The Principles of Political Economy
by John Stuart Mill

Book 5

Chapter 9

The Same Subject Continued

    1. Having spoken thus far of the effects produced by the
excellences or defects of the general system of the law, I shall
now touch upon those resulting from the special character of
parts of it. As a selection must be made, I shall confine myself
to a few leading topics. The portions of the civil law of a
country which are of most importance economically (next to those
which determine the status of the labourer, as slave, serf, or
free), are those relating to the two subjects of Inheritance and
Contract. Of the laws relating to contract, none are more
important economically, than the laws of partnership, and those
of insolvency. It happens that on all these three points, there
is just ground for condemning some of the provisions of the
English law. 
    With regard to Inheritance, I have, in an early chapter,
considered the general principles of the subject, and suggested
what appear to me to be, putting all prejudices apart, the best
dispositions which the law could adopt. Freedom of bequest as the
general rule, but limited by two things: first, that if there are
descendants, who, being unable to provide for themselves, would
become burthensome to the state, the equivalent of whatever the
state would accord to them should be reserved from the property
for their benefit: and secondly, that no one person should be
permitted to acquire, by inheritance, more than the amount of a
moderate independence. In case of intestacy, the whole property
to escheat to the state: which should be bound to make a just and
reasonable provision for descendants, that is, such a provision
as the parent or ancestor ought to have made, their
circumstances, capacities, and mode of bringing up being
considered. 
    The laws of inheritance, however, have probably several
phases of improvement to go through, before ideas so far removed
from present modes of thinking will be taken into serious
consideration: and as, among the recognized modes of determining
the succession to property, some must be better and others worse,
it is necessary to consider which of them deserves the
preference. As an intermediate course, therefore, I would
recommend the extension to all property, of the present English
law of inheritance affecting personal property (freedom of
bequest, and in case of intestacy, equal division): except that
no rights should be acknowledged in collaterals, and that the
property of those who have neither descendants nor ascendants,
and make no will, should escheat to the state. 
    The laws of existing nations deviate from these maims in two
opposite ways. In England, and in most of the countries where the
influence of feudality is still felt in the laws, one of the
objects aimed at in respect to land and other immoveable
property, is to keep it together in large masses: accordingly, in
cases of intestacy, it passes, generally speaking (for the local
custom of a few places is different), exclusively to the eldest
son. And though the rule of primogeniture is not binding on
testators, who in England have nominally the power of bequeathing
their property as they please, any proprietor may so exercise
this power as to deprive his immediate successor of it, by
entailing the property on one particular line of his descendants:
which, besides preventing it from passing by inheritance in any
other than the prescribed manner, is attended with the incidental
consequence of precluding it from being sold; since each
successive possessor, having only a life interest in the
property, cannot alienate it for a longer period than his own
life. In some other countries, such as France, the law, on the
contrary, compels division of inheritances; not only, in case of
intestacy, sharing the property, both real and personal, equally
among all the children, or (if there are no children) among all
relatives in the same degree of propinquity; but also not
recognizing any power of bequest, or recognizing it over only a
limited portion of the property, the remainder being subjected to
compulsory equal division. 
    Neither of these systems, I apprehend, was introduced, or is
perhaps maintained, in the countries where it exists, from any
general considerations of justice, or any foresight of economical
consequences, but chiefly from political motives; in the one case
to keep up large hereditary fortunes, and a landed aristocracy;
in the other, to break these down, and prevent their
resurrection. The first object, as an aim of national policy, I
conceive to be eminently undesirable: with regard to the second,
I have pointed out what seems to me a better mode of attaining
it. The merit, or demerit, however, of either purpose, belongs to
the general science of politics, not to the limited department of
that science which is here treated of. Each of the two systems is
a real and efficient instrument for the purpose intended by it;
but each, as it appears to me, achieves that purpose at the cost
of much mischief. 

