The Mystery of Capital

by Hernando De Soto

  The miners left little to chance. Most mining district regulations generally involved nine distinct stages. First, the miners posted notices or got the word out announcing a mass meeting at a well-known location to form a new district. Second, as the meeting’s first order of business, the miners established the boundaries and jurisdiction of the district and named it (typically for some geographic feature of the area, for the first claim staked, or in honor of the man organizing the district). Third, the miners placed restrictions on ownership to the number of claims held by location and purchase. In most mining districts, the discoverer of a new lode was normally allowed a double claim while others were allowed one per person. There was usually no limit on claims that were purchased, provided the purchase had been made “upon good faith for valuable consideration with recorded deeds and certificates of ownership issued by the recorder.”

  Fourth, the mining districts limited membership and rights to U.S. citizens or those entitled under law to become citizens. Mexicans and Asians were thus generally excluded by the racial prejudices of the day. Mexican or Asian miners were even accused of having contributed “nothing to the prosperity of the people whose hard-earned wealth they have appropriated to themselves” and of endangering the morals of “young [American] men…without home influences.” Fifth, the regulations fixed the dimensions of the mining claim itself from 150 to 300 feet in length for large claims to the size of the miner’s shovel for smaller diggings. A right-of-way was usually given on each side of the claim to run tunnels and drifts at any distance so long as they did not interfere with the rights of a neighbor’s claim. Sixth, the regulations set guidelines for how miners would identify the boundaries of their claims. Usually, the claim was initiated by posting a dated notice of the claim with the names of the locator, the district, and the county.

  Seventh, the regulations established the office of the recorder, where the official records of the district would be kept, and specified how claims would be recorded. Often recorders were elected for a year. Even more importantly, the regulations required miners “to file their notices of action with the recorder within five to thirty days from the date of posting on the claim, and the recorder was required to keep a book of such filing and also record transfers of titles within the district.” Eighth, the regulations established the requirements for development of claims by providing for the “time, extent, and character” of work to be done in order to hold a claim. The “penalty for noncompliance was always the possibility of forfeiture.” Finally, the regulations established a system for resolving disputes.136

  Faced with a legal vacuum in federal mining law, the miners, with some legal acumen, created a kind of acting mining law. Negotiating among themselves, they worked to protect their rights and increase the value of their property until the government could step in to validate their claims. Creating property rights through extralegal means was hardly a rarity. Extralegality was—as it is today in the Third World—rife. In the immediate years after gold was discovered, California had some eight hundred separate jurisdictions, each with its individual regulations.137 Every jurisdiction obtained its initial legitimacy and strength from the consensus of its members. Historian Charles Howard Shinn notes that “no alcalde [mayor], no council, no justice of the peace was ever forced upon a district by an outside power. The district was the unit of political organization, in many regions, long after the creation of the state; and delegates from adjoining districts often met in consultation regarding boundaries, or matters of local government, and reported to their respective constituencies in open-air-meeting, on hillside or river-bank.”138

  Most politicians came to support the miners’ claims, and the courts proceeded to sanction their extralegal arrangements. In 1861, a justice of the California Supreme Court commented on the legitimacy of the miners’ extralegal arrangements in Gore v. McBreyer: “It is enough that the miners agree—whether in public meeting or after due notice—upon their local laws, and that these are recognized as the rules of the vicinage, unless some fraud be shown, or some other like cause for rejecting the laws.”139

  One reason for the easy acceptance of miners’ district regulations was that these were often drafted on the basis of principles, ideas, and procedures not much different from those of existing official law. Lacy points out that the district regulations “reflected the accumulated wisdom and customs…of the Stannary Convocations of the tin miners of Cornwall; the High Peak District practices and the Barmote Court of Derbyshire; the organization and practices of the Burgermeisters of Saxony; the Spanish Colonial ordinances of the vice royalties of New Spain and Peru; and some practices of the mining districts of the Missouri lead belt.”140 For instance, “where a miner took up his claim pursuant to mining rules and customs, actual possession of part of a claim with definite boundaries gave him a possessory right to the entire claim. This would seem to be little more than an application of…[an aspect] of the law of adverse possession.”141 One lawyer for the miners discussed how their law paralleled and simplified the formal property rights system:

  Under the miner’s law, the locator is his own executive officer to take the land, grant himself a possessory title, fix the boundaries, and announce himself the proprietor…. The notice is the substitute for the written application; the marking of the boundaries answers the purpose of a survey; the mining law is the concession, and the record with the local officer the registration. The only official in charge is the great public, whom the miners represent, and whose law is inexorable.142

