On the Ambiguity in the meaning of the word Loan. 3. There is still one formidable ambiguity to be cleared away, which has in recent times created immense confusion in the Theory of Credit. All the old writers, who were chiefly men having a practical knowledge of business, seeing that Credit causes exactly the same circulation of commodities as money, maintained the doctrine that Credit is Capital, without entering into any very nice definition of either credit or capital. Since the time, however, of the French writer, J. B. Say, this doctrine has been the subject of much ridicule. It has been repeated by a multitude of writers, that those who say that credit is capital, maintain that the same thing can be in two places at once. They conceive credit to be the loan of some material substance to some one else, and they ask-How can the same thing be in two places at once, and be used by two persons at once, the borrower and the lender? In a subsequent chapter we shall point out the astonishing self-contradictions of Say on this subject. It will suffice here to say that the whole misconception is founded on an ambiguity in the meaning of the word LOAN. And the examination of this will show upon what subtle considerations some of the most important doctrines in science depend. Suppose any one lends his friend some such an article as a book, Then it is clear that the borrower and the lender cannot both have the book at once. Suppose that this person, wanting his book back again, calls upon his friend and finds him not at home. Seeing perhaps his book on his friend's table, he would have no scruple in taking it away; though he would probably have the courtesy to tell his friend he had done so. But suppose the same person had lent his friend £5, and, as before, wanting it back, called on him, and found him not at home. Suppose he saw his friend's purse on the table, would he feel himself justified in opening it, and helping himself to five sovereigns? Every one would at once feel he would not. He would have no scruple in taking back his own book which he had lent; but he would never dream of opening his friend's purse, and taking out five pounds he had lent. Thus, without giving any particular thought to the subject, every one would instinctively feel that there is an essential distinction between the cases of lending a book and lending money. Or if he was so obtuse on the subject, the law would tell him so. The law would tell him he might take away his own book if he pleased, but that if he opened his friend's purse and took out five sovereigns, he would be guilty of theft; and that he must request his friend to pay him, but that he had no right to help himself. So if a man pays in money to his account at his banker's, i. e., lends him money, and wants some, would he venture to take it himself off the counter? Of course he would not. He would request his banker to pay him, and he must wait until his banker gives him the money of his own free will. If he ventured to take it himself he might be given in charge to a policeman. The fact is, that though both these operations, lending a book and lending money, are both called a loan, they are of an essentially distinct nature. When a man lends a book, or any other chattel, to his friend, he never parts or dispossesses himself of the property in it. He is entitled to have that very book, or the very chattel, back again. There is no exchange, and no new property created. And only one party can have the use of the book, or the chattel. But in all cases whatever of a loan of money, the lender absolutely cedes the property in the money to the borrower, and it becomes his absolute property. What the lender does acquire is the Right, or Property, to demand back an equivalent amount of money, but not the specific money. A loan of money, is 'therefore, always an exchange, and in all such cases, there must, by necessity, be a new property created; and this property may be sold and transferred like the money itself. In the loan of a book, a horse, or other chattel, the right or property, of the lender in it, is never severed from it; in a loan of money, the right, or property, of the lender in it is always severed from it, or rather, transferred to the borrower; and the new right, or property, created in the lender is termed a Debt, or Credit, and when the debt is paid, or, in common language, the loan returned, this new property is destroyed. Hence we see that there are two distinct species of loan: the one where the lender has the right to have the very thing returned, the other where he has only the right to demand to have an equivalent amount returned. Now all commercial loans are of the latter species: they are all sales, or exchanges, and they are never of the former sort; and all the confusion on the subject has arisen from not observing this distinction. The same ambiguity also affects the word Borrow. The confusion, then, has arisen from the English language having but one word, LOAN, to denote two operations of a perfectly distinct nature. The French language is equally faulty. But the distinction is clearly pointed out in Roman Law, and in Latin, there is a distinct word for each operation. Thus it is said in Roman Law" An obligation may be founded on a thing, as by the delivery of a Loan, or mutuum. But the delivery of a Loan, or mutuum, consists in the delivery of those things which have weight, number, or measure; as wine, oil, corn, ready money, whether of bronze, silver, or gold; which things, whether numbered, measured or weighed, we give in such a way, that they become the Property of the receivers. And since the identical things lent are not, but others of the same nature and quality are, returned to us, it is for that reason called a mutuum; because it is so given by me to you, that from being my property it becomes yours (ex meo tuum fiat.)" So also "But it is called giving a mutuum, because from being my property it becomes yours; and therefore if it does not become your property, no obligation is created." 