    2. There are two arguments of an economical character, which
are urged in favour of primogeniture. One is, the stimulus
applied to the industry and ambition of younger children, by
leaving them to be the architects of their own fortunes. This
argument was put by Dr Johnson in a manner more forcible than
complimentary to an hereditary aristocracy, when he said, by way
of recommendation of primogeniture, that it 'makes but one fool
in a family'. It is curious that a defender of aristocratic
institutions should be the person to assert that to inherit such
a fortune as takes away any necessity for exertion, is generally
fatal to activity and strength of mind: in the present state of
education, however, the proposition, with some allowance for
exaggeration, may be admitted to be true. But whatever force
there is in the argument, counts in favour of limiting the
eldest, as well as all the other children, to a mere provision,
and dispensing with even the 'one fool' whom Dr Johnson was
willing to tolerate. If unearned riches are so pernicious to the
character, one does not see why, in order to withhold the poison
from the junior members of a family, there should be no way but
to unite all their separate potions, and administer them in the
largest possible dose to one selected victim. It cannot be
necessary to inflict this great evil on the eldest son, for want
of knowing what else to do with a large fortune. 
    Some writers, however, look upon the effect of primogeniture
in stimulating industry, as depending, not so much on the poverty
of the younger children, as on the contrast between that poverty
and the riches of the elder; thinking it indispensable to the
activity and energy of the hive, that there should be a huge
drone here and there, to impress the working bees with a due
sense of the advantages of honey. 'Their inferiority in point of
wealth', says Mr M'Culloch, speaking of the younger children,
'and their desire to escape from this lower station, and to
attain to the same level with their elder brothers, inspires them
with an energy and vigour they could not otherwise feel. But the
advantage of preserving large estates from being frittered down
by a scheme of equal division, is not limited to its influence
over the younger children of their owners. It raises universally
the standard of competence, and gives new force to the springs
which set industry in motion. The manner of living among the
great landlords is that in which every one is ambitious of being
able to indulge; and their habits of expense, though sometimes
injurious to themselves, act as powerful incentives to the
ingenuity and enterprise of the other classes, who never think
their fortunes sufficiently ample, unless they will enable them
to emulate the splendour of the richest landlords; so that the
custom of primogeniture seems to render all classes more
industrious, and to augment at the same time, the mass of wealth
and the scale of enjoyment.(1*)
    The portion of truth, I can hardly say contained in these
observations, but recalled by them, I apprehend to be, that a
state of complete equality of fortunes would not be favourable to
active exertion for the increase of wealth. Speaking of the mass,
it is as true of wealth as of most other distinctions -- of
talent, knowledge, virtue -- that those who already have, or
think they have, as much of it as their neighbours, will seldom
exert themselves to acquire more. But it is not therefore
necessary that society should provide a set of persons with large
fortunes, to fulfil the social duty of standing to be looked at,
with envy and admiration, by the aspiring poor. The fortunes
which people have acquired for themselves, answer the purpose
quite as well, indeed much better; since a person is more
powerfully stimulated by the example of somebody who has earned a
fortune, than by the mere sight of somebody who possesses one;
and the former is necessarily an example of prudence and
frugality as well as industry, while the latter much oftener sets
an example of profuse expense, which spreads, with pernicious
effect, to the very class on whom the sight of riches is supposed
to have so beneficial an influence, namely, those whose weakness
of mind, and taste for ostentation, makes 'the splendour of the
richest landlords' at. tract them with the most potent spell. In
America there are few or no hereditary fortunes; yet industrial
energy, and the ardour of accumulation, are not supposed to be
particularly backward in that part of the world. When a country
has once fairly entered into the industrial career, which is the
principal occupation of the modern, as war was that of the
ancient and medieval world, the desire of acquisition by industry
needs no factitious stimulus: the advantages naturally inherent
in riches, and the character they assume of a test by which
talent and success in life are habitually measured, are an ample
security for their being pursued with sufficient intensity and
zeal. As to the deeper consideration, that the diffusion of
wealth, and not its concentration, is desirable, and that the
more wholesome state of society is not that in which immense
fortunes are possessed by a few and coveted by all, but that in
which the greatest possible numbers possess and are contented
with a moderate competency, which all may hope to acquire; I
refer to it in this place, only to show, how widely separated, on
social questions, is the entire mode of thought of the defenders
of primogeniture, from that which is partially promulgated in the
present treatise. 
    The other economical argument in favour of primogeniture, has
special reference to landed property. It is contended that the
habit of dividing inheritances equally, or with an approach to
equality, among children, promotes the subdivision of land into
portions too small to admit of being cultivated in an
advantageous manner. This argument, eternally reproduced, has
again and again been refuted by English and Continental writers.
It proceeds on a supposition entirely at variance with that on
which all the theorems of political economy are grounded. It
assumes that mankind in general will habitually act in a manner
opposed to their immediate and obvious pecuniary interest. For
the division of the inheritance does not necessarily imply
division of the land; which may be held in common, as is not
unfrequently the case in France and Belgium; or may become the
property of one of the coheirs, being charged with the shares of
the others by way of mortgage; or they may sell it outright, and
divide the proceeds. When the division of the land would diminish
its productive power, it is the direct interest of the heirs to
adopt some one of these arrangements. Supposing, however, what
the argument assumes, that either from legal difficulties or from
their own stupidity and barbarism, they would not, if left to
themselves, obey the dictates of this obvious interest, but would
insist upon cutting up the land bodily into equal parcels, with
the effect of impoverishing themselves; this would be an
objection to a law such as exists in France, of compulsory
division, but can be no reason why testators should be
discouraged from exercising the right of bequest in general
conformity to the rule of equality, since it would always be in
their power to provide that the division of the inheritance
should take place without dividing the land itself. That the
attempts of the advocates of primogeniture to make out a case by
facts against the custom of equal division, are equally abortive,
has been shown in a former place. In all countries, or parts of
countries, in which the division of inheritances is accompanied
by small holdings, it is because small holdings are the general
system of the country, even on the estates of the great
proprietors. 
    Unless a strong case of social utility can be made out for
primogeniture, it stands sufficiently condemned by the general
principles of justice; being a broad distinction in the treatment
of one person and of another, grounded solely on an accident.
There is no need, therefore, to make out any case of economical
evil against primogeniture. Such a case, however, and a very
strong one, may be made. It is a natural effect of primogeniture
to make the landlords a needy class. The object of the
institution, or custom, is to keep the land together in large
masses, and this it commonly accomplishes; but the legal
proprietor of a large domain is not necessarily bona fide owner
of the whole income which it yields. It is usually charged, in
each generation, with provisions for the other children. It is
often charged still more heavily by the imprudent expenditure of
the proprietor. Great landowners are generally improvident in
their expenses; they live up to their incomes when at the
highest, and if any change of circumstances diminishes their
resources, some time elapses before they make up their minds to
retrench. Spendthrifts in other classes are ruined, and disappear
from society; but the spendthrift landlord usually holds fast to
his land, even when he has become a mere receiver of its rents
for the benefit of creditors. The same desire to keep up the
'splendour' of the family, which gives rise to the custom of
primogeniture, indisposes the owner to sell a part in order to
set free the remainder; their apparent are therefore habitually
greater than their real means, and they are under a perpetual
temptation to proportion their expenditure to the former rather
than to the latter. From such causes as these, in almost all
countries of great landowners, the majority of landed estates are
deeply mortgaged; and instead of having capital to spare for
improvements, it requires all the increased value of land, caused
by the rapid increase of the wealth and population of the
country, to preserve the class from being impoverished. 

    3. To avert this impoverishment, recourse was had to the
contrivance of entails, whereby the order of succession was
irrevocably fixed, and each holder, having only a life interest,
was unable to burthen his successor. The land thus passing, free
from debt, into the possession of the heir, the family could not
be ruined by the improvidence of its existing representative. The
economical evils arising from this disposition of property were
partly of the same kind, partly different, but on the whole
greater, than those arising from primogeniture alone. The
possessor could not now ruin his successors, but he could still
ruin himself: he was not at all more likely than in the former
case to have the means necessary for improving the property:
while, even if he had, he was still less likely to employ them
for that purpose, when the benefit was to accrue to a person whom
the entail made independent of him, while he had probably younger
children to provide for, in whose favour he could not now charge
the estate. While thus disabled from being himself an improver,
neither could he sell the estate to somebody who would; since
entail precludes alienation. In general he has even been unable
to grant leases beyond the term of his own life; 'for', says
Blackstone, 'if such leases had been valid, then, under cover of
long leases, the issue might have been virtually disinherited';
and it has been necessary in Great Britain to relax, by statute,
the rigour of entails, in order to allow either of long leases,
or of the execution of improvements at the expense of the estate.
It may be added that the heir of entail, being assured of
succeeding to the family property, however undeserving of it, and
being aware of this from his earliest years, has much more than
the ordinary chances of growing up idle, dissipated, and
profligate. 
    In England, the power of entail is more limited by law, than
in Scotland and in most other countries where it exists. A
landowner can settle his property upon any number of persons
successively who are living at the time, and upon one unborn
person, on whose attaining the age of twenty-one, the entail
expires, and the land becomes his absolute property. An estate
may in this manner be transmitted through a son, or a son and
grandson, living when the deed is executed, to an unborn child of
that grandson. It has been maintained that this power of entail
is not sufficiently extensive to do any mischief: in truth,
however, it is much larger than it seems. Entails very rarely
expire; the first heir of entail, when of age, joins with the
existing possessor in resettling the estate, so as to prolong the
entail for a further term. Large properties, therefore, are
rarely free for any considerable period, From the restraints of a
strict settlement; though the mischief is in one respect
mitigated, since in the renewal of the settlement for one more
generation, the estate is usually charged with a provision for
younger children. 
    In an economical point of view, the best system of landed
property is that in which land is most completely an object of
commerce; passing readily from hand to hand when a buyer can be
found to whom it is worth while to offer a greater sum for the
land, than the value of the income drawn from it by its existing
possessor. This of course is not meant of ornamental property,
which is a source of expense, not profit; but only of land
employed for industrial uses, and held for the sake of the income
which it affords. Whatever facilitates the sale of land, tends to
make it a more productive instrument of the community at large;
whatever prevents or restricts its sale, subtracts from its
usefulness. Now, not only has entail this effect, but primo.
geniture also. The desire to keep land together in large masses,
from other motives than that of promoting its productiveness,
often prevents changes and alienations which would increase its
efficiency as an instrument. 

    4. On the other hand, a law which, like the French, restricts
the power of bequest to a narrow compass, and compels the equal
division of the whole or the greater part of the property among
the children, seems to me, though on different grounds, also very
seriously objectionable. The only reason for recognizing in the
children any claim at all to more than a provision, sufficient to
launch them in life, and enable them to find a livelihood, is
grounded on the expressed or presumed wish of the parent; whose
claim to dispose of what is actually his own, cannot be set aside
by any pretensions of others to receive what is not theirs. To
control the rightful owner's liberty of gift, by creating in the
children a legal right superior to it, is to postpone a real
claim to an imaginary one. To this great and paramount objection
to the law, numerous secondary ones may be added. Desirable as it
is that the parent should treat the children with impartiality,
and not make an eldest son or a favourite, impartial division is
not alway synonymous with equal division. Some of the children
may, without fault of their own, be less capable than others of
providing for themselves: some may, by other means than their own
exertions, be already provided for: and impartiality may
therefore require that the rule observed should not be one of
equality, but of compensation. Even when equality is the object,
there are sometimes better means of attaining it, than the
inflexible rules by which law must necessarily proceed. If one of
the coheirs, being of a quarrelsome or litigious disposition,
stands upon his utmost rights, the law cannot make equitable
adjustments; it cannot apportion the property as seems best for
the collect.ive interest of all concerned; if there are several
parcels of land, and the heirs cannot agree about their value,
the law cannot give a parcel to each, but every separate parcel
must be either put up to sale or divided: if there is a
residence, or a park or pleasure.ground, which would be
destroyed, as such, by subdivision, it must be sold, perhaps at a
great sacrifice both of money and of feeling. But what the law
could not do, the parent could. By means of the liberty of be.
quest, all these points might be determined according to reason
and the general interest of the persons concerned; and the spirit
of the principle of equal division might be the better observed,
because the testator was emancipated from its letter. Finally, it
would not then be necessary, as under the compulsory system it
is, that the law should interfere authoritatively in the concerns
of individuals, not only on the occurrence of a death, but
throughout life, in order to guard against the attempts of
parents to frustrate the legal claims of their heirs, under
colour of gifts and other alienations inter vivos. 
    In conclusion; all owners of property should, I conceive,
have power to dispose by will of every part of it, but not to
determine the person who should succeed to it after the death of
all who were living when the will was made. Under what
restrictions it should be allowable to bequeath property to one
person for life, with remainder to another person already in
existence, is a question belonging to general legislation, not to
political economy. Such settlements would be no greater hindrance
to alienation than any case of joint ownership, since the consent
of persons actually in existence is all that would be necessary
for any new arrangement respecting the property. 

    5. From the subject of Inheritance I now pass to that of
Contracts, and among these, to the important subject of the Laws
of Partnership. How much of good or evil depends upon these laws,
and how important it is that they should be the best possible, is
evident to all who recognize in the extension of the cooperative
principle in the larger sense of the term, the great economical
necessity of modern industry. The progress of the productive arts
requiring that many sorts of industrial occupation should be
carried on by larger and larger capitals, the productive power of
industry must suffer by whatever impedes the formation of large
capitals through the aggregation of smaller ones. Capitals of the
requisite magnitude belonging to single owners, do not, in most
countries, exist in the needful abundance, and would be still
less numerous if the laws favoured the diffusion instead of the
concentration of property: while it is most undesirable that all
those improved processes, and those means of efficiency and
economy in production, which depend on the possession of large
funds, should be monopolies in the hands of a few rich
individuals, through the difficulties experienced by persons of
moderate or small means in associating their capital. Finally, I
must repeat my conviction, that the industrial economy which
divides society absolutely into two portions, the payers of wages
and the receivers of them, the first counted by thousands and the
last by millions, is neither fit for, nor capable of, indefinite
duration: and the possibility of changing this system for one of
combination without dependence, and unity of interest instead of
organized hostility, depends altogether upon the future
developments of the Partnership principle. 
    Yet there is scarcely any country whose laws do not throw
great, and in most cases, intentional obstacles in the way of the
formation of any numerous partnership. In England it is already a
serious discouragement, that differences among partners are,
practically speaking, only capable of adjudication by the Court
of Chancery: which is often worse than placing such questions out
of the pale of all law; since any one of the disputant parties,
who is either dishonest or litigious, can involve the others at
his pleasure in the expense, trouble, and anxiety, which are the
unavoidable accompaniments of a Chancery suit, without their
having the power of freeing themselves from the infliction even
by breaking up the association.(2*) Besides this, it required,
until lately, a separate Act of the legislature before any
joint-stock association could legally constitute itself, and be
empowered to act as one body. By a statute passed a few years
ago, this necessity is done away; but the statute in question is
described by competent authorities as a 'mass of confusion,' of
which they say that there 'never was such an infliction' on
persons entering into partnership.(3*) When a number of persons,
whether few or many, freely desire to unite their funds for a
common undertaking, not asking any peculiar privilege, nor the
power to dispossess any one of property, the law can have no good
reason for throwing difficulties in the way of the realization of
the project. On compliance with a few simple conditions of
publicity, any body of persons ought to have the power of
constituting themselves into a joint-stock company, or societe en
nom collectif, without asking leave either of any public officer
or of parliament. As an association of many partners must
practically be under the management of a few, every facility
ought to be afforded to the body for exercising the necessary
control and check over those few, whether they be themselves
members of the association, or merely its hired servants: and in
this point the English system is still at a lamentable distance
from the standard of perfection. 

    6. Whatever facilities, however, English law might give to
associations formed on the principles of ordinary partnership,
there is one sort of joint-stock association which until the year
1855 it absolutely disallowed, and which could only be called
into existence by a special act either of the legislature or of
the Crown. I mean, associations with limited liability. 
    Associations with limited liability are of two kinds: in one,
the liability of all the partners is limited, in the other that
of some of them only. The first is the societe anonyme of the
French law, which in England had until lately no other name than
that of 'chartered company': meaning thereby a joint-stock
company whose shareholders, by a charter from the Crown or a
special enactment of the legislature, stood exempted from any
liability for the debts of the concern, beyond the amount of
their subscriptions. The other species of limited partnership is
that known to the French law under the name of commandite; of
this, which in England is still unrecognized and illegal, I shall
speak presently. 
    If a number of persons chose to associate for carrying on any
operation of commerce or industry, agreeing among themselves and
announcing to those with whom they deal that the members of the
association do not undertake to be responsible beyond the amount
of the subscribed capital; is there any reason that the law
should raise objections to this proceeding, and should impose on
them the unlimited responsibility which they disclaim? For whose
sake? Not for that of the partners themselves; for it is they
whom the limitation of responsibility benefits and protects. It
must therefore be for the sake of third parties; namely, those
who may have transactions with the association, and to whom it
may run in debt beyond what the subscribed capital suffices to
pay. But nobody is obliged to deal with the association: still
less is any one obliged to give it unlimited credit. The class of
persons with whom such associations have dealings are in general
perfectly capable of taking care of themselves, and there seems
no reason that the law should be more careful of their interests
than they will themselves be; provided no false representation is
held out, and they are aware from the first what they have to
trust to. The law is warranted in requiring from all joint-stock
associations with limited responsibility, not only that the
amount of capital on which they profess to carry on business
should either be actually paid up or security given for it (if,
indeed, with complete publicity, such a requirement would be
necessary), but also that such accounts should be kept,
accessible to individuals, and if needful, published to the
world, as shall render it possible to ascertain at any time the
existing state of the company's affairs, and to learn whether the
capital which is the sole security for the engagements into which
they enter, still subsists unimpaired: the fidelity of such
accounts being guarded by sufficient penalties. When the law has
thus afforded to individuals all practicable means of knowing the
circumstances which ought to enter into their prudential
calculations in dealing with the company, there seems no more
need for interfering with individual judgment in this sort of
transactions, than in any other part of the private business of
life. 
    The reason usually urged for such interference is, that the
managers of an association with limited responsibility, not
risking their whole fortunes in the event of loss, while in case
of gain they might profit largely, are not sufficiently
interested in exercising due circumspection, and are under the
temptation of exposing the funds of the association to improper
hazards. It is, however, well ascertained that associations with
unlimited responsibility, if they have rich shareholders, can
obtain, even when known to be reckless in their transactions,
improper credit to an extent far exceeding what would be given to
companies equally ill-conducted whose creditors had only the
subscribed capital to rely on.(4*) To whichever side the balance
of evil inclines, it is a consideration of more importance to the
shareholders themselves than to third parties; since, with proper
securities for publicity, the capital of an association with
limited liability could not be engaged in hazards beyond those
ordinarily incident to the business it carries on, without the
facts being known, and becoming the subject of comments by which
the credit of the body would be likely to be affected in quite as
great a degree as the circumstances would justify. If, under
securities for publicity, it were found in practice that
companies, formed on the principle of unlimited responsibility,
were more skilfully and more cautiously managed, companies with
limited liability would be unable to maintain an equal
competition with them; and would therefore rarely be formed,
unless when such limitation was the only condition on which the
necessary amount of capital could be raised: and in that case it
would be very unreasonable to say that their formation ought to
be prevented. It may further be remarked, that although, with
equality of capital, a company of limited liability offers a
somewhat less security to those who deal with it, than one in
which every shareholder is responsible with his whole fortune,
yet even the weaker of these two securities is in some respects
stronger than that which an individual capitalist can afford. In
the case of an individual, there is such security as can be
founded on his unlimited liability, but not that derived from
publicity of transactions, or from a known and large amount of
paid-up capital. This topic is well treated in an able paper by
M. Coquelin, published in the Revue des Deux Mondes for July
1843.(5*)
    'While third parties who trade with individuals,' says this
writer, 'scarcely ever know, except by approximation, and even
that most vague and uncertain, what is the amount of capital
responsible for the performance of contracts made with them,
those who trade with a societe anonyme can obtain full
information if they seek it, and perform their operations with a
feeling of confidence that cannot exist in the other case. Again,
nothing is easier than for an individual trader to conceal the
extent of his engagements, as no one can know it certainly but
himself. Even his confidential clerk may be ignorant of it, as
the loans he finds himself compelled to make may not all be of a
character to require that they be entered in his day-book. It is
a secret confined to himself; one which transpires rarely, and
always slowly; one which is unveiled only when the catastrophe
has occurred. On the contrary, the societe anonyme neither can
nor ought to borrow, without the fact becoming known to all the
world directors, clerks, shareholders, and the public. Its
operations partake in some respects, of the nature of those of
governments. The light of day penetrates in every direction, and
there can be no secrets from those who seek for information. Thus
all is fixed, recorded, known, of the capital and debts in the
case of the societe anonyme, while all is uncertain and unknown
in the case of the individual trader. Which of the two, we would
ask the reader, presents the most favourable aspect, or the
surest guarantee, to the view of those who trade with them?
    'Again, availing himself of the obscurity in which his
affairs are shrouded, and which he desires to increase, the
private trader is enabled, so long as his business appears
prosperous, to produce impressions in regard to his means far
exceeding the reality, and thus to establish a credit not
justified by those means. When losses occur, and he sees himself
threatened with bankruptcy, the world is still ignorant of his
condition, and he finds himself enabled to contract debts far
beyond the possibility of payment. The fatal day arrives, and the
creditors find a debt much greater than had been anticipated,
while the means of payment are as much less. Even this is not
all. The same obscurity which has served him so well thus far,
when desiring to magnify his capital and increase his credit, now
affords him the opportunity of placing a part of that capital
beyond the reach of his creditors. It becomes diminished, if not
annihilated. It hides itself, and not even legal remedies, nor
the activity of creditors, can bring it forth from the dark
corners in which it is placed.... Our readers can readily
determine for themselves if practices of this kind are equally
easy in the case of the societe anonyme. We do not doubt that
such things are possible, but we think that they will agree with
us that from its nature, its organization, and the necessary
publicity that attends all its actions, the liability to such
occurrences is very greatly diminished.'
    The laws of most countries, England included, have erred in a
twofold manner with regard to joint-stock companies. While they
have been most unreasonably jealous of allowing such associations
to exist, especially with limited responsibility, they have
generally neglected the enforcement of publicity; the best
security to the public against any danger which might arise from
this description of partnerships; and a security quite as much
required in the case of those associations of the kind in
question, which, by an exception from their general practice,
they suffered to exist. Even in the instance of the Bank of
England, which holds a monopoly from the legislature, and has had
partial control over a matter of so much public interest as the
state of the circulating medium, it is only within these few
years that any publicity has been enforced; and the publicity was
at first of an extremely incomplete character, though now, for
most practical purposes, probably at length sufficient. 

