58 COLLATERAL, SERVITUDE, AND DIGNITY No man shall take the nether or the upper millstone to pledge: for he taketh a man's life to pledge. . . . When thou dost lend thy brother any thing, thou shalt not go into his house to fetch his pledge. Thou shalt stand abroad, and the man to whom thou dost lend shall bring out the pledge abroad unto thee. And if the man be poor, thou shalt not sleep with his pledge: In any case thou shalt deliver him the pledge again when the sun goeth down, that he may sleep in his own raiment, and bless thee: and it shall be righteousness unto thee before the LORD thy God. . . . Thou shalt not pervert the judgment of the stranger, nor of the fatherless; nor take a widow's raiment to pledge: But thou shalt remember that thou wast a bondman in Egypt, and the LORD thy God redeemed thee thence: therefore I command thee to do this thing (Deut. 24:6, 10-13, 17-18).
The theocentric focus of this pledge law is the general dominion covenant, which defines man in terms of his stewardship before God (Gen. 1:26-28). A pledge is a tool of dominion. It enhances its owner's ability to extend his dominion. A tool lowers the cost of achieving one's goals. The pledge or collateral may sometimes be so closely associated with the individual that to remove it from him completely can undermine his definition of himself. As a dominion law, it was not a seed law or a land law. It was a cross-boundary law.
The Dominion Covenant and Social Hierarchy The doctrine of the covenant itself is point two of the biblical covenant model. We can see this in the very structure of the Pentateuch. The Book of Exodus is the book of the covenant.(1) It is also the second book of the Pentateuch. The second point of the biblical covenant model is hierarchy.(2) A covenant is necessarily hierarchical. God initiates it, and man responds, either as a covenant-keeper or a covenant-breaker. A covenant is not a contract between or among equals.(3) There is always a superior involved: God.
In the dominion covenant, God is the archetype; man is made in His image. From this we draw a conclusion: because God is not a servant of Satan, covenant-keeping man should not become a servant to covenant-breaking man. On the contrary, the opposite is the biblical ideal: covenant-breaking man is to become a servant of covenant-keeping man. Covenant-keeping steadily puts covenant-keepers at the top in history. This process is built into the creation itself. It is recapitulated in God's law.
Sometimes, however, covenant-keepers fall into dire straits through no fault of their own and must become servants of other covenant-keepers. There were rules in the Mosaic law governing such servitude. It was to be mild. The superior in the relationship was not to oppress the subordinate.
Poverty and debt produce a form of servitude. "The rich ruleth over the poor, and the borrower is servant to the lender" (Prov. 22:7). It is best to be financially independent and out of debt. It goes against the biblical model of liberation when a covenant-keeper seeks to enslave fellow believers.
The widow, the orphan, and the stranger were to be protected. This passage extended the Exodus passage: "Thou shalt neither vex a stranger, nor oppress him: for ye were strangers in the land of Egypt. Ye shall not afflict any widow, or fatherless child" (Ex. 22:21-22). These three models served in the Mosaic law as the chief examples of vulnerability. Their legitimate interests were to be upheld in civil courts and in economic transactions. The way that these groups were treated testified to the moral condition of society. The reference in both passages to Egypt pointed back to the era in which God's people were unfairly oppressed. The exodus generation and the conquest generation were reminded: they had deserved liberation, and God had delivered them by destroying their evil oppressors. The lesson was plain enough: they could expect similar negative sanctions for similar transgressions.
The Pledge At the very heart of the debt relationship is the pledge. The pledge serves as collateral: the debtor's economic motivation to repay. If he fails to repay, he loses ownership of the pledge. The most important model of the pledge is God's promise. By means of a pledge, He places His reputation on the line. If He fails to fulfill His pledge, He loses His reputation. He loses His judicial status as God. This, of course, cannot be; this is why God fulfills His verbal pledges. He has too much at stake not to.
The first pledge recorded in the Bible is God's promise to Adam that in the day that Adam ate of the forbidden tree, he would die (Gen. 2:17). This promise was fulfilled: Adam did die that day, judicially speaking. He died definitively. The curse of death came on him and his heirs. Adam was a dead man walking. Death and damnation, as with life and salvation, are definitive, progressive, and final. The final death is the second death of the lake of fire (Rev. 20:14). Had it not been for God's willingness to sacrifice His son on behalf of Adam and Adam's heirs (Heb. 2:17), man's temporal existence from that time on would have been a working out of this definitive judicial status of death. God announced the grace of this future substitutionary atonement in His pledge to Adam regarding the coming of an heir who would crush the head of the serpent (Gen. 3:15). This grace is both common and special. That Adam still walked was proof of God's common grace. That his son Abel offered an acceptable sacrifice to God was proof of God's special grace.
