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Molinari’s 9th Evening

Gustave de Molinari, Les Soirées de la rue Saint-Lazare: entretiens sur les lois économiques et défense de la propriété (Evenings on Saint Lazarus Street: Discussions on Economic Laws and the Defence of Property) (1849)

[A Draft of Liberty Fund's new translation]
[May 17, 2012]

[9th Evening]

[SUMMARY: Continuation of attacks made on internal property. – Right of association. – Legislation which in France regulates commercial companies. – The public limited company and its advantages. – On banking monopolies. – Functions of banks. – Results of government intervention in the affairs of banks. – High cost of discounts. – Legal bankruptcies. – Other privileged or regulated industries. – The bakery trade. – The meat trade. – Printing. – Lawyers. – Stock and investment brokers. – Prostitution. – Funeral directors. – Cemeteries. – The Bar. – Medicine. – The Professoriat. – Article 3 of the law of July 7-9, 1833.]

Molinari_1849LesSoireesRSL-TP300.jpg MolinariObitB-300
Title Page of the original 1849 edition
The photo of Molinari (1819-1912) which accompanied his obituary in the Journal des économistes

Introduction

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Molinari's book Les Soirées de la rue Saint-Lazare; entretiens sur les lois économiques et défense de la propriété. (Paris: Guillaumin, 1849) is being translated by Liberty Fund. The translation was done by Dennis O'Keeffe and it is being edited by David M. Hart. The critical apparatus of foontnotes and glossary entries, and introduction are being provided by David Hart. We welcome feedback from Molinari scholars to ensure that this edition will be a great one and thus befitting Molinari in his centennial year.

This page has a detailed Table of Contents and links to other Chapters.

 

The Ninth Evening

[p. 239]

SUMMARY: Continuation of attacks made on internal property. – Right of association. – Legislation which in France regulates commercial companies. – The public limited company and its advantages. – On banking monopolies. – Functions of banks. – Results of government intervention in the affairs of banks. – High cost of discounts. – Legal bankruptcies. – Other privileged or regulated industries. – The bakery trade. – The meat trade. – Printing. – Lawyers. – Stock and investment brokers. – Prostitution. – Funeral directors. – Cemeteries. – The Bar. – Medicine. – The Professoriat. – Article 3 of the law of July 7-9, 1833.

THE SOCIALIST.

I thought until the present time that the Revolution of 1789 had completely enfranchised labor and that we lived under a régime of absolute laissez-faire.[308] I am beginning to cast my mistake aside.

THE ECONOMIST.

Not only has labor not been completely enfranchised, but in certain branches of production retrogression has gone beyond that of the privileged companies.[309] Instead of once privileged industries being made free they have been made State monopolies. Now, State monopoly signals the infancy of any society. In place [p240] of the institutions of the Middle Ages, what was substituted? The institutions of Ancient Egypt. This did not, however, stop the retention of industries enjoying special privileges. The fact is that our economic system is a strange jumble of monopolies, industries enjoying privileges and free companies.

THE CONSERVATIVE.

Then where are there these industries with special privileges? Is it not the case, according to M. Thiers, that all the privileges were abolished that famous night of the fourth of August?[310]

THE ECONOMIST.

Yes, according to M. Thiers; not according to the true account.[311] There remains in France a host of privileged or controlled industries. We have to put banks at the top of the list. Then come baking, the meat trades, printing, theaters, insurance, the buying and selling of State property, medicine, the Bar, Ministerial offices, prostitution and a number of others which I forget.[312]

Let us add again that Association,[313] that indispensable vehicle of industrial progress, is not freely available in France.

THE CONSERVATIVE.

Ah! This time I have caught you in glaring inaccuracy. I know my Constitution well.

Article 8. Citizens have the right of association, to assemble peacefully without arms, to petition and to make public their opinions by means of the press or otherwise.

The exercise of these rights has no limit other than the rights and liberty of others and the safety of the public.

[p241]

So you see that a right of association obtains in France. Perhaps there is only too much of it?

THE ECONOMIST.

Political associations are free in France… more or less. It is not the same with business associations. As you know, the number of kinds of association is almost boundless. Well, French law recognizes only three kinds of association: partnerships; limited partnerships; and public limited companies.[314] Save for a few irritating formalities, the first two are free; the third, however, which is the most developed, the one most useful to large-scale industrial enterprise, is subject to prior authorization.[315]

THE CONSERVATIVE.

All right! People want authorization and, after a careful examination, the government grants it, if there are grounds.

THE ECONOMIST.

Yes, if there are grounds. And you forgot to say that authorization frequently arrives only six months, a year or two years afterwards, that is to say too late. You know enough about industry to know that a delay of six months is enough to cause most enterprises to drop the project.

Socialists complain of the slowness with which business associations are establishing themselves in France. They do not see that the commercial code has put things in good order by narrowly confining the right of association. A singular blindness.

Partnership does not involve large accumulations of capital, especially in a country where wealth holdings are notably sub-divided; limited partnerships as they are at present regulated, put the share-holders [p242] at the mercy of a business manager and you know what that results in….The public limited company alone involves huge agglomerations of capital built out of small holdings and the best possible management.

THE CONSERVATIVE.

That is not proven.

THE ECONOMIST.

Take a good look at the individual industrial entrepreneur and what do you find? A capitalist and a manager of labor, a man who receives a return for his capital and a payment for his work. Take a look at the public limited company and what will you find? Workers who supply labor and receive a wage, capitalists who supply capital and receive interest. What is combined in the case of an industrial entrepreneur is separated in the limited company. This separation is one step further, taken in the direction of the division of labor; it constitutes progress.