  This fusion of informal and existing legal models filled the vacuum of formal law on America’s vast mineral lands—just as squatting organizations do today in the Third World. During the 1850s, Congress made no effort to take over the Western mineral resources. Historians speculate that perhaps the miners’ success at self-government appealed to the political philosophy of the day, or maybe the nation was too preoccupied with the slavery issue and the threat of secession by the Southern states.143 Perhaps the lawyers among the U.S. legislators simply recognized good law-making when they saw it. One thing, however, is clear: The lack of congressional action only added credibility to the social contract that the miners themselves had not only devised but also made work.144

  By the 1860s, however, the Civil War, the need for funds with which to conduct it, and investor concerns in California, Nevada, and Colorado forced Congress to consider consolidating the thousands of mining laws into an integrated system. The concerns of investors about land title played a prominent role in this debate. One contemporary noted that because of the lack of a standard system of titles, “capitalists were not willing to expend their money in sinking costly shafts, and erecting machinery and buildings, to prove a vein which by miner’s law, might be indefinitely subdivided according to its richness.”145 The federal government began to seriously consider ways that it could regulate mining on federal land.146 According to Lacy, one of the main concerns of members of Congress from the West was the “clamor for security of title and the ability to purchase mineral lands at a reasonable price.”147

  In 1866, Congress for the first time declared the nation’s mineral lands officially open for exploration to U.S. citizens—eighteen years after hundreds of thousands of miners had first begun to prospect for gold in federal lands in California. The 1866 statute explicitly noted that all explorations for minerals would be subject to those “local customs or rules of miners in the several mining districts” that were not in conflict with the laws of the United States.148 The purpose of the law was not to destroy rights born extralegally but to strengthen them “with some wholesome regulations as to the manner of holding and working them, which are not in conflict with existing mining laws, but simply give uniformity and consistency to the whole system.”149 Another significant aspect of this premier mining law was that “the substance of the bill came directly from the lode mining regulations of the Grass Valley Mining District of Nevada County, California…and the Gold Mountain Mining Distri
ct of Storey County, Nevada.”150 In passing the law, Congress went so far as to commend the American genius for creating extralegal arrangements:

  It is essential that this great system established by the people in their primary capacities, and evidencing by the highest possible testimony the peculiar genius of the American people for founding empire and order, shall be preserved and affirmed. Popular sovereignty is here displayed in one of its grandest aspects, and simply invites us, not to destroy, but to put upon it the stamp of national power and unquestioned authority.151

  And so the 1866 legislation not only acknowledged the legitimacy of social contracts born outside the official law but also incorporated principles and rights that had been won by settlers in preemption and settlement claims. The law also extended patent rights to any person or association that had expended $1,000 in labor and improvements on a claim, surveyed or unsurveyed. This was an explicit recognition that value added to assets was something the law needed to encourage and protect.

  On May 10, 1872, Congress passed the general mining law, establishing a basic formal structure of American mining law that continues to this day. This law retained the two most important principles of the 1866 act: the recognition of miners’ laws, and the right of anyone who improved a mine to purchase the title from the government at a reasonable price.152 In a span of twenty years, the extralegally generated rights and arrangements of miners had been integrated into a new formal system. Even the Supreme Court, whose hostility to informal rights sparked a pro-squatter backlash, reaffirmed the validity of the 1866 and 1872 federal mining laws in Jennison v. Kirk. According to the Court, the two statutes “gave the sanction of the government to possessory rights acquired under the local customs, laws, and decisions of the courts…[and] recognized the obligation of the government to respect private rights which had grown up under its tacit consent and approval. It proposed no new system, but sanctioned, regulated, and conferred a system already established, to which the people were attached.”153 By the 1880s, extralegal mining district rules and customs had been integrated into one coherent system of formal property law.154

  At the end of the nineteenth century, American politicians and judges had come a long way in the area of property law—and it was the squatters who led them there. This was also true for housing: In 1862, when Congress passed the celebrated “Homestead Act” that gave 160 free acres to any settler willing to live on the land for five years and develop it, it was only sanctioning what settlers had already done by themselves.155 In spite of the legendary fame of the Homestead Act, most settlement took place before it was enacted. “Between 1862 and 1890, the population of the United States grew by 32 million people—but only about 2 million of them settled on the 372,649 farms claimed through the Homestead Act.”156 By the time Congress finally approved it, the settlers already had many legal alternatives for gaining title to public lands.157 Historically, however, the Homestead Act does have great symbolic value, signifying the end of a long, exhausting, and bitter struggle between elitist law and a new order brought about by massive migration and the needs of an open and sustainable society. By ultimately embracing many of the extralegal arrangements of the settlers, formal law had legitimized itself, becoming the rule for most people in the United States rather than the exception.