    7. The other kind of limited partnership which demands our
attention, is that in which the managing partner or partners are
responsible with their whole fortunes for the engagements of the
concern, but have others associated with them who contribute only
definite sums, and are not liable for anything beyond, though
they participate in the profits according to any rule which may
be agreed on. This is called partnership en commandite: and the
partners with limited liability (to whom, by the French law, all
interference in the management of the concern is interdicted) are
known by the name commanditaires. Such partnerships are not
allowed by English law: in all private partnerships, whoever
shares in the profits is liable for the debts, to as plenary an
extent as the managing partner. 
    For such prohibition no satisfactory defence has ever, so far
as I am aware, been made. Even the insufficient reason given
against limiting the responsibility of shareholders in a
joint-stock company does not apply here; there being no
diminution of the motives to circumspect management, since all
who take any part in the direction of the concern are liable with
their whole fortunes. To third parties again; the security is
improved by the existence of a commanditei since the amount
subscribed by commanditaires is all of it available to creditors,
the commanditaires losing their whole investment before any
creditor can lose anything; while, if instead of becoming
partners to that amount, they had lent the sum at an interest
equal to the profit they derived from it, they would have shared
with the other creditors in the residue of the estate,
diminishing pro rata the dividend obtained by all. While the
practice of commandite thus conduces to the interest of
creditors, it is often highly desirable for the contracting
parties themselves. The managers are enabled to obtain the aid of
a much greater amount of capital than they could borrow on their
own security; and persons are induced to aid useful undertakings,
by embarking limited portions of capital in them, when they would
not, and often could not prudently, have risked their whole
fortunes on the chances of the enterprise.
    It may perhaps be thought that where due facilities are
afforded to joint-stock companies, commandite partnerships are
not required. But there are classes of cases to which the
commandite principle must always be better adapted than the
joint-stock principle. 'Suppose,' says M. Coquelin, 'an inventor
seeking for a capital to carry his invention into practice. To
obtain the aid of capitalists, he must offer them a share of the
anticipated benefit; they must associate themselves with him in
the chances of its success. In such a case, which of the forms
would he select? Not partnership, certainly'; for various
reasons, and especially the extreme difficulty of finding a
partner with capital, willing to risk his whole fortune on the
success of the invention.(6*) 'Neither would he select the
societe anonyme,' or any other form of joint-stock company, 'in
which he might be superseded as manager. He would stand, in such
an association, on no better footing than any other shareholder,
and he might be lost in the crowd; whereas, the association
existing, as it were, by and for him, the management would appear
to belong to him as a matter of right. Cases occur in which a
merchant or a manufacturer, without being precisely an inventor,
has undeniable claims to the management of an undertaking, from
the possession of qualities peculiarly calculated to promote its
success. So great, indeed,' continues M. Coquelin, 'is the
necessity, in many cases, for the limited partnership, that it is
difficult to conceive how we could dispense with or replace it':
and in reference to his own country he is probably in the right. 
    Where there is so great a readiness as in England, on the
part of the public, to form joint-stock associations, even
without the encouragement of a limitation of responsibility;
commandite partnership, though its prohibition is in principle
quite indefensible, cannot be deemed to be, in a merely
economical point of view, of the imperative necessity which M.
Coquelin ascribes to it. Yet the inconveniences are not small,
which arise indirectly from provisions of law by which every one
who shares in the profits of a concern is subject to the full
liabilities of an unlimited partnership. It is impossible to say
how many or what useful modes of combination are rendered
impracticable by such a state of the law. It is sufficient for
its condemnation that, unless in some way relaxed, it is
inconsistent with the payment of wages in part by a percentage on
profits; in other words, the association of the operatives as
virtual partners with the capitalist.(7*) 
    It is, above all, with reference to the improvement and
elevation of the working classes that complete freedom in the
conditions of partnership is indispensable. Combinations such as
the associations of workpeople, described in a former chapter,
are the most powerful means of effecting the social emancipation
of the labourers through their own moral qualities. Nor is the
liberty of association important solely for its examples of
success, but fully as much so for the sake of attempts which
would not succeed; but by their failure would give instruction
more impressive than can be afforded by anything short of actual
experience. Every theory of social improvement, the worth of
which is capable of being brought to an experimental test, should
be permitted, and even encouraged, to submit itself to that test.
From such experiments the active portion of the working classes
would derive lessons, which they would be slow to learn from the
teaching of persons supposed to have interests and prejudices
adverse to their good; would obtain the means of correcting, at
no cost to society, whatever is now erroneous in their notions of
the means of establishing their independence; and of discovering
the conditions, moral, intellectual, and industrial, which are
indispensably necessary for effecting without injustice, or for
effecting at all, the social regeneration they aspire to.(8*)
    The French law of partnership is superior to the English in
permitting commandite; and superior, in having no such
unmanageable instrument as the Court of Chancery, all cases
arising from commercial transactions being adjudicated in a
comparatively cheap and expeditious manner by a tribunal of
merchants. In other respects the French system was, and I
believe, still is, far worse than the English. A joint-stock
company with limited responsibility cannot be formed without the
express authorization of the department of government called the
Conseil d'Etat, a body of administrators, generally entire
strangers to industrial transactions, who have no interest in
promoting enterprises, and are apt to think that the purpose of
their institution is to restrain them; whose consent cannot in
any case be obtained without an amount of time and labour which
is a very serious hindrance to the commencement of an enterprise,
while the extreme uncertainty of obtaining that consent at all is
a great discouragement to capitalists who would be willing to
subscribe. In regard to joint-stock companies without limitation
of responsibility, which in England exist in such numbers and are
formed with such facility, these associations cannot, in France,
exist at all; for, in cases of unlimited partnership, the French
law does not permit the division of the capital into transferable
shares. 
    The best existing laws of partnership appear to be those of
the New England States. According to Mr Carey,(9*) 'nowhere is
association so little trammelled by regulations as in New
England; the consequence of which is, that it is carried to a
greater extent there, and particularly in Massachusetts and Rhode
Island, than in any other part of the world. In these states, the
soil is covered with compagnies anonymes -- chartered companies
-- for almost every conceivable purpose. Every town is a
corporation for the management of its roads, bridges, and
schools: which are, therefore, under the direct control of those
who pay for them, and are consequently well managed. Academies
and churches, lyceums and libraries, saving-fund societies, and
trust companies, exist in numbers proportioned to the wants of
the people, and all are corporations. Every district has its
local bank, of a size to suit its wants, the stock of which is
owned by the small capitalists of the neighbourhood, and managed
by themselves; the consequence of which is, that in no part of
the world is the system of banking so perfect -- so little liable
to vibration in the amount of loans -- the necessary effect of
which is, that in none is the value of property so little
affected by changes in the amount or value of the currency
resulting from the movements of their own banking institutions.
In the two states to which we have particularly referred, they
are almost two hundred in number. Massachusetts, alone, offers to
our view fifty-three insurance offices, of various forms,
scattered through the state, and all incorporated. Factories are
incorporated, and are owned in shares; and every one that has any
part in the management of their concerns, from the purchase of
the raw material to the sale of the manufactured article, is a
part owner; while every one employed in them has a prospect of
becoming one, by the use of prudence, exertion, and economy.
Charitable associations exist in large numbers, and all are
incorporated. Fishing vessels are owned in shares by those who
navigate them; and the sailors of a whaling ship depend in a
great degree, if not altogether, upon the success of the voyage
for their compensation. Every master of a vessel trading in the
Southern Ocean is a part owner, and the interest he possesses is
a strong inducement to exertion and economy, by aid of which the
people of New England are rapidly driving out the competition of
other nations for the trade of that part of the world. Wherever
settled, they exhibit the same tendency to combination of action.
In New York they are the chief owners of the lines of packet
ships, which are divided into shares, owned by the shipbuilders,
the merchants, the master, and the mates; which last generally
acquire the means of becoming themselves masters, and to this is
due their great success. The system is the most perfectly
democratic of any in the world. It affords to every labourer,
every sailor, every operative, male or female, the prospect of
advancement; and its results are precisely such as we should have
reason to expect. In no part of the world are talent, industry,
and prudence, so certain to be largely rewarded.'
    The cases of insolvency and fraud on the part of chartered
companies in America, which have caused so much loss and so much
scandal in Europe, did not occur in the part of the Union to
which this extract refers, but in other States, in which the
right of association is much more fettered by legal restrictions,
and in which, accordingly, joint-stock associations are not
comparable in number or variety to those of New England. Mr Carey
adds, 'A careful examination of the systems of the several
states, can scarcely, we think, fail to convince the reader of
the advantage resulting from permitting men to determine among
themselves the terms upon which they will associate, and allowing
the associations that may be formed to contract with the public
as to the terms upon which they will trade together, whether of
the limited or unlimited liability of the partners.' This
principle has been adopted as the foundation of all recent
English legislation on the subject 

    8. I proceed to the subject of Insolvency Laws.
    Good laws on this subject are important, first and
principally, on the score of public morals; which are on no point
more under the influence of the law, for good and evil, than in a
matter belonging so pre-eminently to the province of law as the
preservation of pecuniary integrity. But the subject is also, in
a merely economical point of view, of great importance. First,
because the economical well-being of a people, and of mankind,
depends in an especial manner upon their being able to trust each
other's engagements. Secondly, because one of the risks, or
expenses, of industrial operations is the risk or expense of what
are commonly called bad debts, and every saving which can be
effected in this liability is a diminution of cost of production;
by dispensing with an item of outlay which in no way conduces to
the desired end, and which must be paid for either by the
consumer of the commodity, or from the general profits of
capital, according as the burthen is peculiar or general. 
    The laws and practice of nations on this subject have almost
always been in extremes. The ancient laws of most countries were
all severity to the debtor. They invested the creditor with a
power of coercion, more or less tyrannical, which he might use
against his insolvent debtor, either to extort the surrender of
hidden property, or to obtain satisfaction of a vindictive
character, which might console him for the non.payment of the
debt. This arbitrary power has extended, in some countries, to
making the insolvent debtor serve the creditor as his slave: in
which plan there were at least some grains of common sense, since
it might possibly be regarded as a scheme for making him work out
the debt by his labour. In England the coercion assumed the
milder form of ordinary imprisonment. The one and the other were
the barbarous expedients of a rude age, repugnant to justice, as
well as to humanity. Unfortunately the reform of them, like that
of the criminal law generally, has been taken in hand as an
affair of humanity only, not of justice: and the modish humanity
of the present time, which is essentially a thing of one idea,
has in this as in other cases, gone into a violent reaction
against the ancient severity, and might almost be supposed to see
in the fact of having lost or squandered other people's property,
a peculiar title to indulgence. Everything in the law which
attached disagreeable consequences to that fact, was gradually
relaxed, or entirely got rid of: until the demoralizing effects
of this laxity became so evident as to determine, by more recent
legislation, a salutary though very insufficient movement in the
reverse direction. 
    The indulgence of the laws to those who have made themselves
unable to pay their just debts, is usually defended, on the plea
that the sole object of the law should be, in case of insolvency,
not to coerce the person of the debtor, but to get at his
property, and distribute it fairly among the creditors. Assuming
that this is and ought to be the sole object, the mitigation of
the law was in the first instance carried so far as to sacrifice
that object. Imprisonment at the discretion of a creditor was
really a powerful engine for extracting from the debtor any
property which he had concealed or otherwise made away with; and
it remains to be shown by experience whether, in depriving
creditors of this instrument, the law, even as last amended, has
furnished them with a sufficient equivalent. But the doctrine,
that the law has done all that ought to be expected from it, when
it has put the creditors in possession of the property of an
insolvent, is in itself a totally inadmissible piece of spurious
humanity. It is the business of law to prevent wrong-doing, and
not simply to patch up the consequences of it when it has been
committed. The law is bound to take care that insolvency shall
not be a good pecuniary speculation; that men shall not have the
privilege of hazarding other people's property without their
knowledge or consent, taking the profits of the enterprise if it
is successful, and if it fails throwing the loss upon the
rightful owners; and that they shall not find it answer to make
themselves unable to pay their just debts, by spending the money
of their creditors in personal indulgence. It is admitted that
what is technically called fraudulent bankruptcy, the false
pretence of inability to pay, is, when detected, properly subject
to punishment. But does it follow that insolvency is not the
consequence of misconduct because the inability to pay may be
real? If a man has been a spendthrift, or a gambler, with
property on which his creditors had a prior claim, shall he pass
scot-free because the mischief is consummated and the money gone?
Is there any very material difference in point of morality
between this conduct, and those other kinds of dishonesty which
go by the names of fraud and embezzlement? 
    Such cases are not a minority, but a large majority among
insolvencies. The statistics of bankruptcy prove the fact. 'By
far the greater part of all insolvencies arise from notorious
misconduct; the proceedings of the Insolvent Debtors Court and of
the Bankruptcy Court will prove it. Excessive and unjustifiable
overtrading, or most absurd speculation in commodities, merely
because the poor speculator "thought they would get up", but why
he thought so he cannot tell; speculation in hops, in tea, in
silk, in corn -- things with which he is altogether unacquainted;
wild and absurd investments in foreign funds, or in joint stocks;
these are among the most innocent causes of bankruptcy.'(10*) The
experienced and intelligent writer from whom I quote,
corroborates his assertion by the testimony of several of the
official assignees of the Bankruptcy Court. One of them says, 'As
far as I can collect from the books and documents furnished by
the bankrupts, it seems to me that' in the whole number of cases
which occurred during a given time in the court to which he was
attached, 'fourteen have been ruined by speculations in thing
with which they were unacquainted; three by neglecting
bookkeeping; ten by trading beyond their capital and means, and
the consequent loss and expense of accommodation bills;
forty-nine by expending more than they could reasonably hope
their profits would be, though their business yielded a fair
return; none by any general distress, or the falling off of any
particular branch of trade.' Another of these officers says that,
during a period of eighteen months, 'fifty-two cases of
bankruptcy have come under my care. It is my opinion that
thirty-two of these have arisen from an imprudent expenditure,
and five partly from that cause, and partly from a pressure on