I will give you the proof of this by pointing out to you some of the inherent advantages of the limited company.

Preeminent among these is the ability to set up production projects on an immense scale. This means always being able to match the strength of the effort to that of the obstacles, and thereby cut the costs of production to a minimum.

The second advantage of the limited company lies in the superior administration which it allows. A freelance entrepreneur has responsibility only to himself. The director of a limited company is responsible to his shareholders. He must give them an account of his activities and justify them. This requirement, inherent in the very nature of the limited company, entails [p243] on the part of the director, the need to act with intelligence and probity. If he did not manage the business intelligently, the shareholders would not fail to remove him. If he engaged in shady operations, would he really dare to give a public account of them to a meeting of the shareholders? Well, with the system of accountancy in use today, he would not be able to keep secret any of his activities.

Where limited companies are the rule, industrial enterprises would necessarily be managed with intelligence and probity. Industry would necessarily be led by the most capable and upright men.

Industrial fraud would disappear under this regime. In which industries is fraud most common? In those which operate in small, segmented and precarious units. When one cannot count on the future, or construct a large-scale commercial existence for oneself, one is inclined to seek by all possible means, to make a lot of money quickly. The quality of products is corrupted. Merchandise known to be poor is sold as good quality stuff. When one faces on the other hand an indefinite time period ahead and one is deploying very considerable capital, one is concerned to acquire a good reputation in order to keep one’s clients. So good products are supplied along with reliable business dealings.

In enterprises organized on a large scale and in a stable way there is more probity than in weak and precarious firms. Compare the various branches of production in France, England, [p244] Holland etc and you will be convinced of the absolute correctness of this fact. Falsification and fraud do not have their origin in industrial liberty; they arise on the contrary from obstacles to the free and full development of industry.

The third advantage of public limited companies and perhaps the most important, is to make the situation of each enterprise a matter of public knowledge; it is to make clear on a daily basis the prosperity or the weak performance of various branches of production.

THE CONSERVATIVE.

How is that so?

THE ECONOMIST.

When a firm manages to sell its products at a price which breaks even, we say it is at par; when production costs are not covered it is working at a loss; when production costs are more than covered , it is in profit. In a system with individualized production it is extremely difficult to grasp these different industrial situations accurately and to know when one can fruitfully put one’s capital in a firm and when one cannot. You often risk further building up an already very lively branch of production, while others are waiting in vain for funds and labor. These mistakes cease to be possible in the case of limited companies. Each company having an interest in making public what it is doing in order to facilitate trading, day by day information is available as to the situation of different branches of production. By taking a look at Stock Exchange prices, we know which firms are in loss and which in [p245] profit, and which are breaking even. One knows exactly which one to invest in to achieve the greatest profit. If for example the share price in blast furnaces is better than that in mineral exploitation one would put one’s capital into the iron industry rather than zinc production. Thus iron production will be increased. What will the result be? That the market price of iron will fall until it matches exactly the costs of production: the price of shares falling in these circumstances to par, people will stop moving towards this branch of production for fear of no longer covering their costs.

Thanks to this publicly available information on industrial share prices, production is self regulating, in a way so to speak ‘mathematical’. We are no longer exposed to producing too much of one thing and too little of another, to allowing certain prices to inflate and others to fall wildly. An endless cause of disturbance disappears from the arena of production.

Notice then the singularly democratic character of limited companies. The private entrepreneur is the irresponsible and absolute monarch; the limited company governed by shareholders and run by a director and board of responsible people, is the republic. Having been monarchical, production becomes republican. That shows to you, once again, that monarchy is on the way out.

THE SOCIALIST.

Society splits up into a multitude of little republics, each one having a special and economically limited purpose. Now that is a very remarkable change. [p246]

THE ECONOMIST.

And one not sufficiently remarked on. Unfortunately the barbaric legislation of the imperial code presents an obstacle to this salutary transformation. ….

THE CONSERVATIVE.

Is not the transformation of which you speak, however, naturally confined to certain industries? Would there not be serious diadvantages if the limited liability régime were to be applied to agriculture, for example?

THE ECONOMIST.

What disadvantages? The limited company would solve the twin problem of the fragmentation of landed property[316] and the economic concentration of farms. The limited company would permit agriculture to be carried out on an immense scale and render farms stable, by dividing landed property up indefinitely into shares of fr.1000, fr.500, and smaller shares of fr.100, fr.50 and fr.10. From the point of view of the economics of farming, this change would have an incalculable impact. What disadvantages do you see in it? Would not a limited company have an interest in cultivating the soil as well as possible? If it farmed it badly, would it not it not be forced to close down, after its capital was used up, and leave its position, either to other firms or isolated individuals? If you see nothing amiss with an area of land in the possession, in perpetuity, of a single individual, why should you think it amiss for a collection of individuals to possess it? Does not the [p247] single owner carry on as well as the association of proprietors?[317]

THE SOCIALIST.

This is quite right. In truth, I cannot imagine why the limited company has not yet been applied to the cultivation of the soil.

THE ECONOMIST.

Why is agriculture, in France, and elsewhere, the most burdened of economic sectors? Why is the limited company so tightly regulated?

THE CONSERVATIVE.

Perhaps the previous authorization demanded for the limited company is now pointless; but do you not admit that government could scarcely give up the right to exert rigorous supervision over that sort of organization?

THE ECONOMIST.