  The Significance for Third World and Former Communist Nations

  For developing and former communist countries trying to make their own transition to capitalism, the American experience is extremely significant. The recognition and integration of extralegal property rights was a key element in the United States becoming the most important market economy and producer of capital in the world. As Gordon Wood emphasizes, during this time “something momentous was happening in the society and culture that released the aspirations and energies of common people as never before in American history.”158

  That “momentous” something was a revolution in rights to property rights. The Americans, not always eagerly or consciously, gradually legitimized extralegal property norms and arrangements created by the poorest Americans and integrated them into the law of the land. At the beginning of the nineteenth century, information about property and the rules that governed it were dispersed, atomized, and unconnected. It was available in rudimentary ledgers, personal notes, informal constitutions, district regulations, or oral testimony in every farm, mine, or urban settlement. As in developing and former communist countries today, most of this information related only to the local community and was not available within any consistent network of systematized representations. Although American officials probably did not either intend or realize it, when they constructed national laws such as the preemption and mining acts they were creating the representational forms that integrated all this loose and isolated property data into a new formal property system.

  It was not an easy task or a quick one; nor was it without violence. But the American experience is very much like what is going on today in Third World and former communist countries: The official law has not been able to keep up with popular initiative, and government has lost control. As a result, people outside the West live today in a world of paradoxes not unlike the one described by historian G. Edward White: “When the miner left his shack and went to work, he employed the latest in industrial technology. When the farmer stepped outside his sod shanty, he often used the most modern farm machinery.”159 Third Worlders also live and work in shacks and slums side by side with television sets and electronic calculators. They too are organized in claim clubs. And their governments have also begun to give them preemption rights.

  But what they still do not have is the efficiently crafted legal right to have their property integrated into a formal legal system that allows them to use it to create capital. Through occupancy, preemption, homesteading, miners’ laws, and such, Americans built a new concept of property, “one that emphasized its dynamic aspects, associating it with economic growth,” and which replaced a concept “that emphasized its static character associating it with security from too rapid change.”160 American property changed from being a means of preserving an old economic order to being, instead, a powerful tool for creating a new one. The result was the expanded markets and capital needed to fuel explosive economic growth. This was the “momentous” change that still drives U.S. economic growth.

  Ultimately, the lessons of the United States’ transition to formality will be found not in the technical details but in the changes in political attitudes and in broad legal trends. In passing laws to integrate the extralegal population, American politicians expressed the revolutionary idea that legal institutions can survive only if they respond to social needs.161 The American legal system obtained its energy because it built on the experience of grassroots Americans and the extralegal arrangements they created, while rejecting those English common law doctrines that had little relevance to problems unique to the United States. In the long and arduous process of integrating extralegal property rights, American legislators and jurists created a new system much more conducive to a productive and dynamic market economy. This process constituted a revolution born out of the normative expectations of ordinary people, which the government developed into a systematized and professional formal structure.

  This is not to say that developing and former communist nations should slavishly imitate the U.S. transition. There are plenty of negative consequences in the U.S. experience that they should be careful to avoid. But as we have already seen, there is much to learn. The primary lesson is that pretending extralegal arrangements do not exist or trying to stamp them out, without a strategy to channel them into the legal sector, is a fool’s errand—especially in the developing world, where, as we saw in Chapter 2, the extralegal sector now constitutes the majority of the populations of those countries and holds trillions of dollars in dead capital.

  Efforts to create a property revolution elsewhere in the Third World and former communist countries will face their own unique requirements,
obstacles, and opportunities. We must contend with other ongoing revolutions in communications, information technology, and rapid urbanization. But the basic situation is the same. Today, in many developing and former communist nations, property law is no longer relevant to how the majority of people live and work. How can a legal system aspire to legitimacy if it cuts out 80 percent of its people? The challenge is to correct this legal failure. The American experience shows that this is a threefold task: We must find the real social contracts on property, integrate them into the official law, and craft a political strategy that makes reform possible. How governments can meet these challenges is the subject of the next chapter.

  CHAPTER SIX

  The Mystery of Legal Failure

  The life of the law has not been logic; it has been experience.

  —U.S. Supreme Court Justice Oliver Wendell Holmes

  NEARLY EVERY developing and former communist nation has a formal property system. The problem is that most citizens cannot gain access to it. They have run into Fernand Braudel’s bell jar, that invisible structure in the past of the West that reserved capitalism for a very small sector of society. Their only alternative, as we saw in Chapter 2, is to retreat with their assets into the extralegal sector where they can live and do business—but without ever being able to convert their assets into capital.

  Before we can lift the bell jar, it is important to know that we will not be the first to try. As we shall see in this chapter, governments in developing countries have tried for 180 years to open up their property systems to the poor.

  Why have they failed? The reason is that they usually operate under five basic misconceptions: