not be rendered permanently secure until the Revolution of 1689, and especially the Act of Settlement of 1700, which took from the monarch the power to remove the justices of the courts. When James I succeeded Elizabeth, in 1603, the prerogative, besides including the power to appoint judges of the common-law courts and of the highest of those courts, the King’s Bench, included also a number of other courts, or rather a number of other agents of the King appointed and removed at his pleasure. Greatest was the Star Chamber, the personal council of the King sitting as a court in the Star Chamber, exercising civil, criminal and political jurisdiction wherever great questions of state or great and powerful personages, or violations of the King’s prerogative, were called in question or litigated. The most
1. CUNNINGHAM, Growth of English Industry and Commerce, 2:I27 (1903).
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significant function of the Star Chamber was its position as an administrative court by means of which the King’s officials were exempt from trial in the common-law courts.1 A similar jurisdiction existed in the Court of Exchequer where all cases between taxpayers and the crown were tried, as well as cases in which revenue officers themselves were tried. It, too, had power to remove cases from the common-law courts. [2] Then there was the Court of High Commission with inferior ecclesiastical courts, having authority to try cases of religious doctrine and ritual, and to remove the clergy from the jurisdiction of the common-law courts. [3] Finally was the Chancellor, a member of the King’s Council and the highest personage next to the King, who kept the King’s seal which alone authenticated the King’s acts, and exercised likewise the King’s prerogative power of issuing injunctions restraining parties from bringing their cases to the common-law courts, or, if they had already done so, from enforcing judgment. [4]
The parliament of 1640 and the revolution that followed abolished these prerogative courts or limited them, while the Act of Settlement in 1700 [5] made the judges as well as the chancellor independent of the King and appointed for life. Henceforth came about that peculiar and outstanding feature of Anglo-American law, the subjection of officials as well as citizens to the jurisdiction of the ordinary courts of law. It was this that made it possible for Francis Lieber, in 1853, to say “The guaranty of the supremacy of the law leads to a principle which, so far as I know, it has never been attempted to transplant from the soil inhabited by Anglican people, and which, nevertheless, has been in our system of liberty, the natural production of a thorough government of law as contra-distinguished to a government of functionaries,” [6] and for English and American courts to say, ours is a “government of laws, and not of men.” It is such because officials and citizens are each subject to the same courts, interpreting the same due process of law.
But the American constitutions went much further. While the Act of Settlement made the judges independent, yet parliament retained the power to overrule the courts. But in America, as is
I HOLDSWORTH, History of English Law, 1:276.
2 ibid., 104, 105.
3 Ibid., 375 1F.
4 Ibid., 246.
5. ADAMS and STEPHENS, Select Documents of English Constitutional History, 475-479.
6. LIEBER FRANCIS, Civil Liberty and Self-government, 91(1853); TAYLOR, H., Due Process, 608 (1917).
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well known, under written constitutions, the Supreme Courts are the final interpreters of the constitution and of the powers and responsibilities of officials, as well as the rights and duties of citizens. In this respect, as is brought out by Haines, [1] America, went back to the doctrine of Sir Edward Coke, who would have made parliament, as well as the King, subordinate to the common-law court of King’s Bench over which he presided as Chief Justice. But with a difference. Coke would have made the King and parliament subject to the common law. The supreme courts of the United States make legislatures, executives and judges subject to the common law and equity. The common law is historic custom, precedent, and the ancient law of the land; equity is conscience, reason, and the law of God or nature. The two are in fact inseparable. King James had said that “he thought the `law’ was founded upon reason, and that he and others had reason, as well as the judges.” “True,” said Coke, “God had endowed his Majesty with excellent science and great endowments of nature. But his Majesty was not learned in the laws of his realm of England, and causes which concern the life, or inheritance, or goods, or fortunes of his subjects, are not to be decided by natural reason, but by the artificial reason and judgment of law, which law is an act which requires long study and experience, before that a man can attain to the cognizance of it.” The King ought not, indeed, to be under any man, but under “God and law” yet not God’s law, as James and the Church contended, but the common law. [2] Furthermore, contended Coke, when an act, even of parliament, “is against common right and reason, or repugnant or impossible to be performed, the common law will control it, and adjudge such act to be void.” [3] Thus Coke interpreted the common law as not only the customs and precedents of ancient law but also as the rule of “right and reason,” interpreted by the common-law judge. In this respect he distinguished it from equity, which at that time was the arbitrary power of the sovereign, and agreed with his great contemporary, John Selden, who likened equity to the Chancellor’s foot.
Meanwhile, the common law also, under the influence of Lord Mansfield in the eighteenth century, had itself widened out with principles of natural justice drawn from Roman law and from equity, [4]
1. HAINES, C. G., The American Doctrine of Judicial Supremacy 25 ff. (1914).
2. Prohibitions del Roy, 12 Co. 64-65 (1608); HAINES, 28.
3. Bonham’s case, 8 Co. 118 a., b.,; HAINES, op. cit. 31.
4. HOLDSWORTH, 1:253; JENKS, 234 ff.
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thus adapting itself to the change from a feudal. economy to a capitalist economy. It required another century, in England, before the parliament, in 1873, consolidated the common law and equity courts in a supreme court of judicature, [1] a consolidation which was effected in America, by the Constitution of 1787 making the judicial power of the federal government extend to all cases at law and equity under the Constitution, while the state constitutions began the similar consolidation with New York in 1840.
The evident advantage of the equity process over the common-law process is in its control over conduct in advance of action instead of punishment after action. The proceedings do not require the prolonged investigation, indictment and jury trial of the common law, but both the injunction and punishment for its violation are expeditious. For the Court of Chancery had the peculiar faculty of commanding specific behavior by mandamus or injunction, on mere allegations and affidavits of a complainant, without waiting for the slow processes of a suit for damages, as in the common-law courts. It commands first, and finds out afterwards what are the law, the rights and the facts; whereas the common law finds out first what are the law and facts and afterwards issues its commands. This one feature alone would have required the equity courts to intervene with the injunction, or else would have required the extension, by the common-law courts, of their writs of mandamus and prohibition, in order to create those intangible property rights of modern business which have made the transition from physical property to intangible property. By means of the injunction the court can, in advance, enter into the most minute detail of behavior needed to recognize new rights and protect new definitions of persons and property. [2] The common law was able to deal effectively only with physical things and to punish after the event, equity deals with the most intangible values, for it commands directly, before the event, the very performance, avoidance or forbearance on which value depends. Equity looks on property as behavior claimed of other persons; the common law looks on it as a thing owned by a person. [3]
1 Jenks, op. cit. 408.
2 “This capacity of moulding a decree to suit the exact exigencies of a particular case is indeed one of the most striking advantages which procedure in chancery enjoys over that at common law, and must have been one of the elements which contributed in no small degree to the origin and growth of equitable jurisprudence.” Bispham, Principles of Equity, 9 (8th ed., 1909).