It would be much more to the point to monitor small private firms. Limited companies publish full accounts of their activities, operating quite openly, while small private firms keep what they are doing secret…..

Do you know what effect government supervision has on limited companies? It serves first of all to diminish the vigilance of shareholders, who trust quite happily in government supervision. It also serves to hamper the development of productive operations. Finally it serves to secure comfortable jobs for the government’s minions.

THE SOCIALIST.

That closes the matter!

[p248]

THE ECONOMIST.

The imperial commissioners, whether of the Crown or the Nation, with jurisdiction over insurance companies, railway companies and the like, are no more nor less pointless, no more or less excessive, than those well known councilors, examiners of pigs’ tongues,[318] inspectors of woodpiles etc., who flourished under the ancien régime.

I think that should enlighten you on how much credit should be given to the obstacles placed in the way of the right of association.[319]

[p249] Besides these restrictions which apply in a general way to industrial and commercial enterprises, there are others which apply particularly to those which devote themselves to commercial banking.

Our public banks are still subject to the regime of privilege.

[p250]

THE CONSERVATIVE.

I must warn you that on this score I will wage all out war on you. I am not a supporter of free banking[320] and I never will be. I cannot understand how the government can allow anyone who wishes, to print paper money or to issue assignats,[321] and toss them freely into circulation. Moreover, [p251] what this marvelous utopia leads to has already been shown.

THE ECONOMIST.

Where?

THE CONSERVATIVE.

In the United States and you know what it led to there.[322] A general bankruptcy. God preserve us from a [p252] like calamity. I would rather have a bit less freedom and a bit more security.

THE ECONOMIST.

The only trouble is that your information is quite false. The banks are free in the [p253] United States, only in the case of six individual States: Rhode Island, Massachusetts, Connecticut, New Hampshire, Maine and Vermont. And it is precisely these six states and only they which stayed clear of the general bankruptcy.

If you are skeptical I would beg you to read the remarkable works of MM. Carey[323] and Coquelin on the banks.[324] [325] In them you will learn that the free banks of America caused fewer disasters than the protected banks of Europe.

THE CONSERVATIVE.

And yet I have often heard the complete opposite asserted.

THE ECONOMIST.

By people about as well informed as you. By minds imbued with all the prejudices of the regulatory regime, who never fail, on an a priori basis and when they have no information, to lay disorders in production at the door of laissez-faire.[326]

THE CONSERVATIVE.

Agree at least that it was highly imprudent to authorize the first issuing of paper as money.

THE ECONOMIST.

You do not really believe that. Does not everyone, do not you and I, sir, create paper money? Do we not give our creditors promises every day to pay on such and such a date, such [p254] and such a sum of specie? We would give them tickets payable in other merchandise, in products made by ourselves, for example, if they were happy to accept tickets issued on such a basis. Unfortunately, they do not want to. Why? Because they can always exchange cash money against all sorts of merchandise, whilst they cannot easily make satisfactory use of other goods. What would my boot-maker do, for example, with a newspaper article which I undertook to deliver to him three months later, in exchange for a pair of boots? It is probably true, in the end, that a journalist like myself does pay for his boots with newspaper articles; but this does require after all that I succeed in placing them. If I gave my boot-maker a promise payable in leader-articles for Paris newspapers instead of money, it would be up to him to place these leaders and Lord knows whether he would manage it. So he will not accept anything payable except in good, old-fashioned money.

What do these long-term bills do? For the most part, they serve the process of circulation. If they did not exist, we would have to replace them with sums in gold or silver. As an individual who issues these dated bills, I am creating money therefore. I have the right to do this; if it seems sound to me, I can make millions of promises to pay; I can fill a room with them. The question, however, is not making them, but of exchanging them against things of real value, of value incorporated in the form of specie, clothes, boots, furniture etc. Well, will it be possible for me to exchange my promissory notes indefinitely against these valuable things? It will not. [p255] I will barely be able to exchange them for more than the sum which people assume me to be in a position to pay. Before accepting my notes, people will enquire as to my situation, my financial resources, my intelligence, my probity and my health. After all that, they will decide whether my promise to pay is worthwhile or not. There are smart people who contrive to have their notes valued at more than they will in fact realize; on the other hand there are incompetents who will not manage to place theirs for as much as they are worth. In general, however, each person’s credit matches his abilities.

THE SOCIALIST.

Evaluation is very difficult for all that.

THE ECONOMIST.

Evaluation also demands the most delicate tact. Bankers acquire and develop this tact through long experience. Those who do not have it go on to ruin themselves. If the government dared to run a bank in the way it runs so many things, like a train or an omnibus, you would soon see capital exiting from any banker who ran his business in this fashion….Fortunately, the government has not yet become the universal banker. So it is still hardly possible to pump more promises into circulation than one can reimburse.

What difference is there between a bank’s promise to pay and an individual’s? None, save that the one is payable on demand and the other is payable at the contracted due date. Both must be equally supported by real assets before they are accepted. Your promise will be accepted only on the assumption that it will be paid on the due date; we accept bank notes only [p256] if we are sure we can convert them into specie.

When banknotes are not reimbursable in specie, that is to say in the form of a good, one easily exchangeable, easily put into circulation, when they are reimbursable in land or houses, for example, they undergo a depreciation precisely matching the difficulty of exchanging land or houses against a good more readily circulated; when they are reimbursable neither on demand nor by some specified due date, in anything possessing real value – specie, houses, land, furniture etc., – they lose all value, and cease to be anything other than scraps of paper.

