On Spooner and Repayment

Proposition 6. All credit should be based upon what a man has, and not upon what he has not. A debt should be a lien only upon the property that a man has before and when the debt becomes due; and not upon his earnings after the debt is due. If, therefore, a man be able to pay a debt when it becomes due, he should pay it in full; if unable to pay it in full, he should pay to the extent of his ability; and that payment should be the end of that transaction. [18] The debt should be no lien upon his future acquisitions.

...

Under the operation of this principle, nearly all debts would be settled at once on their becoming due; and be then settled finally and forever. The creditor would then know what he had got, and would have no occasion to spend any further time, thought, or money, in harassing the debtor by attempts to get more. And the debtor, on his part, would know that he was a free man; and would at once engage in the best employment he could find, without being liable to be disturbed or obstructed by his former creditor, in the prosecution of it. Thus creditor and debtor would be likely thenceforth to be more useful, both to themselves and society, under this arrangement, than under the opposite one, which makes the creditor the enemy of the debtor, and incites him to an expensive, cruel, perpetual, destructive and generally profitless war upon him, his family, and his and their industry.

It may be supposed by some, that credit would not be given, if the legal obligation of debts were limited in this manner. But men would as lief [sic] give credit on this principle, as on any other, if they were to understand, when the contract was made, that such was its legal effect; and if they were also to be at liberty to make their own bargains in regard to the rate of interest—for they would then charge [19] an additional interest sufficient to cover the additional risk, if any, that they might suppose to result from this principle. And it would be far better for debtors to pay a slight additional interest, and have the benefit of this principle, than to make their contracts under all the liabilities of the opposite one. The payment of a slight additional interest would be equivalent to paying a slight premium for being insured against the calamity of an arrearage of debt and perpetual poverty, in case of any miscalculation or misfortune on their part.--Lysander Spooner (1846) Poverty: Its Illegal Causes and Legal Cure, 

Spooner is not much read outside libertarian and anarchist circles.+ This is a shame because he is not just an excellent writer, who was an early abolitionist* and advocate of jury nullification, but  he also shows how Lockean principles mixed with straightforward political economy, can generate fairly radical and egalitarian conclusions. If he is to be faulted at all is that -- not unlike many radical reformers -- he is very clear about the downside risks of the status quo, but unable to see what could possibly go wrong with his proposed alternatives. Okay, let's turn to the issue at hand.

Financial debt is often presented as simply a promise to repay a loan with interest. Unsurprisingly, creditors often insist that all debts must be repaid: they appeal to the obligation to keep one’s promises. Especially in Protestant-influenced cultures, this stance has historical roots in law and cultural norms. For example, during the recent financial crisis, German and Dutch politicians often appealed – inconsistently given the bailouts of local banks -- to some such norm to argue against bailouts and debt-forgiveness. (They have been roundly and correctly castigated for this in the case of Greece, although even the worst proposals to Greece included conditions that de facto recognized there would be no full repayment.)

However, modern debt instruments are not simply grounded in the promise to repay.  For, in economic theory and practice, riskier loans attract (ceteris paribus) higher interest rates in order to compensate the creditor for the risk of default. Higher interest rates make it, in turn, likelier that some debtors default. This is why banks, analysts, and regulators (etc.) treat loan-books in terms of portfolios in which risks are spread. And, so they assume some default. Even so, the legal protection offered to creditors is insensitive to the riskiness of the loan. This seems unfair. I had not realized that my intuition was anticipated by Spooner.

In a legal regime where creditors can always expect full repayment on riskier loans with higher interest, they effectively are rewarded twice over: once on the higher than average interest that they receive and once more for securing the partiality and full force of the state (which acts as a kind of credit insurance) to their cause. It also facilitates irresponsible behavior on the part of the creditor, who can get away with performing less due diligence. Spooner argues that demanding full repayment also encourages more reckless behavior by a debtor who foresees only ruin from full repayment.

There is, of course, a risk of moral hazard and encouragement of fraud if one need not repay a debt in full (with interest). But as Spooner notes, this is no different from existing ordinary credit practice and the courts could evaluate competing claims. Spooner's proposal is offered in the midst of other radical proposals (against usury laws, and in favor of free banking), but does not rely on them morally or practically. Rather, they relay on the idea that credit-debtor relationships have to be jointly beneficial not just in intent, but also in consequence. (I return to this before long.) While there have been many changes in personal bankruptcy since Spooner wrote, the full impact of his ideas on the morality of debt have not been fully felt yet.

 

+I am grateful to matt zwolinski for introducing me to him

*A firm supporter of John Brown, he also became a critic of (Republican) attempts to save the union by force. Not unlike his fellow abolitionist, New Englander, Thoreau, there is a sense of abhorrence at the fact that the price of victory in the civil war means a strengthened national state.

Comments

[Dan Kervick]

“It may be supposed by some, that credit would not be given, if the legal obligation of debts were limited in this manner. But men would as lief [sic] give credit on this principle, as on any other, if they were to understand, when the contract was made, that such was its legal effect.”

Well, certainly, if debtors were only liable up to the extent of their wealth at the time the debt is due, some loans would still be made, but the amounts creditors would be willing to lend would shrink drastically, an issue Spooner is rather absurdly avoiding in this passage, no? Applied to our contemporary world, say goodbye to most home mortgages, as well as most student loans and a major proportion of consumer lending as well. Most people in the US have negligible amounts of personal wealth.

But this is a policy choice to be made. If we want to live in a world in which people are able to reallocate estimated future income to present purchases - which might include investments in their own “human capital” - we have to take the bad consequences of that choice along with the good.

[Matt]

I read the first thing he's saying to be that you could never borrow more money than what you have as collateral. Is that right? That doesn't seem like a very good idea to me. (It certainly would have made my own life much worse many times.) I suppose it's one of those "common sense" ideas that really don't stand up to any pressure, unless I'm misreading it. I guess I also don't see how modern bankruptcy protection (or perhaps a better version of it)isn't a massively better idea than what's offered here. It looks like someone struggling for a solution, but not coming close to a good one. (It also looks like more of a practical problem than a deeply moral one, but that, too, seems like a confusion on Spooner's part.)

[Eric Schliesser]

Your interpretation is a reasonable one, Matt. But I don't think it's Spooner's intent to disallow debts based on judgments of "character" and possibility without further collateral. Rather, the point is that even when there is collateral, no more can be taken from a debtor when it's time to repay than it.

[Eric Schliesser]

Dan,
See my response to Matt. Moreover, he thinks that the interest rate would increase for those with less collateral or fewer prospects.

[ajkreider]

Spooner seems to be operating under the idea that the principle and interest on the debt are due in total at the maturation point. But most personal debt today is paid in installments. A couple of points.

A sizable chunk of debt in rich countries today is for things like homes and cars. And if one defaults on these, it is not the case that the lender can retrieve the full value of the loan. They can only repossess the car or house - sometimes at a loss for the lender. Higher interest rates loans paid back in installments allows for the lender to get more of their money back sooner, which will be more of a concern for loans of greater risk.

Another thing higher interest rate installment loans allow for is multiple loans with different maturity dates - which seems unlikely with Spooner's suggestion. Suppose I take out a loan that matures in 10 years for $100K. On Spooner's proposal, I am on the hook for what I have, up to that amount plus interest, at the maturity date. But suppose another lender recognizes this, and offers me the same loan that matures the day before the first loan. I have in effect made the value of the original loan worthless. What higher interest rate installment loans allow for is for existing debt to be factored in to one's ability to pay a new debt.

[Eric Schliesser]

I don't think Spooner is committed to the idea that interest is only due or delayed until when the principle has to be repaid.

And, yes, Spooner thinks that if you are willing to extend credit you must be willing to suffer a loss, say, because underlying collateral declines in value (and the ability to repay is limited).

Finally, Spooner's proposals are all designed to limit the stacking of consumer/individual debt (in the way you describe--this is becoming increasing problem). The first creditor's rights cannot be displaced by later creditors--and, in his scheme, there is no incentive for a debtor to stack debts.