3 Ames, J. B., Lectures in Legal History, 108 (1913).
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Indeed, the first important field of equity was that of creating uses and trusts, which distinguish physical things from the expected transactions growing out of things. And since value does not reside in things but in these expected transactions, equity procedure at once extracts from the common-law procedure the very substance of value. Hence flowed the whole range of behavioristic values by way of the relief which equity afforded against the rigidity or inadequacy of the common law, such as the remedying of accidents and mistakes, the controlling of accounts, partnerships, and every detail of corporation law. The remarkable expansion of the equity jurisdiction in the Eighteenth Century reflected the rise of capitalism based on pecuniary expectations, and the corresponding subsidence of feudalism and the prerogative based on physical power. Thereafter it became possible for the courts to build up the law of business in proportion as business itself developed.
II. INCORPOREAL PROPERTY-ENCUMBRANCES
The law of credit instruments passed through two stages, first, the stage of enforcement of contracts, the second the authorization of the supplementary buying and selling of the contracts themselves. The first may be distinguished as the stage of enforceable promises, or incorporeal property; the second the stage of negotiable promises, or intangible property. The first stage was practically completed by the latter half of the sixteenth century; the second begins with the first recorded opinion on bills of exchange at the beginning of the seventeenth century. The distinction between the law of intangible property, which we name the law of opportunities, and the law of incorporeal property, which we name a special case of the law of encumbrances, turns on the question whether the opposite party has or has not liberty of choice between alternatives.
If the opposite party has no liberty of choice, in the particular behavior at issue, then, to that extent, he is burdened by an encumbrance, or duty, of performance, forbearance or avoidance. If, however, the opposite party is at liberty to choose an alternative then the relation between them is one of opportunity. The law of encumbrances on behavior is the law of right and duty; the law of opportunities for behavior is the law of liberty and exposure. An
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encumbrance indicates the psychological relation of command and obedience. The first party issues a command, the opposite party obeys, or is compelled to obey. He has no option. But an opportunity indicates the psychological relation of persuasion or coercion. The opposite party is free to choose alternatives rather than obey. Instead, therefore, of a command and obedience, the first party must resort to that kind of inducement which consists in setting up, or taking advantage of, alternatives between which the opposite party may choose. If the alternative is onerous so that the choice is a hard one, the opposite party still improves his condition, as perceived at the time, by selecting the better alternative. He always gains by choosing, and persuasion and coercion do not differ in kind but in degree. A hard alternative, where taken advantage of, is coercion; an agreeable, or not disagreeable alternative, is persuasion.
Command and obedience are thus legally different from persuasion or coercion, although psychologically they may look alike, for in the one relation the opposite party has no lawful option. He must obey. But in the other relation he has an option; he is free to accept or reject. Command and obedience imply the juristic relation of duty of the opposite party, which therefore we name encumbrance. Persuasion and coercion imply the juristic relation of liberty, which we understand by choice of opportunities. Command and obedience, that is, encumbrances, are sanctioned by legal rewards and penalties; persuasion or coercion, that is, opportunities, are sanctioned by economic advantage and disadvantage. Each is expected to be beneficial to the first party, but encumbrances are beneficial in that they are mandatory acts required of an opposite party; opportunities in that they are optional transactions with an opposite party. Encumbrances, completely defined, are expected, beneficial, one-sided, mandatory actions; opportunities are expected, beneficial, reciprocal, optional, transactions.
Now, the law of incorporeal property is a special case of the law of encumbrances, in that it imposes only a “positive” duty, the duty of performance, whereas the “negative” duties of forbearance and avoidance are the encumbrances peculiar to the law of intangible property. Incorporeal property turns on the duty to pay a debt, but intangible property turns on the duty to avoid or forbear in the exercise of physical, economic or moral power. The two are insep-
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arable in fact, the distinction between the two being made at the point of time when an enforceable promise is deemed to come into effect. Before the promise is made the parties are in the position of choosing between opportunities; after the promise is made there is no further choice if the promise is enforceable in law. Yet both before and after the promise comes into effect, there exist duties of forbearance or avoidance on the two parties and all third parties. It is the gradual historical change in all of these encumbrances on behavior, whether of performance, avoidance, or forbearance, that marks the evolution of both incorporeal and intangible property and the shift back and forth from one to the other.
Since, therefore, the special case of a duty of performance is the peculiar attribute of incorporeal property, we may take for granted the presence of the necessary supporting duties of forbearance and avoidance and may speak of the law of encumbrances as the law of “positive” encumbrances of performance and therefore equivalent to incorporeal property in that it is the law of creditor and debtor relations; while the law of opportunities is the law of intangible property, in that it deals with the relation of buyer and seller in its various forms of purchase and sale, lending and borrowing, hiring and hiring out, leasing, and so on.
The law of positive encumbrances may be said to have had a two-fold development, distinguishable as the law of labor encumbrances, and the law of investment encumbrances. The law of labor has historically unfolded as the law of owner and slave, landlord and serf, master and servant, employer and employee, principal and agent, with perhaps subordinate divisions of parent and child, husband and wife. The law of investment is mainly the law of landlord and tenant, lessor and lessee, creditor and debtor. Each of these shows an evolution of the notion of property from the ownership of visible things to the ownership of invisible encumbrances on behavior and opportunities.
The law of employment and agency sets up the creditor and debtor relation until such time as wages or salaries are paid, and then slides informally into the law of specific investment. The investor proper of modern industry emerges as a specialist who takes over, at pay-day, from the employee or agent, the burden of waiting for compensation until that time when the ultimate consumer makes compensation for all of the preceding services. He may be a formal or an informal
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investor. As an informal investor he enters by investing his own money in his own business.