THE CONSERVATIVE.

How does it happen then that people accept banknotes instead of demanding coin?

THE ECONOMIST.

Because such means of circulation are more convenient, more easy to move and less costly, that is all.

THE CONSERVATIVE.

Once again, though, is not the government right to stop the banks issuing more bills than they can reimburse?

THE ECONOMIST.

By that reckoning it should intervene to stop individuals from subscribing more promissory notes than they can finance. Why does it not do so? First because it is impossible and next because it is pointless. I have no need to show you that it is impossible; I will, however, show you in two words why it is pointless. Your [p257] individual issues are not restricted by your will alone; they are limited by what everyone else wants. When people judge that you have gone beyond your ability to pay, they refuse to accept your promises of payment, and your note issue finds itself blocked. Certainly, no government could judge as accurately as the interested parties themselves, precisely when an individual has exceeded his financial means. The intervention of the government to regulate credit at the individual level, even supposing it were possible, would therefore be absolutely pointless.

What is true for individuals who issue long-term paper, is no less true for banks who issue notes in the form of cash on demand.

What is the function of banks, or at least, their main function? It is to discount bills. It is to exchange valuable assets realizable in the long-term, for assets whose value is already realized or immediately realizable, such that they can be put into circulation immediately. It is the buying of long-term paper with cash or short-term bills, easily cashable.[327]

If the bank pays for these long-term bills, not in specie but in banknotes, the outcome is different, I agree. The bank might, tempted [p258] by this profitable discounting, to issue a sizeable flow of paper without worrying whether it will always and in all circumstances, able to redeem them.

Just as the bank does not accept promissory notes from individuals, however, when it does not have sufficient trust in their being reimbursed, likewise individuals will not accept the bank’s notes when they lack the certainty of being able to realize them, always and in all circumstances.

If individuals judge that the bank is not able to redeem its notes, they do not take them or they demand coin. Or perhaps they do take them, but subject to discounting against risk of non-payment.

How can the public know whether a bank is in a position to honor its banknotes, cash on demand?

Since the public does not accept them, unless it is fully reassured in this respect, the banks have an interest in making their situation public. Therefore they publish weekly or monthly accounts of their dealings.

In these accounts members of the public can see how much financial paper has been issued and the total reserves both in specie and in portfolio form. They can compare assets with liabilities and hence judge whether they can continue or not to accept the bank’s issues, and at what price.

THE CONSERVATIVE.

What if the bank presents a false account of the situation?

THE ECONOMIST.

In a word, it engages in fraud. In this case the [259] the holders of its notes can have or ought to have the power to effect the punishment of this bank’s directors, as fraudsters, as cheats, dealing falsely in money, and get themselves reimbursed by the responsible shareholders to the full extent of the thefts committed against them.

Moreover, the public, guided by its interest, is prudent enough to deal only with the banks whose directors and administrators offer sufficiently firm moral guarantees.

You can see then that if the government can dispense with intervening to prevent individuals from duping the banks, it can also equally well manage without intervening to prevent the banks from cheating individuals.

Experience here is fully in accordance with theory. The free banks of Massachusetts, Vermont etc., have caused far fewer disasters than the chartered banks of Europe.

If attempts by the government to regulate the issuing of banknotes are pointless, what purpose does its intervention serve?

I will explain to you in a few words what purpose it serves.

The intervention of the government in questions of credit, in the end always comes down to this: it is to grant a bank the exclusive right to issue banknotes payable on demand. When a bank possesses this right, it can easily take on any competition. Other financial companies, being restricted to specie and fixed-term paper, are in no condition to compete with the privileged bank:

In the first place, because banknotes payable on demand [260] are superior as instruments of circulation, to specie or dated bills.

In the second place, because paper money can be made available more cheaply than specie. The reason is this.

It is true enough that banknotes must always be based on real and exchangeable value. The bank must always be in a position to convert them into specie. Here is what happens, however: when a bank is on stable foundations, it is not as a rule faced with more than a small number of bills to cash. It can therefore dispense with the need for a constant stock of specie equal to the sum of its notes in circulation. It has to be in a position to procure this sum, against the possibility of its being demanded the redemption of all its outstanding notes: all that takes is its having access to a sufficient volume of valuable paper easily realizable in specie. Nothing more could be asked of it. These assets, however, made up of shares in railway and insurance companies and various revenue-yielding properties, add up to less than the specie value of the sum total of interest payments owed.

The less specie the bank is forced to keep in reserve and the cheaper it can sell its bank notes, the lower it can hold down the discount rate. Ordinarily the banks do not hold in cash more than a third of the value of their total note issue.[328] The level of the cash reserve however is entirely subordinate to circumstance. The bank has to maintain larger or smaller holdings of specie, according to whether monetary crises[329] [p261] are more or less to be feared, and also according to the ease or difficulty with which the other assets constituting its reserves, can be realized in specie. The question is a delicate one. The bank is moreover, soon alerted by the reduction of its discounts, that it is below the necessary limit. For the public is not slow to buy fewer bills when it has less confidence in their reimbursement.

A bank specifically authorized to issue bank notes, therefore has a double advantage: it can supply a perfectly tuned instrument of circulation to those demanding money, and this perfectly tuned instrument it can also supply more cheaply than its rival banks can supply the cruder instrument, namely cash. In this way it easily shrugs off all competition.

If the privileged bank however succeeds in remaining sole arbiter of the market, will it not lay down the law to the purchasers of money? Will it not force them to pay more for its bank notes than they would pay under free competition?