Man's word is not God's word. Man's promise is not God's promise. Man does not lawfully defend his words and his promises with the same degree of commitment with which God defends His. "It is a faithful saying: For if we be dead with him, we shall also live with him: If we suffer, we shall also reign with him: if we deny him, he also will deny us: If we believe not, yet he abideth faithful: he cannot deny himself" (II Tim. 2:11-13; emphasis added). In short, man is a greater risk than God. Believing in man's word is far more risky than believing in God's word. Therefore, a wise creditor requires either collateral or imposes a higher rate of interest on a loan before he extends it. A man's promise to repay may be merely verbal or contractual, such as with a "signature loan" or a credit card loan. Such uncollateralized loans command higher interest rates than collateralized loans because they are more risky. Borrowers are statistically more likely to default on such loans. This is why they must offer to pay lenders a higher rate of interest in order to obtain loans. All borrowers in this statistical classification of borrowers pay a higher rate because a higher percentage of borrowers in this class will default. The lender must be compensated for this additional risk.
A collateralized loan adds security to the loan, i.e., it increases the statistical likelihood that the borrower will repay the debt. The pledge is a valuable item -- at least to the borrower -- that the borrower agrees to transfer to the lender, should he default on the loan. The pledge could be a tool of production. This case law specifies that if this tool is basic to the borrower's life or productivity, it must remain with him. His means of escaping debt bondage must not be taken from him by the creditor.
These pledge laws are extensions of the laws governing collateral given in Exodus: "If thou at all take thy neighbour's raiment to pledge, thou shalt deliver it unto him by that the sun goeth down: For that is his covering only, it is his raiment for his skin: wherein shall he sleep? and it shall come to pass, when he crieth unto me, that I will hear; for I am gracious" (Ex. 22:26-27). A poor brother's life is not to be endangered by having to surrender his coat as a pledge against debt.
This law does not protect the covenant-breaker. It is not a general equity law. The covenant-keeper is to be subdued economically for the glory of God. "The LORD shall open unto thee his good treasure, the heaven to give the rain unto thy land in his season, and to bless all the work of thine hand: and thou shalt lend unto many nations, and thou shalt not borrow. And the LORD shall make thee the head, and not the tail; and thou shalt be above only, and thou shalt not be beneath; if that thou hearken unto the commandments of the LORD thy God, which I command thee this day, to observe and to do them" (Deut. 28:12-13).
Tools of Dominion The millstone is a miller's source of livelihood, but it is not his source of biological life. He can make a living doing something else, but he believes that cannot make as good a living. A man is versatile. He can do many kinds of work. But a man is also limited. Each man performs certain tasks with greater skill than he performs others. Because some men are more skilled than their fellows in particular areas of production, they can perform these services less expensively than their competitors. This set of circumstances makes possible the social division of labor.
The Social Division of Labor
The range of skills across the human race is stupendous. A man who has one set of skills can learn different skills. A man is not a machine. A machine can perform one task well. The more complex the machine, the fewer uses to which it can be put profitably. A machine that makes one item falls to scrap value if demand for that one item falls to zero and is expected to stay there by all entrepreneurs. This condition is not true of a man. He can learn new skills if the demand for his present specialized abilities should fall.
Because of the highly diverse and unspecific nature of human labor, men can gain income by exchanging their specialized labor services for other specialized services or goods. Because of the highly specific abilities which some men possess, they can gain a higher price than their competitors for their labor services. But selling these specialized labor services is risky. If demand for a specific labor service declines, the seller will lose income faster than another man whose more general skills rarely face an equally large decline in demand. An across-the-boards decline in demand is far less likely statistically than a decline in demand for a specialized service or product.
In times of economic growth through capital investment, income rises faster for those who supply specialized labor. Why? Because their unique abilities have been empowered by specialized tools of production. This income advantage persuades additional people to specialize. The social division of labor increases when capital investment increases. Conversely, in times of economic decline, when the division of labor shrinks because of a breakdown in the money payments system, the specialist may find that his income falls rapidly. He must then abandon his specialty. The man who uses a specialized tool of production to gain his income is therefore more vulnerable to shifts in demand than his less capitalized neighbor. He gains his income by producing a specialized service or product. He builds his way of life -- his pattern of expenditures -- in terms of the income generated by his tool. If he demand falls for his output, or if he loses access to this tool, his way of life will be disrupted.
No Tool, Low Output
The miller has invested capital and time in mastering the tools of his trade, which in this case are a pair of millstones. He then seeks a loan. The lender demands one of the millstones as a pledge. Without his complementary tools of production, his output falls rapidly. He must revert to selling less specialized forms of labor. These services bring a lower return because there are more competitors who can underbid him in this new field than there had been in his old field. He has lost his competitive advantage. His ability to repay the loan falls. His self-definition as a participant in society is undermined by the loss of his tool of production. Both his self-image and his productive role in society are threatened by the loss of his tool.
This case law prohibits the lender from taking a millstone as a pledge. He is restricted in two ways. First, the lender may not legally collect this pledge in advance of repayment, which would increase the likelihood that the loan will not be repaid, thereby forcing the miller into servitude. Second, the language indicates that he may not accept the millstone as a default pledge, i.e., a transfer of ownership to the lender should the borrower default. God says: "Hands off!" To reduce the risk of the debtor's default in the absence of the millstone as a pledge, the lender must therefore either ask for a higher rate of interest (if this is a profit-seeking loan) or else content himself with some other form of pledge, including the man's willingness to be sold into indentured servitude.
Wouldn't the debtor's self-image be threatened by indentured servitude? Yes. I conclude that this prohibition against taking a millstone as a pledge must have more to do with his life as a producer than his life as a free man. Under the Mosaic economy, the lender was allowed to sell the debtor into servitude or force him or his children (II Ki. 4:1-7) to come and work for him until the debt was paid off. But the lender was not allowed to take away the man's tools of production. Without these, the debtor could not readily buy his way out of servitude. Furthermore, society would lose his output as a tool-endowed, specialized producer. To enhance the debtor's ability to pay off the loan and, if necessary, buy his way out of debt servitude, this law allowed him to retain ownership of his tools of production. As a secondary benefit to society, this law kept the producer in the work force as a specialist.
To put this law into a modern setting, there is no doubt that taking an automobile tire as collateral can be a high motivational technique to get repayment from a man with only one car with only four tires (no spare). He cannot drive into town without it on Saturday night. But he also cannot drive to work or do odd jobs that would earn him extra money. Without the use of his car, he falls under the threat of permanent debt, meaning permanent bondage. This case law rejects as illegitimate the use of such collateral. The required collateral is not to be part of a man's tool kit of dominion. If a debtor owns a sports car that is his pride and joy, as well as an old car for pulling loads of hay, it would be legitimate to take one or more tires of the sports car. The sports car testifies to his misplaced sense of priorities. Humbling his pride is different from breaking his spirit by bankrupting him.
The Good Life A specialized producer can shift to a less specialized occupation and still put food on his family's table. The man without a pair of millstones is not facing starvation. Yet the language of this text indicates that the millstone was the man's life. I conclude that the language must be referring to something other than biological life. What does this text mean? While the Hebrew word here is often used in the sense of biological life, it has other meanings. It often means a man's chief desire. "And Hamor communed with them, saying, The soul of my son Shechem longeth for your daughter: I pray you give her him to wife" (Gen. 34:8). "The enemy said, I will pursue, I will overtake, I will divide the spoil; my lust shall be satisfied upon them; I will draw my sword, my hand shall destroy them" (Ex. 15:9). "Also thou shalt not oppress a stranger: for ye know the heart of a stranger, seeing ye were strangers in the land of Egypt" (Ex. 23:9). "But now our soul is dried away: there is nothing at all, beside this manna, before our eyes" (Num. 11:6). The use of the word in the preceding passage, which preserves open fields, is close to the meaning in this text: "When thou comest into thy neighbour's vineyard, then thou mayest eat grapes thy fill at thine own pleasure; but thou shalt not put any in thy vessel" (Deut. 23:24; emphasis added). A man's heart and soul define his life in his own eyes. "But if from thence thou shalt seek the LORD thy God, thou shalt find him, if thou seek him with all thy heart and with all thy soul" (Deut. 4:29). "Chief desire" seems to be the meaning in this text.
Our Daily Bread
A millstone is a tool of bread-making, but owning one is not a matter of life and death. It is possible to eat grain without grinding it into bread. Corn can be eaten on the cob. Wheat can be sprouted or cooked as cereal. A man need not starve because he does not own a pair of millstones to grind his grain.
Bread is more than nutrition; it is symbolic of the full life. "Give us this day our daily bread" (Matt. 6:11) refers to a comfortable way of life, a good life. As such, bread is one of the sacraments.(4) Where there is no millstone, there will be something important lacking: bread, which provides a sense of personal and social fulfillment. This condition of dearth is a mark of God's judgment: "Moreover I will take from them the voice of mirth, and the voice of gladness, the voice of the bridegroom, and the voice of the bride, the sound of the millstones, and the light of the candle" (Jer. 25:10). A society in which millstones are not grinding is a society under God's wrath.
This case law forbade a creditor from taking away one of the means of the good life. This law was not restricted to millers. It was more comprehensive than that. A poverty-stricken family enjoys its daily bread. It should not have this enjoyment cut off by a creditor. A covenant-keeper is not deliberately to reduce another covenant-keeper to beggary. "I have been young, and now am old; yet have I not seen the righteous forsaken, nor his seed begging bread" (Ps. 37:25).
Household Authority The independent head of the household should not have his authority undermined. The very term "breadwinner" indicates the importance of bread. It is a mark of authority, of productivity, to provide bread. A breadwinner who is reduced by another man's deliberate actions to eating wheat sprouts and cereal has been stripped of his authority. The covenant-keeper is not to afflict his fellow covenant member of his dignity. This is why the lender does not have lawful access to the debtor's house. He must stand outside the boundaries of the debtor's house and wait for the debtor to bring out the pledge.
Basic to dominion is confidence in oneself and one's future. Anything that degrades a man is a threat to his ability to fulfill the terms of the dominion covenant. This applies even to corporal punishment: "Forty stripes he may give him, and not exceed: lest, if he should exceed, and beat him above these with many stripes, then thy brother should seem vile unto thee" (Deut. 25:3). A man must not be deliberately humiliated. The prohibition against taking a man's millstone is related to this concern. A man who has been stripped of the marks of authority in his own household is not in a strong position to recover his lost productivity. He is less likely to "bounce back" from adversity. The lender is to refrain from actions that would needlessly inhibit the recovery of the covenant-keeping debtor. The extension of God's kingdom through the corporate efforts of the covenant-keeping community must not be needlessly inhibited.
The creditor knows that the debtor will be motivated to repay the debt if the creditor owns something of value. But there is a difference between owning something of economic value and something of psychological value. The debtor wants to have his pledge returned, so he works to replay the loan. But an item that is vital psychologically for a normal man's ability to repay, such as a millstone used to put bread on his own table, is not to be taken as collateral.
Sanctions What is the State's role in enforcing this law? First, it must refuse to enforce the terms of a contract if the contract uses the crucial tools of a man's trade as his pledge. But should the State bring negative sanctions against a lender who actually collects such a pledge? That is, should the State require the lender to pay double restitution to the victim of the prohibited contract? In this case, should the lender be required to return to the debtor his upper millstone, plus an additional one?
One of the goals of biblical law is to protect people from the rise of an arbitrary State. If the lender who has collected his collateral from a defaulting borrower cannot predict with some high degree of accuracy whether a judge or jury will regard this collateral as an indispensable tool of the borrower's trade, then the greater the potential penalty that can be assessed by the court, the less likely the creditor will make the loan in the first place. If he may be retroactively required to return the pledge, he will consider this possibility when counting the cost of making the loan. The threat of double restitution increases this cost. The very unpredictability of the court reduces the size of the credit market. The court's decision regarding the crucial nature of the pledge is inherently difficult to predict. If the lender might be compelled to pay double restitution as a criminal penalty, he may choose not to make the loan.
On the other hand, if the State is not allowed to enforce this law, this law loses its status as a civil law. Society's wealth will be threatened by the possibility that millers will lose their upper millstones -- and not merely millers. How can the two goals be reconciled, so that would-be debtors can obtain loans and society will also retain the services of skilled craftsmen?
One way is for magistrates to refuse to enforce the terms of a biblically prohibited debt contract. Surely, a magistrate should not enforce a murder contract. This situation is analogous. A magistrate would require the lender to return the tool-based collateral to the borrower. But no criminal sanctions are imposed because no criminal intent can be proven. Perhaps the lender did not understand that this tool was truly crucial to the borrower's productivity. Besides, the borrower must not be thought of as without information about his own occupation. If he failed to inform the lender about this, he must bear some of the responsibility. This is not a criminal matter.
Society needs protection from an arbitrary State far more than it needs protection from grasping creditors who drive hard bargains. An arbitrary State is dangerous to men's freedom and society's wealth. It is not just lenders who must be placed on a tight leash; it is also State bureaucrats. To allow the State to impose criminal sanctions against a creditor who has taken a tool of production as collateral from a borrower is to foster the expansion of State power.