the business in which the bankrupts were employed. Fifteen I
attribute to improvident speculations, combined in many instances
with an extravagant mode of life.'
    To these citations the author adds the following statements
from his personal means of knowledge. 'Many insolvencies are
produced by tradesmen's indolence: they keep no books, or at
least imperfect ones, which they never balance; they never take
stock; they employ servants, if their trade be extensive, whom
they are too indolent even to supervise, and then become
insolvent. It is not too much to say, that one-half of all the
persons engaged in trade, even in London, never take stock at
all: they go on year after year without knowing how their affairs
stand, and at last, like the child at school, they find to their
surprise, but one halfpenny left in their pocket. I will venture
to say that not one-fourth of all the persons in the provinces,
either manufacturers, tradesmen, or farmers, ever take stock; nor
in fact does one-half of them ever keep account-books, deserving
any other name than memorandum books. I know sufficient of the
concerns of five hundred small tradesmen in the provinces, to be
enabled to say, that not one.fifth of them ever take stock, or
keep even the most ordinary accounts. I am prepared to say of
such tradesmen, from carefully prepared tables, giving every
advantage where there has been any doubt as to the causes of
their insolvency, that where nine happen from extravagance or
dishonesty, one' at most 'may be referred to misfortune
alone.'(11*)
    Is it rational to expect among the trading classes any high
sense of justice, honour, or integrity, if the law enables men
who act in this manner to shuffle off the consequences of their
misconduct upon those who have been so unfortunate as to trust
them; and practically proclaims that it looks upon insolvency
thus produced, as a 'misfortune', not an offence? 
    It is, of course, not denied, that insolvencies do arise from
causes beyond the control of the debtor, and that, in many more
cases, his culpability is not of a high order; and the law ought
to make a distinction in favour of such cases, but not without a
searching investigation; nor should the case ever be let go
without having ascertained, in the most complete manner
practicable, not the fact of insolvency, but the cause of it. To
have been trusted with money or money's worth, and to have lost
or spent it, is prima facie evidence of something wrong: and it
is not for the creditor to prove, which he cannot do in one case
out of ten, that there has been criminality, but for the debtor
to rebut the presumption, by laying open the whole state of
affairs, and showing either that there has been no misconduct, or
that the misconduct has been of an excusable kind. If he fail in
this, he ought never to be dismissed without a punishment
proportioned to the degree of blame which seems justly imputable
to him; which punishment, however, might be shortened or
mitigated in proportion as he appeared likely to exert himself in
repairing the injury done. 
    It is a common argument with those who approve a relaxed
system of insolvency laws, that credit, except in the great
operations of commerce, is an evil; and that to deprive creditors
of legal redress is a judicious means of preventing credit from
being given. That which is given by retail dealers to
unproductive consumers is, no doubt, to the excess to which it is
carried, a considerably evil. This, however, is only true of
large, and especially of long, credits; for there is credit
whenever goods are not paid for before they quit the shop, or, at
least, the custody of the seller; and there would be much
inconvenience in putting an end to this sort of credit. But a
large proportion of the debts on which insolvency laws take
effect, are those due by small tradesmen to the dealers who
supply them: and on no class of debts does the demoralization
occasioned by a bad state of the law, operate more perniciously.
These are commercial Credits, which no one wishes to see
curtailed; their existence is of great importance to the general
industry of the country, and to numbers of honest, well.conducted
persons of small means, to whom it would be a great injury that
they should be prevented from obtaining the accommodation they
need, and would not abuse, through the omission of the law to
provide just remedies against dishonest or reckless borrowers. 
    But though it were granted that retail transactions, on any
footing but that of ready money payment, are an evil, and their
entire suppression a fit subject for legislation to aim at; a
worse mode of compassing that object could scarcely be invented,
than to permit those who have been trusted by others to cheat and
rob them with impunity. The law does not generally select the
vices of mankind as the appropriate instrument for inflicting
chastisement on the comparatively innocent. When it seeks to
discourage any course of action, it does so by applying
inducements of its own, not by outlawing those who act in the
manner it deems objectionable, and letting loose the predatory
instincts of the worthless part of mankind to feed upon them. If
a man has committed murder the law condemns him to death; but it
does not promise impunity to anybody who may kill him for the
sake of taking his purse. The offence of believing another's
word, even rashly, is not so heinous that for the sake of
discouraging it the spectacle should be brought home to every
door, of triumphant rascality, with the law on its side, mocking
the victims it has made. This pestilent example has been very
widely exhibited since the relaxation of the insolvency laws. It
is idle to expect that, even by absolutely depriving creditors of
all legal redress, the kind of credit which is considered
objectionable would really be very much checked. Rogues and
swindlers are still an exception among mankind, and people will
go on trusting each other's promises. Large dealers, in abundant
business, would refuse credit, as many of them already do: but in
the eager competition of a great town, or the dependent position
of a village shopkeeper, what can be expected from the tradesman
to whom a single customer is of importance, the beginner,
perhaps, who is striving to get into business? He will take the
risk, even if it were still greater; he is ruined if he cannot
sell his goods, and he can be ruined if he is defrauded. Nor does
it avail to say, that he ought to make proper inquiries, and
ascertain the character of those to whom he supplies good on
trust. In some of the most flagrant cases of profligate debtors
which have come before the Bankruptcy Court, the swindler had
been able to give, and had given, excellent references. 

NOTES:

1. Principles of Political Economy, ed. 1843, p. 264. There is
much more to the same effect in the more recent treatise by the
same author, 'On the Succession to Property vacant by Death'.

2. Mr Cecil Fane, the Commissioner of the Bankruptcy Court, in
his evidence before the Committee on the Law of Partnership, says
"I remember a short time ago reading a written statement by two
eminent solicitors, who said that they had known many partnership
accounts go into Chancery, but that they never knew one come
out... Very few of the persons who would be disposed to engage in
partnerships of this kind' (co-operative associations of working
men) 'have any idea of the truth, namely that the decision of
questions arising amongst partners is really impracticable. 
    'Do they not know that one partner may rob the other without
any possibility of his obtaining redress? -- The fact is so; but
whether they know it or not, I cannot undertake to say.'
    This flagrant injustice is, in Mr Fane's opinion, wholly
attributable to the defects of the tribunal. 'My opinion is, that
if there is one thing more easy than another, it is the
settlement of partnership questions, and for the simple reason,
that everything which is done in a partnership is entered mode of
in the books; the evidence therefore is at hand; if therefore a
rational mode of proceeding were once adopted, the difficulty
would altogether vanish.' -- Minutes of Evidence annexed to the
Report of the Select Committee on the Law of Partnership (1851),
pp. 85-7. 

3. Report, ut supra, p. 167. 

4. See the Report already referred to, pp. 145-158. 

5. The quotation is from a translation published by Mr H.C.
Carey, in an American periodical, Hunt's Merchant's Magazine, for
May and June 1845. 

6. 'There has been a great deal of commiseration professed,' says
Mr Duncan, solicitor, 'towards the poor inventor; he has been
oppressed by the high cost of patents; but his chief oppression
has been the partnership law, which prevents his getting any one
to help him to develop his invention. He is a poor man, and
therefore cannot give security to a creditor; no one will lend
him money; the rate of interest offered, however high it may be,
is not an attraction. But if by the alteration of the law he
could allow capitalists to take an interest with him and share
the profits, while the risk should be confined to the capital
they embarked, there is very little doubt at all that he would
frequently get assistance from capitalists; whereas at the
present moment, with the law as it stands, he is completely
destroyed, and his invention is useless to him; he struggles
month after month; he applies again and again to the capitalist
without avail. I know it practically in two or three cases oF
patented inventions; especially one where parties with capital
were desirous oF entering into an undertaking of great moment in
Liverpool, but five or six different gentlemen were deterred from
doing so, all feeling the strongest objection to what each one
called the cursed partnership law.' Report, p. 155.
    Mr Fane says, 'in the course of my professional life, as a
Commissioner of the Court of Bankruptcy, I have learned that the
most unfortunate man in the world is an inventor. The difficulty
which an inventor finds in getting at capital involves him in all
sorts of embarrassments, and he ultimately is for the most part a
ruined man, and somebody else gets possession of his invention.'
ib. p. 82. 

7. It has been found possible to effect this through the Limited
Liability Act, by erecting the capitalist and his workpeople into
a Limited Company; as proposed by Messrs Briggs.

8. By an Act of the year 1852, called the industrial and
Provident Societies Act, for which the nation is indebted to the
public-spirited exertions of Mr Slaney, industrial associations
of working people are admitted to the statutory privileges of
Friendly Societies. This not only exempts them from the
formalities applicable to joint-stock companies, but provides for
the settlement of disputes among the partners without recourse to
the Court of Chancery. There are still some defects in the
provisions of this Act, which hamper the proceedings of the
Societies in several respects; as is pointed out in the Almanack
of the Rochdale Equitable Pioneers for 1861. 

9. In a note appended to his translation of M. Coquelin's paper. 

10. From a volume published in 1845, entitled Credit the Life of
Commerce, by Mr J. H. Elliot.

11. pp. 50-1.