THE SOCIALIST.

That would seem inevitable to me. It is the law of monopoly.

THE ECONOMIST.

The shareholders of the privileged bank will benefit from the difference. In truth they will be obliged to admit some co-sharers to the profits of their fruitful monopoly.

In a large country, when a bank obtains the exclusive right to issue banknotes, all competition succumbing in the face of this privilege, it will find its clientele increasing enormously. Soon it [p262] is no longer large enough for the latter; it abandons some of its work and therefore some of its profits to a few chosen bankers. It now accepts only bills bearing three good signatures and surrounds its discounting with formalities and difficulties, such that those demanding its paper are obliged to have recourse to intermediary bankers with accounts open at the bank.[330]

This simplifies quite considerably the work of the privileged bank. Rather than having to deal with several thousand individuals, it now need handle only a small number of bankers, whose operations it can easily oversee, although these privileged intermediaries naturally see to it that their services get paid. Thanks to their small numbers they can lay down the law with regard to the public. Thus they constitute, under the wing of the privileged bank, a veritable financial aristocracy, which shares with the bank the advantages of that privileged status.

 These advantages, however, cannot go beyond certain limits. When the bank and its intermediaries push the discount rate too high, the public turn to bankers who do their discounting in cash or deposit accounts. Unfortunately, the murderous competition of the privileged establishment, by greatly reducing the number [p263] of the former and permitting them only a precarious existence, leads to a permanently excessive discount price.

In times of crisis the privileges some banks have, lead to even more deadly results.

I have said to you that a bank must always have been in a position to reimburse its notes in specie. What happens when it is not in a position to reimburse them all? What happens is that the notes which cannot be reimbursed depreciate. Who has to bear this depreciation? Those with these notes in their position. They undergo virtual bankruptcy.

Well, do you know the purpose of these privileges? They effectively authorize the banks to get away, legally, with bankruptcy of this sort. The Bank of France and the Bank of England have on numerous occasions been authorized to suspend payments in specie. The Bank of England was a notable case of this in 1797. Those holding notes lost up to 30% during the course of the suspension. The Bank of France was given the same leeway in 1848.[331]

THE CONSERVATIVE.

Its notes lost very little value.

THE ECONOMIST.

The magnitude of the loss does not affect the matter. If they had lost only a thousandth per cent in one day, those bearing this loss would still have been victims of a bankruptcy.

If these two Banks had not been privileged, their shareholders would have been obliged to pay the notes presented for redemption, down to the very last sou. In that eventuality those holding notes would have lost nothing; on the other hand the shareholders would have had to impose [p264] on themselves sufficient sacrifice to fulfill all the Bank’s obligations. This, though, is a risk that all capitalists whose funds are engaged in production run…with the exception, however, of those who enjoy the privilege of imposing their losses on the public.

THE SOCIALIST.

Now I see why in 1848 the shareholders of the Bank of France were paid their customary dividends, while all other industrial and commercial companies were in deficit.

THE ECONOMIST.

Let us be fair, however. The shareholders of privileged banks deserved far less condemnation than the governments which handed out these privileges. In France, as in England, the privileges dispensed by the Bank came at a heavy price. In exchange for this favor, the government took possession of all or part of the capital spent by the shareholders. Not being in a position to repay them in times of crisis, it extricated itself from this embarrassment, by authorizing the Bank to suspend its payments in specie. Being unable to fulfill its engagements towards the Bank, it authorized the Bank to fall short in its undertakings to the public.[332]

[p265]

Formerly, when governments found themselves unable to pay their debts, they debased their coinage, adding copper or lead to it, or perhaps even reducing the weight of the coins. These days they go about it differently: they borrow large sums from those establishments exclusively authorized, by themselves, to issue paper currency. Deprived of its natural and requisite foundation, this money depreciates in times of crisis. The government then intervenes in order to make the public bear the weight of the depreciation.

What is the difference between these two procedures?

In a system of free competition, no such plundering arrangements would be possible.

In this regime, banks would have enough capital to fulfill their commitments, failing which the public would not accept their notes. In times of crisis, they alone would bear the natural losses of the contraction of circulation; they would not be permitted to offload it onto the public.

Furthermore, in this regime it would also mean that competition between the banks [p267] would promptly force down the rate of discount, now held at the highest level possible.

Finally, this system would generate, on a large and growing scale, banknotes of real value, rather than bad debt, such currency being distributed according to the needs of the public and no longer to suit the convenience of parties granted special privileges. Almost the entire circulation would be economically produced in paper form, rather than expensively in specie.

THE SOCIALIST.

I have to say that you have very much shaken my deepest beliefs. What? Can that finance feudalism[333] whose existence I attributed to free competition, really have sprung up as a result of monopoly? What? Do the high cost of discounting and the disastrous ups and downs in the circulation of our money supply result from privilege and not from liberty?

[p268]

THE ECONOMIST.

Precisely. You socialists are as wrong about the banks as you are about everything else. You thought the banks were subject to laisser-faire,[334] and you attributed to freedom, ills which have their origin in privilege. This has been the huge and deplorable error you have made about everything.

THE SOCIALIST.

This could well be so in fact.

THE ECONOMIST.

If we had enough time to take a look at all the other industries which either enjoy special privileges or are closely regulated, such as bakery, meat production, printing, the lawyers, brokerage, sale of public property, the Bar, medicine, prostitution etc., you would see that privilege and regulation have always delivered the same disastrous results economically: lowering of production and a change in its composition on the one hand, disorder and iniquitous distribution on the other.

Limits were put on the numbers of bakers in the principal areas of population. It became apparent, however, that this limitation put the people at the mercy of the bakers and so a maximum price was put on bread.[335] The wish was to correct one rule by imposing another. Was it successful? The manipulations which take place on a daily basis in the flour market, are evidence to the contrary. Speculators conspire with the bakers to create an artificial rise in the price of flour, the maximum is raised above the real price of the grain, and the authors of this immoral maneuvering pocket the difference.

[p269]

There are some towns in France where bakery has remained free, for example in Lunel, and nowhere do people eat bread of better quality or at a lower price.

You know how profitable privileges have been to foreign exchange dealers in the case of the small numbers in whom they have been invested; you also know how much the privileges of lawyers have raised the price of civil lawsuits while at the very same time rendering deposits less secure. In no free branch of production have failures been as numerous and as scandalous as is the case with the lawyers.

The privileges which the printers possess have increased the price of printing by creating a veritable surcharge for the printers.[336] In Paris these charges come to at least twenty five thousand francs. The printing workers, along with the bakers’ and butchers’ boys and the notaries’ clerks, find themselves stuck their whole life long in the lower grades of the business; not possessing sufficient capital to take out a patent or incur any costs, they cannot become entrepreneurs or business managers. Another iniquity!

THE CONSERVATIVE.

You drew attention to prostitution too. Is not the limitation on the numbers of brothels[337] necessary in the interests of public morality?

THE ECONOMIST.

The obstacles applied to the multiplication of brothels do nothing save to increase the profits of the madames and silent partners, lowering the while, the earnings of the unfortunates who trade their beauty and their youth. Sizeable fortunes are drawn from this [p261] sordid exploitation….The monopoly of the brothels is reinforced by regulations which forbid prostitutes to stay in cheap boarding rooms. Those lacking the means for buying furnished accommodation are forced to put themselves at the mercy of the entrepreneurs of the prostitution business or engage in itinerant prostitution.

THE SOCIALIST.

Do you not think prostitution will disappear one day?

THE ECONOMIST.

I do not know. In any case, however, it will not be made to go away by means of coercive regulation. On the contrary that would make it more dangerous.

In circumstances in which property was fully respected, and in which, as a result, poverty was reduced to a minimum, prostitution would diminish considerably, for poverty is prostitution’s very own great and indefatigable supplier. In such a regime there would only be voluntary prostitutes. Things being thus, it would be a better situation, it seems to me if prostitution were specialized, in conformity to the division of labor, rather than universalized. I would rather a few women prostituting themselves a lot than a lot of women prostituting themselves a little.

You would scarcely guess where privilege and communism have nestled most closely to one another: in the coffins where our sad mortal remains are laid; in the cemeteries where our human dust is buried. Funeral directors and cemeteries are both privileged and shared in common. One cannot bury a corpse at will; nor are we free to open a cemetery.

In Paris, the administration of funeral services is leased out [p271] to a single firm.[338] The cost of that lease is truly excessive, absorbing as much as some three quarters of the presumed income. And payments are made not to the municipality but to the church businesses recognized by the State. So much the worse for the dead of religions not officially recognized. The total revenue from this funerary taxation covers the minor expenses of the parishes, the payment of well-known preachers, the cost of the sumptuous decorations in the month of Mary, etc. Heretical or orthodox, the dead can scarcely claim much.

Handed over thus to a management endowed with special privilege and, into the bargain, exorbitantly taxed, funeral services could scarcely be other than expensive and of poor quality. The service costs eight or ten times more than it would in a free market system, and its inadequacy is confirmed at all times when death rates are out of the ordinary.

Present funeral arrangements mean that the modest savings of a worker vanish under the costs of burial, unless his children resign themselves to accepting the charity of a pauper’s burial. Is there a more monstrous unfairness?

The cemeteries, vast hostelries of death, belong to the municipalities. One is not allowed to compete with them by using free market cemeteries. Moreover, reserved places are extremely expensive. Six feet square in the Père Lachaise cemetery, costs more than an acre of land elsewhere.[339] Only the rich man can go to kneel at the tomb of his fathers; the pauper is reduced to leaning on the bank of the common ditch, where, squeezed together like grains in a [p272] grinder, dwell the successive generations of the poor. The most savage hordes would be horrified by this communism of the grave; we are used to it…or to put it better, we tolerate it as we do so many other abuses which torment us…Have you noticed sometimes in our cemeteries, women of the common folk trying to find the place where their father, their husband or their child has been laid? These women had placed there a little cross with an inscription painted in white. But the cross has disappeared under a new layer of coffins. Wearied by a hopeless searching, they go away heavy hearted, carrying with them, the funeral wreath, purchased with a week’s retched earnings…

THE CONSERVATIVE.

Let us leave this lamentable subject. In your list of privileged industries, you cited the bar, medicine and the professoriate. Everyone is free however to become a doctor or a lawyer or a professor.

THE ECONOMIST.

This is doubtless true, but these professions are tightly regulated. Well any regulation which obstructs entry to a profession or branch of production, or which hinders the exercise of these, contributes inevitably to raising their costs.

THE CONSERVATIVE.

What? You want people to practice medicine and law freely, and to teach as they wish…But what will happen to us in the name of God?

THE ECONOMIST.