2 3 But when such a thing as a book, or a horse was lent, it was not called mutuum, but commodatum. "He also to whom the use of anything is granted, or commodated, is bound by the delivery of the thing, and is subject to the actio commodati. But his case greatly differs from that of the person who has received a mutuum; because the thing is not given to him so as to become his Property: and therefore he is bound to restore the very thing itself." So also" We retain the property and the possession of the thing lent (rei commodatæ). No one, by lending (commodando) a thing, gives the property in it to him he lends it to." It will thus be seen that the ambiguity in the word Loan, which has perplexed so many Economical writers would never 1 Institutes of Justinian, iii., 15. 2 Digest, xii., 1: 2, 2. See also Gaius' Inst. iii., 90. 3 Institutes of Justinian, iii., 15: 2. 4 Digest, xiii, 6: 8, 9. have caused any difficulty to any one who had studied Roman Law. All commercial loans are mutua not commodata. Every loan of money is in reality a sale, or an exchange, in which a NEW PROPERTY is created, which is CREDIT; and when the money is returned, or the loan repaid, it is another exchange, by which this new property is extinguished. On some Erroneous Ideas as to the Nature of CREDIT. 4. The Theory of Credit has not only "puzzled and distressed Courts of Law, but a great number of Economical writers as well, and among them many very able men of business; and it will be of advantage at this stage of our inquiry, to clear away several erroneous notions which are more or less prevalent. We will commence by a very specious error put forth by Mr. Henry Thornton, an able man, a banker, and one of the authors of the Bullion Report. We have thought it more convenient to give the full extract in the subsequent section on the Mechanism of Banking, but we will cite one sentence here. He says "Paper constitutes, it is true, an article on the credit side of the books of some men, but it forms an exactly equal item on the debit side of the books of others. It constitutes, on the whole, neither a debit nor a credit." So another eminent banker, M. Henri Cernuschi, says ' balance sheet of every individual contains three accounts: existing goods, Credits and Debts. But if we collected into one all the balance sheets of every one in the world, the debts and the credits mutually neutralize each other, and there remains but a single account; existing goods. "The totality of goods, therefore, form the general inventory. There is the first matter of exchange. The debts and credits are subsidiary matters. Debts and credits are reciprocally transmitted, as goods are transmitted; but however great or small they may be, and through whatever hands they pass, credits for 1 An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. p. 20. This work is now very scarce. In a copy we bought there is a M.S. note, "Many copies of this work were destroyed by the author, who endeavoured to suppress it."-Thorpe. 2 Mécanique de l'échange, p. 1. some, debts for others, they add nothing to, they take away nothing from the general inventory. "The increase or the diminution of this general inventory can never take place except from the increase or diminution of the quantity of actually existing goods." The argument of Thornton and M. Cernuschi is simply thisSuppose A to have £100 in money, and a three months' bill of £50 on B as well. Suppose B also to have £100, having accepted the Bill for £50 at three months as well. £50. Then A's property would be stated thus, £100 + £50. B's property would be stated thus, £100 Now the argument of these writers is that the + £50 and the - £50 balance each other, the result is 0, which according to them is the same thing as saying that these quantities do not exist at all. This view may perhaps at first sight seem plausible, but a very little reflection will shew that it is erroneous. Suppose a landlord lets a farm to a tenant who agrees to pay him a yearly rent. The tenant is under the obligation to pay his rent year by year, which is just as if he had accepted a series of bills payable every 12 months. Now the right to receive these rents is an actually existing right in the landlord, it is his property, which he may sell or transfer to any one else. It is plus to him, and an addition to his other property. The tenant is bound to pay this rent. He is, therefore, exactly in the same position as the merchant who has accepted a bill, and therefore this rent is minus to him just as the bill is to the merchant. is quite clear that if the property of a merchant who has accepted a bill for £50 is stated, thus, £100-£50. It the property of a farmer who is bound to pay rent must be stated thus, Property-Rent. But no one would ever say that because a farmer has agreed to pay rent a year hence, that that is any diminution of his balance at his bankers, or to be subtracted from the present amount of his property. It is quite clear that the future rents stipulated to be paid are meant to be paid out of future profits which are yet to be produced. It is just the same with a merchant who has accepted a bill |