The bargain which the formal investor makes is a sale of present purchasing power in exchange for future purchasing power. This occurs, in modern business, under many forms and includes shares of stock, as well as bonds and promissory notes. In either case, the essential transaction consists in selling present purchasing power and accepting a promise or expectation of future purchasing power. The one is money, the other is credit.
In selling present purchasing power he sells that part of his liberty which consists in control over the purchasing power which had been his, so that his field of liberty, for the time being, is thus limited by a duty of avoidance. He accepts, in return, a promise of future purchasing power, an encumbrance on the debtor or the going concern, and it is this investment encumbrance, or incorporeal property, that has emerged out of the primitive notion of holding physical things for one’s own use.
The law of investor’s encumbrance started, under the common law, with the idea of property in physical things and with corresponding legal actions for the recovery of tangible goods and even specific money coins, wrongfully deforced, detained or held, from their owner; and also with actions against violent trespass on lands, chattels, or persons, until it gradually became, about the middle of the Sixteenth Century, the enforcement of a mere promise, express, or implied, written or unwritten, accepted formally or even acted upon without a formal promise, as though it had been promised.
Thus, for example, the “writ of right” and the “writ of debt” indicated similar ideas and procedure, the one being a remedy for forcible detention of land, the other for forcible detention of physical chattels. The writ of right, addressed by the King to the sheriff, bade him to require the defendant A to render to the plaintiff B, a piece of land, which A had unjustly taken from B. [1] This merely gave to B a better right of possession than to A. It gave possession, but not property. [2] Yet, eventually, out of this remedy grew the complete remedies of the judgment in rem, affirming the absolute right of property against all the world with its various remedies, applicable to title and ownership of all physical things, whether lands, goods, or even paper instruments serving as evidence of ownership.
1 JENKS, 56 (1912).
2 POLICE and MAITLAND, 2:77.
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The “writ of debt” was scarcely different from the writ of right except in the physical object claimed by the plaintiff. It, too, bade the sheriff to require the defendant A to render to the plaintiff B not land, but, say, one hundred specific pieces of coin which A owed B. The defendant was to restore the very coins lent. Afterwards this became, not the specific coins, but the amount of the debt. [1] Even where a personal obligation of the debtor to perform a certain act was recognized, it had to take objective form in a sealed bond, made with formality in the presence of witnesses or the court, [2] and it was not so much the promise of the debtor that constituted the ground of his debt as the bond itself with its huge seal. [3]
But the modern simple, or parol, contract, a written or unwritten promise, with its recognition of a personal liability of the debtor, got its recognition, not by way of enforcement of a promise, but by way of physical damage done to the person or property of the creditor. “The gist of the Writ of Trespass was an allegation that the defendant had, with force and arms, and against the peace of our Lord the King, interfered with the plaintiff’s possession of his body, land, or goods.” [4] Next by authority of Parliament in 1285 [5] the writ of trespass was permitted to be extended to analogous cases, and came to be known as “trespass on a similar case,” then as “trespass on the case,” then simply as “action on the case,” or merely “case.” Under this authority it was extended to “malfeasance,” or damage to a physical object owned by the plaintiff, as early as the year 1374; then extended to “non-feasance,” in 1424, or the damage caused by mere nonfulfillment of a promise without fraud or deceit; then to “misfeasance” or deliberate fraud of the defendant in breaking his promise though not involving physical damage (1433); then, including “assumpsit” and limited by the doctrine of “consideration,” or “value received,” it established the modern form of contract in the latter part of the Sixteenth Century. [6]
Thus the promissory note or even a simple promise by word of mouth or only implied in the conduct of the parties, was slowly legalized through the period of the sixteenth century, and the court
1. JENKS, 57, 58. 59.
2. AMES, Lectures on Legal History, 123 (1913).
3. JENKS, 135-6 510.
4. Ibid., 137; POLLOCK and MAITLAND, 182 (contract) 510 (The Trespasses),
5. Westm. 2, 13 Edw. I,
c. 24 (1285).
6. POLLOCK and MAITLAND, 2:511.
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recognized the essential notion of a credit instrument, the modern incorporeal property, where protection was something distinct and widely different from the older notions of protection against trespass on the body, land, or goods of a plaintiff.
Not that there had not been in the feudal period a type of incorporeal property, but that property was not the modern relation of voluntary agreements between equals, but was lordship over physical things, or the physical products of the soil or of labor. The “rents” of land were even a part of the lordship over lands and tenants. “The landlord who demands the rent that is in arrear is not seeking to enforce a contract, he is seeking to recover a thing.” [1] It was only in course of time, and with the modern freedom of labor and money economy, that this “medieval realism,” [2] became the modern obligation of contracts between equals. The law of landlord and tenant unfolds into many varieties of the law of lessor and lessee, a special case of the law of creditor and debtor. The lessor turns over to the lessee the control of his property, and accepts, for the period of time, the economic relation of investor and creditor, the lessee that of business man or going concern and debtor.
We need not delay to consider the informal investor, the business man, who puts his own property or money into his own business. He does so, of course, not on a formal promise, but on an implied expectation of something roughly in excess of what is promised in similar cases. He takes chances on expected opportunities.
2. Legal Tender
It has been the practice in economic theorizing, since the reaction of the Physiocrats and Adam Smith against Mercantilism, to eliminate money from consideration and to get back to the realities of physical commodities and human wants. Money was simply a measure of value and a medium of exchange, and, while important, its importance belonged to the category of weights and measures or transportation. The government should provide an authentic unit of measurement of value just as it provided a unit of length, weights or cubic content, and it should provide a smooth administration of coinage and banking, since what it provided was Adam Smith’s “great wheel of circulation.” In these respects the value of
1 POLLOCK and MAITLAND, 2:126.
2 Ibid., 2:181, on Ownership and Possession.
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money was simply nominal value, containing nothing more in itself than a yardstick or an empty basket. The real thing back of it was the production, exchange and consumption of quantities of commodities, whose measurement and transfer money facilitated.
These views obviously took the individualistic or private standpoint, as against Mercantilism which had taken the public or rather monarchical standpoint. What the individual wants is commodities, not money, - satisfaction, not prices. When the public standpoint was needful it was brought in as a servant or administrator operating “ a great wheel of circulation,” [1] rather than a judge deciding disputes, or brought in as a “ natural order “ and beneficent purpose of nature or deity, rather than a common-law judge enforcing private contracts. Obviously it followed that, when the history of money was traced out of the customs of primitive society, showing the evolution of the material of money from beads, cattle, tobacco, to iron, copper, silver, gold, and bank credit, it was the mechanism of money and credit, rather than the behavior of judges in interpreting and enforcing promises, that attracted attention.
This attitude conformed to the general attitude imposed on both economists and publicists by the constitutional struggles of three hundred years between monarchs and parliaments which made it appear that government signified only the executive and legislative branches of government rather than the judicial branch. Hence they sought for the legal attributes of money in the proclamations of the prerogative or in the statutes of the legislatures rather than the common law. Yet it is out of the common law, the law that standardized the customs of the people, that the legal tender quality originated, and the function of the prerogative or legislature came in afterwards to direct the judges as to the lawful standards of weights and measures, including money, which all of them should employ uniformly throughout the land in deciding disputes and enforcing promises.
This oversight of the Physiocrats, of Adam Smith and the classical economists, is explicable in the fact that what they mistook for the order of nature or divine providence was merely the common law silently growing up around them in the decisions of judges who were quietly selecting and standardizing the good customs of the neighborhood and rejecting the bad practices that did not conform
1. Cp. VEBLEN, Place of Science, 6G.
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to the accepted rules of reason. Legislatures and monarchs are dramatic, arbitrary and artificial; courts are commonplace and natural.
It is also explicable in the fact that economic theory has consistently taken the point of view of individuals on the one hand and commodities on the other hand, instead of the point of view of transactions between individuals. Our analysis of a transaction has shown that there is always a third party to every transaction, the judge who decides or is expected to decide every dispute upon the principle of the common rule applicable to all similar transactions. The business man is not concerned, directly, in his daily transactions, with what the legislatures or the state or monarch does - he wants to know what the judge and the sheriff will do. This judge, however, necessarily takes a public point of view, since his decisions must conform to what other judges have decided in similar disputes and to what the customs or laws of the community authorize and support. In applying the common rule he is conforming to public purpose. Hence the public point of view is inherent in every transaction, and just as much so in primitive society as in a credit economy.
Money originated, indeed, out of the habits and customs of individuals in their transactions, but whenever a dispute arose between individuals as to the price, or the payment of a deferred price, agreed upon, it is evident that the judge, chieftain, headman or king, exercising the controlling power of the community, had to decide upon the quantity and quality of the circulating medium which the seller or creditor should be required to accept. This decision settled the dispute, stopped private vengeance, liberated the debtor or buyer and restrained the creditor or seller. Then when markets and fairs appeared, the same process automatically appeared, and the impromptu pie poudre1 courts of early England testify to the inherent function of the judiciary in interpreting and enforcing accepted customs even of the most transitory and individualistic of itinerant peddlers.
Consequently there is another custom to be taken into account in the history and origin of money - the custom of judges in deciding disputes according to the principle of the working rule, and thereby determining what is “lawful money” or “lawful tender” in the settlement of claims. The fact that these judges presumably followed the
1. The “dusty feet” courts of traveling merchants; cp. POLLOCK and MAITLAND, 1:467; HOLDSWORTH, I:300, 302, 309.
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custom of the community in making their decisions is simply the universal fact of the common law which consists in selecting the good and approved customs and eliminating bad practices in the decision of disputes. This custom of courts led to the next stage when conquest or federation had brought together tribes under a sovereign with many local courts and many private coiners and minters of money. Ethelstan, Edgar and Canute, in Anglo-Saxon times, issued proclamations condemning and threatening punishment of those who corrupted the coinage; Edward I proclaimed that “no subject should be compelled to take in buying or selling or other payment any money made but only of lawful metal, silver or gold”; and Henry II is said to have selected the coins of a set of foreign merchants from Flanders, the Esterlings, and proclaimed their “ sterling “ alloy to be the standard for all goldsmiths, coiners, [1] and obviously also for the itinerant justices whom Henry was the first to send out on the circuits. Thus it came to be settled, at common law, that the King, “by his absolute prerogative” might make foreign or any coin “lawful money” in England, [2] and that an obstinate creditor had no remedy by the common law to have payment “ because it shall be accounted his own folly that he refused the money when a lawful tender of it was made to him.” [3] The records of the pie poudre court at St. Ives in the year 1300 contain a decision by merchants requiring a fellow merchant to pay in “lawful money”- legali moneta - since the “crocards and pollards” in which he promised to make payment had meanwhile been “prohibited by the lord King throughout all England.” [4]
Evidently the King was directly concerned in stabilizing the coinage, since by impairing the coins the King lost his revenues, forfeitures and subsidies, the coercive debts of his subjects. Then when the modern banking system arose, with its bills, notes and deposits, the expectation of what the judges will do in deciding disputes becomes the all-important standard for all private transactions. The “customs “ of business men and bankers are still the foundations of money, but these private practices must conform to the customs of the courts if business promises are to be secure. It is this legal tender
1. 2 Coke Inst. 576.
2. 5 Co. Rep. II4a Wades Case; Trin. 43 Eliz. (1601).
3. Co. Litt. 207, a. b. 208, a; Pong v. Lindsay, I Dyer, 82a, Hil. 6 and 7, Edw. VI; I B1a. Com. 276; Viner Abr. “Tender.”
4. 23 Selden Soc. So.
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medium of payments, including governmental paper money, the “greenbacks,” [1] required by the custom of courts which, in American practice, is known as “lawful money,” the common-law term that goes back to Anglo-Saxon times.
There is thus always a public purpose in every system of money, even the most primitive, as soon as there is an authoritative decision of disputes respecting the means of payment. The public purpose develops along with the growth of population, the practices of the people, the form of government and the motives of the governor. In early times it might go no further than the purpose of keeping the peace; but soon it becomes the purpose of obtaining a revenue for the sovereign; then, with the development of modern capitalism and the predominance of business in the counsels of government, it became Adam Smith’s purpose of providing “the great wheel of circulation,” truly “an organ of the economic commonwealth.”
Soon the question had to arise as to whether the legal tender standard itself had been designed to accomplish accurately the purpose of a “great wheel of circulation,” and then a critical examination ensued as to the relative importance of different purposes from the public standpoint. Since the time of John Locke the dominant purpose for the sake of modern world commerce has been that of settling upon a single standard of value that should be undisturbed by the ignorance or interests of monarchs who controlled its issue. This standardization of gold and silver came in with the overthrow of absolutism in England in 1689 and the control of government by the constitutional methods of parliamentary representation. Here the public purpose was simply that of providing a ‘simple uniform medium of exchange for both domestic and foreign trade.
A hundred and fifty years after the settlement of this as the dominant purpose, a new public purpose began to be suggested as the ideal, namely, a stable level of prices, in order to prevent injustice between creditors and debtors. This purpose was based upon a new device of statistics, namely, the tabular standard or index number of prices, suggested, in 1822 by Joseph Lowe, the London merchant, and renewed in 1833 by C. Poulett Scroupe, the politician and publicist.
Malthus, in 1821, had previously suggested another practical pur-
1 Hepburn v. Griswold, 8 Wall. 603 (1869); Legal Tender Cases, I2 Wall. 457 (1870); Juillard v. Greenman, 110 U. S. 421 (1884).
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pose from the public standpoint, namely, that of preventing the oscillations of prosperity and depression, over-employment and underemployment, which he had connected with the oscillation of the general purchasing power of money. [1] This public purpose has now come to the forefront as a criterion for determining the legal standard of value and the operations of the banking system, which are the means instituted by government for furnishing and withholding credit. [2] If the governing officials are changed, or the existing officials change their minds in conformity with this new criterion, as was the case when John Locke addressed himself to them at the close of the Seventeenth Century, then the public purpose, as revealed in the behavior of officials and judges, will also advance another step and adopt a stable price level as well as a single standard of value as its criterion.
Thus it is not so much the material out of which money is made, nor the mechanism of money and credit, as it is the behavior of judges in deciding disputes, that determines the measure of value and medium of exchange. It is not gold, but the legal tender attribute of gold attached to it by the courts, that determines the prices that business men shall pay for commodities, for it is that that determines the enforceability of contracts, the liquidation of debts, the assets and liabilities of a going concern. Prices are indeed “nominal values” - they are the expectations of judicial behavior in the enforcement of promises. And modern economics is not a barter economy or a truck economy as the Physiocrats and classical economists would have it, nor is it a pleasure and pain economy of production and consumption, as the hedonic economists would have it, but it is a price economy, as the customs of business and the custom of courts actually have it. For business is not an exchange of commodities - it is a purchase and sale of commodities. It is an economy of buyers and sellers, borrowers and lenders, not one of truck and barter. Its essential quality, before anything else can be done, is transfer of titles and the liberation of debtors from encumbrances through the tender of lawful means of liquidating their promises. It is strictly, in the fullest sense of the word, a “ credit “ economy, for it is a transfer of goods and services for a mere promise to pay a price, whose reality is none other than confidence in the expected behavior of citizens, judges
1. MALTHUS, T. R., Principles of Political Economy, 397. 398 (1821).
2. CJ. COMMONS, MCCRACKEN, and ZEUCH, “Secular Trends and Business Cycles,” 4 Rev.of Ec. Stat., 6 (1922).
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and legislatures. Back of this insubstantial and delicate process of the mind with its purely nominal values or prices, is the great reality of production and consumption, prosperity and poverty, private wealth and commonwealth. We cannot, however, clearly see the connection between promises and reality, between prices and welfare, until we have seen another and most remarkable quality of this mental process, by which the courts have made mere promises actually to look and act like a commodity - the quality of negotiability.
III. INTANGIBLE PROPERTY - OPPORTUNITIES
We have described the change in meaning of the term property from the common-law meaning of physical things to the business-law meaning of the prices of things. The expected prices are imputed as a present value and become the assets, or expectations, which the business man entertains, of future transactions on the commodity markets. An even more momentous change from the common law to the business law was that which converted the mere promises of one person to another into commodities that could be bought and sold on the money and securities markets. “If it were asked,” says McLeod, [l] “ what discovery has most deeply affected the fortunes of the human race it might probably be said with truth - The discovery that a debt is a saleable commodity. When Daniel Webster said that credit has done more a thousand times to enrich nations than all the mines of all the world, he meant the discovery that a debt is a saleable commodity, or chattel; and that it may be used like money; and produce all the effects of money.”
There were two circumstances which prevented the primitive common law from enforcing the assignment or negotiability of contracts,
1. MCLEOD, H. D., Theory and Practice of Banking, 5th ed., I:200. Further references on negotiability and assignment are as follows: Morse Joan T. JR., Banks and Banking, 4th ed., 1903; HOLDSWORTH, W. S., “Origins and Early History of Negotiable Instruments,” 31 L. Q. R. 12, 173, 376; 32 L. Q. R. 20 (7975-x6); JENKS, EDWARD, “Early History of Negotiable Instruments,” 9 L. Q. R. 70 (1893); GREER, F. A., “Custom in the Common Law,” g L. Q. R. 153 (1893); CARTER, A. T., “The Early History of the Law Merchant in England,” 17 L. Q. R. 232 (1901); AMES, JAMES BARB, “History of Assumpsit,” 2 Harv. L. Rev. x, 53. 377 (1888); Selected Essays in Anglo-American Legal History, 3:259; HOLDSWORTH W. S., A History of English Law, 302 (1909); POLLOCK and MAITLAND, History of English Law, 2:226 (1911); PAGE on Contracts, 2343 et passim (1919); POUND, ROSCOE, “Liberty of Contract,” 18 Yale Law Jour. 454 (1909); BROWNE, J. H. B., The Law of Usages and Customs (1875).
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namely, the concept of property as tangible objects and the concept of contract as a personal relation. The concept of tangible objects arises from man’s dealings with physical nature; the concept of personal relations arises from the character and confidence imposed in individuals. While the business law in the 17th century was converting man’s dealings with nature into the assets of a going concern, the same business law was eliminating the personality of individuals by converting their debts also into the assets and liabilities of a going concern.
The primitive mind could not conceive of property apart from physical possession. “Property” is really an intangible relation depending on the promises of government, such that a person may own an object that he cannot see. But “possession” is, in its original meaning, a physical relation of seeing, touching and holding tangible things. And if the thing cannot be physically handled yet that physical handling can be symbolized by another physical object which can be handled. Hence a class of promises embodied in such paper documents as deeds and bonds, the so-called “specialties,” drafted in the presence of witnesses with great solemnity and loaded with the formidable seal of the grantor, symbolized physically to the owner and all others his direct holding of a physical object, in the case of a deed, or his indirect holding of the same to be delivered to him, in the case of a bond. The primitive mind could not grasp the underlying promise with its unseen foundation in the expected behavior of courts that enforce the promise, but must grasp it in the paper instrument with its huge decorated seal.
Survivals of this primitive materialism continue to the present day. In distinguishing the paper symbol of a deed, which had been altered and modified, from the “substance” of the promise contained in the deed, which had not been modified, Justice Holmes, in 1901, pointed out that, under the primitive law, “the alteration was a cancellation of the deed, having the same effect that tearing off the seals would have had. This rule comes down to us from a time when the contract contained in a sealed instrument was bound so indissolubly to the substance of the document that the soul perished with the body when the latter was destroyed or changed its identity for any cause.” [1] And, in distinguishing a debt from the paper instrument which was merely an evidence of the debt, Justice Holmes also said,
1. Bacon v. Hoofer, 177 Mass. 335. 337 (1901).
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in another case, “The debt is inseparable from the paper which declares and constitutes it, by a tradition that comes down from more archaic conditions. Therefore, considering only the place of the property, it was held that bonds held out of the state could not be reached… But it is plain that the transfer does depend upon the law of New York, not because of any theoretical speculation concerning the whereabouts of the debt, but because of the practical fact of its power over the person of the debtor… What gives the debt validity? Nothing but the fact that the law of the place where the debtor is will make him pay. Power over the person of the debtor confers jurisdiction.” [1]
Thus has judicial analysis continually been called upon to go behind the primitive notions of physical things as the “substance” or symbol of property and to find the reality of property, not in things but in the promises of individuals supported by the promises of courts to hold individuals responsible for the execution of their promises. This outcome is a result of the several centuries of experience required to work out the principle of the simple unsealed promise, made without formality which we have seen in the preceding section, and especially to work out the devices by which such promises could be bought and sold.
There was another fundamental reason in primitive society accounting for the non-negotiability of promises. Promises, express or implied, are the foundation of human society. This is the root of the doctrine that society originated in contract. But the contract was not an original formal contract made once for all at the beginning of society and then interpreted afterwards by each individual, but is a process of implied promises inferred from daily behavior according to the approved way of doing things at the time. [2] When a person enters a room with others, he promises, by his very act of entrance, that he will not trespass, but will fall in line with the custom of that kind of gathering. Such promises are personal. They are made between the persons then living and acting together. But while personal, they are not individual. They are collective. An injury to one is the concern of all who are acting together. In primitive society these collective expectations absorbed the individual
1 Blackstone v. Miller, 188 U. S. 189, 205, 206 (1903).
2 “It is custom that writes out slowly from generation to generation the terms of the social compact.” GREER, r. A., “Custom in the Common Law,” 9 Law Quar. Rev. Rev. Rev. 153 (1893).
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in the group, such that the violation of express or implied promises must be atoned vicariously by other members of the group and by the children of the wrongdoer, while the recompense accrued not alone to the individual injured but to his group and his children. Thus the blood feud, hereditary serfdom, fixed status of individuals, and communism, followed the primitive notions of collective responsibility and collective power to enforce responsibility.
When the individual emerged out of the group it was by stages and by classes of individuals, first the landed proprietors by conquest, second the capitalists by participation in sovereignty, third the laborers. This emergence consisted in the equality and liberty of the individuals constituting the class, retaining superiority and command over individuals of classes not yet participating in sovereignty. Between superior and inferior the promise was the involuntary one of protection and obedience, and its enforcement was in the hands of the superior. Between equals the promise was the voluntary one of reciprocal service, and its enforcement was accomplished, as we have seen, by the judiciary, who took away from individuals the power of private enforcement while recognizing the binding character of the promise.
Such recognition of the promises of reciprocal service between equals consisted in allowing equal liberty to make individual promises and the accompanying individual responsibility to fulfill the promise. As such, the resulting contract did not bind a successor of the one who promised nor did its benefits accrue to a successor of the one to whom the promise was so made. Likewise, the liability to make redress for violation of the custom could not be vicariously transferred to another, neither could the one to whom redress is owed transfer his claim to another, but the compensation must be rendered in person by the wrongdoer and satisfaction must be obtained in person by the sufferer. Neither may the liability survive the life of the wrongdoer nor the claim to redress survive the life of the injured individual, else it ends in blood feud, or in the hereditary relation of slavery and serfdom which nullifies the equality and liberty - if individuals in the same class. The law of equality and liberty of the individual is, then, the law of non-transferability and non-survivorship of both the right to recompense and the duty to make recompense, while the law of slavery or status was the law of transferability and survivorship of the rights of the superior and the duties of the inferior.
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Thus it was that, after the law of creditor and debtor had been perfected in the sixteenth century, it required still another century to convert the personal relations of creditor and debtor between equals, as conceived in the common law of liberty and equality, into the property relation of assets and liabilities. This consisted in inventing the transferability and survivorship of promises freed from the personality of the parties to the promise. And so substantial has been the transformation that these mere promises between equals, which constitute the debts of the credit system, can themselves be treated, in law and popular thought, like commodities, to be bought and sold like other commodities, though they are neither commodities nor slaves nor serfs treated like commodities, but are a mental expectation arising out of confidence in the promises of governments, courts and business men.
The essential requirement of business practice was to convert these promises of freemen into something as nearly like money as possible. Primitive buying and selling was barter - the direct exchange of movable products. Even when money was introduced the exchange for money was but a barter of coins for products, and both were chattels. This constituted strictly a money bargain as distinguished from a credit-bargain or price-bargain. No credit-bargain was recognized, the “action of debt” being an action to recover coins or chattels unlawfully held, just as the “action of right” to land was an action to recover land forcibly detained. [1] They were actions to recover physical property, not actions to enforce promises. In so far as mere promises were enforced, involving no idea of unlawful assault, trespass or theft, they were matters of conscience or honor, and the court to which appeal could be made was only either the priest in the confessional or the wager of battle to ward off dishonor.
It was similar with the relation of landlord and tenant. Being a personal relation, the rent bargain and its resulting contract could not be transferred by either the landlord or the tenant to another landlord or tenant, without the consent of the other party. The King’s tenant could not alienate his tenancy without consent of the King; and the sub-tenants down the line could not alienate without consent of their immediately superior landlord.
The same was true of other contracts. A contract, being a personal relation between creditor and debtor, could not be sold by the creditor to a third party, nor assumed on behalf of the debtor by another
1. Above, p. 238.
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debtor, without the consent of the adverse party to the original contract. Being personal promises of oath and fidelity, or of reciprocal personal service of equals, the common-law lawyers could not see how other parties not originally bound to each other in good faith could become so unless they also personally pledged themselves to each other in a similar confidence.
Thus, at common law, the assignment of contractual rights, being the voluntary promises of two parties equal and free, was of no effect if the opposite party did not consent to the assignment. The relation between the two was a personal relation arising out of personal confidence, and not a property relation arising out of the transfer of the physical things. Wherever this personal relation continues, indeed, to prevail at the present day, the contract continues to be non-transferable. A promise to marry cannot be assigned by the promisee to a third party, nor negotiated upon the market. A promise to perform any special service depending on the contingencies of character or skill of the promisor cannot be transferred.
The highest and most complete type of assignability is negotiability, which consists in a promise to pay a definite sum of money, without condition, at a definite time and place. Here the personal element is as nearly eliminated as possible, so much so that a third party to whom the promise is legally transferred, can bring suit in his own name as though the promise were made to him personally. And in doing so, he is free of all defenses of fraud or offsets which the debtor might have set up against the party with whom the contract was actually made. The bearer of certain negotiable paper takes even a stronger title than that possessed by the original creditor, for he takes it free from defect in title and free of equities against the creditor from whom he received it; and the anomaly is created of authorizing a person to sell more than he owns. The debtor must pay and then bring suit against the original creditor who has presumed to sell more than he owned.
It was this anomaly that persisted in the minds of the common-law judges until the legislature was compelled to intervene. As late as 1704, Chief Justice Holt refused enforcement of the promissory notes of the goldsmiths of London, payable to bearer on demand, and constituting the modern bank note. These promissory notes, he said, “are only an invention of the goldsmiths in Lombard street who had a mind to make a law to bind all those that did deal with them; and sure
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to allow such a note to carry any lien with it were to turn a piece of paper, which is in law but evidence of a parol contract, into a specialty; and besides it would empower one to assign that to another which he could not have himself; for since he to whom this note was made could not have this action, how can his assignee have it?” [1] It required an Act of Parliament to reverse this common-law theory of Justice Holt. [2]
While the negotiability of promissory notes was thus long delayed, it had been a rather simple matter to bring about recognition of the negotiability of bills of exchange, including their modern development, the checks drawn by a depositor on the bank. A bill or check is an order by a creditor upon his debtor to pay to a third party designated, or even to any third party, “the bearer,” a part or the whole of the debt owing. The first recorded case recognizing the negotiability of bills of exchange in England was decided in 1603.[3] This related to a foreign bill of exchange, and negotiation was easily allowed since international trade was distinct from domestic trade and came under a mercantile custom common to merchants of all lands. But once started in this direction, the negotiability of inland bills was afterwards slowly allowed. At first, both for bills and notes, it was necessary to set out and prove the custom of merchants, but after 1695 and 1704, the courts began to assume “judicial knowledge” of the custom and hence a mere declaration of the custom was good. [4] At first the courts applied the law only to those who were actually merchants, then it was extended to all traders and dealers, and finally, in 1689, an acceptor who was not actually a merchant was forbidden to deny that he was. [5] Thus, by a process extending through a hundred years, aided by equity and legislation, of gradually taking away the defenses which at common law the debtor could set up against paying his debt, the bona fide holder of the debtor’s promise could not only sue in his own name even though the promise had not been made to him personally, but could even have a stronger case at law than that of the original creditor; and that which had been a personal relation between definite individuals became the assets and liabilities of a going business,
1. Butler v. Crips, 6 Mod. 29 (1702). But see MCLEOD, Theory and Practice of Banking, I:224 ff., who contended that justice Holt was wrong and that promissory notes were negotiable at common law. This contention overlooks the decisive fact that Lord Holt was one of the most eminent of the common-law lawyers.
2. 3 and 4 Anne c. 7, 1705.
3. Martin v. Boure, Cro. Jac. 6 (1603).
4. Williams v. Williams, Carthew, 269 (1693); Bromwich v. Lloyd, 2 Lutw. 1582 (1704).
5. Sarsfield v. Witherly, Carth. 82 (1689).
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independent of the persons, past, present or, future, who might actually constitute the concern.
It can be seen, therefore, why it is that modern capitalism begins with the assignment and negotiability of contracts. They accomplish two purposes, a low rate of interest and a rapid turnover of capital. The two operate together. Capitalism could scarcely survive on a 10% or 20% rate of interest and a turnover once or twice a year. It has survived on a 3% to 6% rate of interest and a turnover three to five times a year. The difference is cumulative. Ten per cent a year on capital turned over once a year means an overhead cost of obtaining capital ten times as great as 5% a year on capital turned over 5 times a year. The, same amount of capital does five times as much work at one-half the rate of interest.