What will happen to us? We will be cured much more quickly and cheaply. Our law suits will [p273] will cost us less and our children will receive a better education, that is all! If you want that, put your trust in supply and demand, under a regime of free competition. If teaching were freed thus, would educational entrepreneurs stop asking for good teachers? Would the latter not have an interest as a consequence, in being able to supply substantial and wide knowledge? Would not their salaries be in proportion to their merits? If the exercise of medicine came to be released from the regulation which impedes it, would the sick continue any less to seek out the best doctors? Among the studies imposed on doctors and lawyers today, how many are pointless practically? How many displace vital knowledge? What use, I ask you, are Latin and Greek to doctors and lawyers?

THE CONSERVATIVE.

To want lawyers and doctors to stop learning Latin and Greek, is that not going too far?

THE ECONOMIST.

The costs of this Latin and Greek are in part met by taxpayers, who sustain these university establishments, and in part by the clients of lawyers and doctors. Well I wonder to myself in vain what a lawyer and a doctor, who have to discuss French laws and heal French people who are sick, can do with Latin or Greek. All the body of Roman law has been translated, along with Hippocrates and Galen.

THE CONSERVATIVE.

What about medical terminology then? [p274]

THE ECONOMIST.

Do you think an illness named in French cannot be healed as easily as one named in Latin or Greek? When therefore, will we deal with it as it deserves, with this evil charlatanism of false and formulaic etiquette that Molière pursued with such remorseless good sense?[340]

It would take volumes, however, to count the host of privileges and regulations which obstruct the entry to the most crucial professions and which hamper the carrying out of the most vital work.[341].

I will finish by quoting a final pronouncement from that monument of barbarism known as the Code français.

There is the general complaint that the great public utilities have scarcely developed in France. Do you want to know why? Read this article of the law of the 7-9th of July, 1833.[342]

Art. 3. All large-scale public works, roads of highest quality [p275] and docks undertaken by the state or by private companies, with or without tolls, with or without subsidies from theTreasury, with or without sale of public land, may not be carried out, except under a legal enactment which will be confirmed only after a government inquiry. An ordinance will suffice to authorize the building of roads, canals and branch railways, not exceeding twenty kilometers in length, of bridges and all other projects of lesser importance. This ordinance must also be preceded by an inquiry.

Well, do you know how much time it takes to mount a ministerial inquiry, to discuss or law or effect an ordinance? Will you complain, then, knowing this, that the spirit of business does not develop in France? Complain rather that the unfortunates you have garrotted cannot walk.

 

1. Molinari’s 1: Coquelin on Legislation concerning Commercial Organizations

In an article on “Les Sociétés commerciales en France et en Angleterre” (Commercial companies in France and England) in the Revue des Deux Mondes (Review of the Two Worlds) [of 1st of August, 1843], M. Charles Coquelin has insisted above all on the need for full liberty to commercial associations. Here are some extracts from this remarkable essay:

In recent years schools of philosophy have formed, which claim to be leading humanity, by means of the process of association, towards purposes as yet unknown. Is there any need to name them, when the last syllables of their sonorous proclamations still echo all around us? What did the leaders of these schools want? To improve the existing order, to purge this human society of the blemishes which the work of the ages has formed, to continue the efforts of past generations to perfect by degrees its procedures and structures? All this was not enough to satisfy the ambitions of these philosophers. The society we have, had not in their view been sufficiently controlled; it was not sufficiently absolute, not sufficiently restricted; it left too much room to human free will; it was too regarding of human spontaneity. What they wanted was an utterly unitary society with a single centre and single leader, its reach, like its purposes, extending and obtaining everywhere, a society in which human individuality disappears in the current of social action, one possessed of a single spirit and a single motivation, a society in which man knows only one connection, but one which clasps him, so to speak, whole and entire. This is what those self-proclaiming apostles of human sociability wanted. Is that what the future holds in store for us? Is this how progress has to unfold? The truth is far from this: the study of the true character of man and the knowledge of the facts of history, show us on the contrary, that in the natural course [p249 ] of things, every day has the social bond dividing and multiplying; that humankind, in its normal development, in its real aspiration to progress, rather than leading society to such a narrow and wretched uniformity, tends constantly to divide and diversifty its forms, to spread it, so to speak, on objects more numerous and varied, every day.

Man is a social creature, some say, and on this basis they want him to be absorbed in one and only one kind of society, as if the social proclivity attributed to him can be exercised only there. Yes, man is a social being; this makes him all the more a creature of sensibility. Herein is his most distinctive and his noblest attribute. Along with the feelings of sociability, however, he cherishes within himself a need, not to be denied, for freedom and for a certain spontaneity in his relationships. He is a dynamic and diverse being as much as a social one, and he inclines by instinct towards a society as dynamic and diverse as his own nature. So instead of binding himself, once and for all, to a single societal form, by a heavy chain which will impede his freedom of movement, he must instead bind himself by countless light reins, which by connecting him on all sides to people of his sort, nevertheless respect the way in which his lively nature works. This is what reason demands; this is where progress lies....

In years past the principle of association was not widely applied in France. Whether before or after the Revolution, one found scarcely more than a few of those stunted organisations that the basic development of society achieves but few or none of those powerful conglomerations of capital and labor which put a nation’s commerce up to the level of large-scale enterprise. Lots of people put the blame on the spirit of the French people, little disposed, they say, to the goings-on of commercial enterprises. Without calling a halt over this explanation, which seems to us premature, we will [p250]show that the cause of the ill is entirely a matter of the law regulating our industries.

The law of 1807,[343] which regulates commercial enterprises, has subsisted unchanged until the present. It is in its outlook and its activities that we must search for the causes of the torpor in which business languishes among us, as also in the abuses and scandals which have attended its only too rare applications. – We can summon it up thus: the law recognises only three kinds of business companies: partnerships; limited partnerships; and public limited companies.

Under partnership, all the members must be mentioned by name in a published legal agreement. They are, moreover, united by the bonds of a narrow solidarity, being indefinitely responsible without limit, on pain of their person and goods alike, for all undertakings contracted by the society, and for the social undertakings contracted by each one of them, provided he has signed under the company name.

The limited partnership involves a contract between one manager or a number of united managers and one financial backer or several associated financial backers, called “sponsors”or limited share associates. Managers’ names are the only ones which are posted in the legal agreement. They alone can sign under the company name. Management is theirs alone. As regards them, the firm entails all the aspects of a partnership. As for the sponsors, they are liable for losses only to the extent of the financial contribution they have made or of the funds which they owe the firm.

The public limited company is not based on signatures under the company name. It is not designated by the name of any of the associates. It is named through the specification of the purpose of the exercise. All the associates of the company, without [p251] distinction, enjoy the advantage of liability only up to the limit their agreed holdings. The company is administered by executives under revocable contract, partners or not, salaried or not, who contract with respect to their management of the company, no personal or collective obligation with respect to the operations of the company, and who are responsible only for the carrying out of their mandate.

When one considers in overall terms the system I have just explained, one cannot help being struck by the restrictive spirit which dominates it and gives itself away, just in these few words: the law recognises three types of commercial company. Association being no more than a natural act, one would expect it necessarily to be regulated in a spontaneous way between the contracting parties, in ways and under conditions freely determined by themselves, according to their interests and needs. We find, on the contrary, that the law substitutes itself in certain respects, for the parties to the contract: it encroaches on their freedom by dictating to them the mode of association allowed to them, specifically restricting them to choosing between the three forms it has itself established. It goes even further, by imposing on each of these specified forms, narrow and unbending rules, whose application it is not permissible even to modify according to different circumstances....

What exactly is the public limited company in France today? Is it by chance a form of association which commerce might be able to apply to its own purposes? It quite obviously is not; it is a form reserved by legal privilege for certain outstanding firms, whose out of the ordinary size and glamorous performance recommend them. It is only these, effectively, which can present themselves to the Council of State with any reasonable chances of success, on which chances public opinion is formed, and which have in their favor the support of the established authorities and of some [p252] powerful men. Firms of this kind are rare and whatever their individual importance, that fact in itself renders them of secondary interest for the nation. As for the host of second order enterprises, or to put it another way, those whose usefulness is less apparent, access to the status of public limited company is absolutely forbidden them.

In the face of factors like these, we can see why association has not been able to make great progress in France and why, inevitably, commerce is almost entirely deprived of its blessings. Indeed, until these last few years, in which the spirit of association, anxious to get itself up to date, has burst through the legal barriers, scarcely anything about France’s appearance could offer us a single clue as to the creative potential of commercial forces working in harness. At present, which are the rare companies with extensive joint-stock in our country? In England, under more favourable yet still too stern conditions, association has been developed for a long time on a vastly stronger basis. The number of joint-stock companies which that country contains is incalculable; the imagination would be staggered with the volume of capital involved and, with the amount of freedom they enjoy, these companies have produced marvels. It is the same in the United States. Without our counting the innumerable joint-stock banks that country has, each sizeable part of the Union has can number a host of firms of all types, some of them enormous. The smallest cities, the towns, even the villages, have their own. They support, reinforce and energise private enterprise, at the same time as they complement it. In overall terms, whether they confine themselves to the role of protecting individual firms, or commit themselves to operations of an exceptional kind, their activity and their immense resources, increase the industrial power and wealth of the country. What a long way we are from this marvellous development!

 

2. Molinari’s Long Footnote 2: Say on the Bank of France

[p264]

In a letter addressed to M. Napier, in Edinburgh, J.-B. Say provided an interesting account of the privileged status of the Bank of France. Here are a few instructive extracts from that letter:

<p>
.....The Bank was recognised by the Bonaparte government, and received from
him, by a law of the 24 germinal in the year XI (14<sup>th</sup> April, 1803),
the exclusive right to put bearer-bills into circulation.<a id="_ftnref344" name="_ftnref344" href="#_ftn344" title="_ftnref344"><sup>[344]</sup></a>.
</p>
<p>
The apparent motive was to give the public a more solid guarantee of notes
issued. The real motive was to make the bank pay [p265] for the exclusive
privilege of having in circulation, notes bearing no interest. It paid for
this exclusive privilege, as did the Bank of England, by making loans to
the government. 
</p>
<p>
Events moved on. The Battle of Austerlitz took place. The public, which
knew that the Bank had been obliged to lend Napoleon 20 million of its bills,
taking a look at the military strength of this Austrian prince and Russia,
thought he was doomed, and themselves rushed to the Bank to have their holdings
of its bills reimbursed. The Bank suspended payment in December 1805. The
Battle of Austerlitz took place on December 2<sup>nd</sup>. The capitulation
of Presbourg was the outcome of the (French) victory. Napoleon emerged more
than ever the master of France&rsquo;s resources. He settled his debts with the
Bank which accepted his payments again from the beginning of 1806. 
</p>
<p>
Napoleon took advantage of the extremities into which he himself had cast
the Bank, and to avoid, so he said, the embarrassment that had forced him
to suspend payments on his bearer bills, he change

Last modified April 10, 2014