Shortly after the middle of the 17th century in the year 1668, when the legal process of assignment and negotiability above mentioned was halfway accomplished in England, Sir Joshua Child, the great English exponent of Mercantilism, compared the advantages which Holland enjoyed contrasted with England, where the current rate of interest was 3% in “peaceable times” compared with a legal rate of 6% in England, and the turnover of capital was twice or thrice that of England. This “turnover,” as it now would be named, was accomplished in Holland, said Child, by “the law that is in use among them for transference of bills of debt from one man to another; this is of extraordinary advantage to them in their commerce; by means whereof they can turn their stocks twice or thrice in trade, for once that we can in England; for that, having sold our foreign goods here, we cannot buy again to advantage, till we are possessed of our money; which it may be we shall be six, nine or twelve months in recovering: and if what we sell be considerable, it is a good man’s work all the year to be following vintners and shopkeepers for money. Whereas, were the law of transferring bills in practice with us, we could presently after the sale of our goods dispose of our bills, and close up our accounts.” [1]
And Sir Joshua proposed a cumbersome piece of legislation authorizing assignment, equivalent to the modern “acceptance,” which, however, was, within the next thirty years accomplished, as we have just noted, by the simple method of judicial recognition and
1. CHILD, SIR JOSHUA, “A New Discourse of Trade,” original, 1668. See Dict. of Pol. Econ. (6th ed. of 1804).
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enforcement of the customs of merchants. “The great advantage,” he said, “that would accrue to this kingdom by a law for transferring bills of debt from one person to another, is sufficiently understood by most men, especially by merchants. The difficulty seems not to be so much in making of a law to this purpose, as reducing it to practice; because we have been so long accustomed to buy and sell goods by verbal contracts only, that rich and great men for some time will be apt to think it a diminution of their reputation to have bills under their hands and seals demanded of them for goods bought, and meaner men will fear the losing of their customers by insisting upon having such bills for what they sell.” These compunctions of the great and meaner men have long since given way, as we know, before the greater economy of buying and selling short-term promises at the commercial banks. Twenty years after the perfection of negotiability of promises, by the Act of 1704, the rate of discount at the Bank of England had fallen to 2 1/2%, and has since fluctuated between 2% and 7% according to business conditions.
2. Commodity Tickets and Price Tickets
This remarkable innovation of negotiability, which took an entire century for its accomplishment from the first decision on bills of exchange in 1603 to the parliamentary reversal of Lord Chief Justice Holt in 1704, while it established modern capitalism, yet introduced the most disturbing confusion between primitive notions of physical commodities and the new notion of a promise acting like a commodity. Stock-jobbing frenzies for the first time seized upon the minds of Englishmen in 1792,1 the Mississippi Bubble and the South Sea Bubble overwhelmed France in 1716 and England in 1718, and a recurring cycle of inflation and contraction, prosperity and depression set in for two hundred years so regularly that learned men ascribed it to the sun, to Venus, to human nature, to human depravity, until, in more recent times, it is seen to be the workings of the clever invention of negotiability of promises. What negotiability actually introduced was the phenomena of two opposite markets, two opposite classes of legal claims to commodities or services, and two opposing concepts of value. The two markets are the commodity markets and the money markets; the two classes of legal claims may be contrasted as commodity tickets and price tickets, and the
1. MACAULAY, T. B., History of England, 4:x56. (1856).
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two concepts of value are the real value assigned to commodities or labor and the nominal value expressed in prices.
Every productive enterprise carries on these two lines of business, the business of buying, storing, enlarging and selling quantities of real value or real wealth in the form of commodities and labor, and the business of creating, buying, selling, offsetting and cancelling promises to pay the nominal value or price of that real value or real wealth. The former kind of business is carried on at factories, retail and wholesale stores, railroads, theatres, warehouses, produce exchanges, farms, real estate markets, where people deliver commodities or labor power and transfer the titles to them. Every factory is a kind of warehouse in which raw material and labor are “deposited” to reappear in a few weeks or months as a finished product. Every wholesale or retail store is a warehouse where finished goods and the labor of salesmen are bought and stored to be sold in a few days or weeks. So with every farm, every railroad, every workshop, every theater, and so on. These are the commodity markets and labor markets of the country, and the operations there going on constitute that process which we have named a going plant with its producing organization, creating the real values and real wealth of the country.
But the business of creating, buying, selling, offsetting and cancelling the promises to pay the prices which are negotiated on the commodity markets is conducted at commercial banks which are the money markets of the country. The “going business” of any concern connects its commodity market and its money market, for it is the business on the commodity markets, of buying and selling, hiring and hiring out, renting and leasing, and the business on the money market of borrowing and lending, discounting and depositing promises to pay the prices of commodities in lawful money within 24 hours to 90 days.
Historically the legal transition is the transition from bailments which are commodity tickets, to debts, which are price tickets. The Bank of Amsterdam and the Goldsmiths of London began their “banking” business as warehouses for the storage of gold and silver and the issue of warehouse certificates to depositors for the amount of the commodity, gold or silver, which they had stored. The survival of that warehouse business is seen in the American gold and silver “certificates.” Latterly, finding that all of this commodity in storage was not called for at any one moment, they violated their pledge of
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storage, loaned their depositors’ money to other people at a profit, and issued their commodity tickets in excess of the quantity of commodity on hand. This violation of a pledge, if practiced by an ordinary warehouseman, would constitute an unlawful conversion of bailment, since, in such a case, the deposited commodity, such as wheat or gold, is not the property of the warehouseman to loan or sell to others, but is the property of the depositor. In order that this unlawful practice of the goldsmiths might become lawful, it was necessary for the courts to substitute a sale of gold to the banker for a deposit of gold by the customer, and to substitute a debt of the banker to the customer for a bailment of the customer to the warehouse. The warehouseman now became the owner of the commodity instead of a bailee, and the former owner became a creditor, owning a bank note, instead of a depositor owning the commodity. This was the unlawful “invention of the goldsmiths in Lombard street who had a mind to make a law” different from the common law, that stirred the wrath of Chief Justice Holt and required an act of parliament to overrule him.
Yet the names “deposit” and “depositor” were retained in banking practice in order not to break with that conservative materialism of the human mind which insists on tangible evidence, although the depositor had changed from owner of a thing to creditor of the bank. This retention of the primitive materialism was convenient under the practice of bank checks, although the depositor now deposits not a commodity but his own or his customer’s promise to pay, and the bank, through the device of negotiability, becomes, not the warehouseman, but the owner of that promise. “Money” now becomes, not a corporeal property, gold or silver, but bank credit, having the two legal qualities of incorporeal property, the demand-promise of the banker, and intangible property, the exchange-value of that promise on the markets. And this kind of money becomes elastic since its volume changes with the prices that business men agree to pay for commodities. Thus the transition is accomplished from a commodity ticket, or bailment, calling for a specific corporeal property, gold or silver, to a price-ticket, or bank credit, calling for any commodity at its then exchange-value.
The commodity ticket is, in effect, a title of ownership of corporeal property, the price-ticket is a negotiab