God provides a positive sanction: "it shall be righteousness unto thee before the LORD thy God" (v. 13). That is, God has made a pledge. Men can count on this. God has given His word.
The Boundaries of a Man's Home The lender must not violate the boundaries of a debtor's home. When the debtor brings out his pledge, either before the loan is made or after he has defaulted, the lender must wait outside the doors of the household. This makes it clear to all parties that the obligation has been met by the payment of the pledge. The lender exercises authority over the pledge. He does not exercise authority over the debtor. The hierarchy of the contract extends from the lender to the pledge. It does not extend to the debtor.
This means that the debt relationship, when collateralized by a marketable asset, is limited in scope. It is, in this restricted legal sense, an impersonal relationship. The lender must content himself with collecting the pledge. He is not given authority to transgress the boundaries of the debtor's house.
The dignity of the debtor is preserved by this law. He is not to be humiliated. For a lender to march across the door of the debtor's home is to humiliate the debtor. This is not lawful. There is a limit on the debtor's obligation. One limit is the door of his household. This is a judicial boundary.
This does not mean that the State is similarly restricted. If the debtor refuses to transfer the contract's pledged item to the lender, then the lender has the authority to appeal his case to the State. The boundaries of the home protect the borrower from an invasion by the lender. They do not protect against the invasion of the State in defense of a lawful contract. The State, in its capacity as God's delegated agent, possesses the authority to enforce lawful contracts. The lender has become the victim. The State must defend the victim's rights.(5)
Burdensome Collateral "And if the man be poor, thou shalt not sleep with his pledge: In any case thou shalt deliver him the pledge again when the sun goeth down, that he may sleep in his own raiment, and bless thee: and it shall be righteousness unto thee before the LORD thy God." This is a recapitulation of the earlier law of collateral: "If thou at all take thy neighbour's raiment to pledge, thou shalt deliver it unto him by that the sun goeth down: For that is his covering only, it is his raiment for his skin: wherein shall he sleep? and it shall come to pass, when he crieth unto me, that I will hear; for I am gracious" (Ex. 22:26-27). The law in Exodus pledges a negative sanction: "I will hear," meaning He will bring judgment in history.(6) This pledge by God must be acknowledged by men and honored in word and deed.
The lender must return life-preserving collateral every evening. This form of collateral is not a tool of production. Demanding a tool of production as a pledge is altogether prohibited. This collateral is an asset that is necessary to sustain life for part of the day. If it is freezing outside, day and night, then such collateral is prohibited by the language of verse 6, "for he taketh a man's life to pledge." So, this asset must be life-preserving in the sense of not humiliating a man by making him shiver through the night, i.e., removing from him the good life. Shivering through the night is the functional equivalent of not eating bread.
The lender must return the collateral every night. This is a major burden on him. It is bothersome. The lower the market value of the loan and its collateral, the less willing a lender will be to demand this item as collateral. The time wasted is worth more to the lender than the loan is worth to him. He has the option of not collecting the collateral daily. But he has the option on any morning of claiming it. This right of the lender lowers the possibility of a form of fraud on the part of the borrower which I call multiple indebtedness.
The Restriction on Multiple Indebtedness I have covered this aspect of the laws governing collateral in another place.(7) Here I expand on my earlier analysis. If his cloak is his collateral, then he can lawfully pledge it for only one loan. He can use the collateral to keep warm at night, but he may not use it to secure another loan. He cannot lawfully offer a pledge of his cloak to half a dozen lenders, none of whom is aware that the cloak has been pledged to five other lenders. Multiple pledges secured against the same collateral are fraudulent. Each of the lenders believes that his loan is secured by an item that is important to the borrower, an item that the borrower does not want to lose. But if it is being used to secure six loans, the debtor at some point may decide: "I can't earn enough money to pay off all of my creditors. I am too far in debt. Why should I bother to repay any of these people?" The magnitude of his debt becomes a motivation to stop repaying. The debtor gives up. This defrauds the lenders, who believed that the pledge was an incentive for him to repay. Instead, because of multiple pledges, it became an incentive for him to go so far into debt that the loans could not be repaid. This is a misuse of the concept of collateral. Multiple indebtedness is a lure into greater debt and greater risk.
By allowing the creditor to take possession of the pledge during the day, this law discourages the practice of multiple indebtedness. The pledge is still useful to the debtor, but it is also useful to the lender, not as an income-producing asset but as a chain that limits the debtor's opportunity to go too deeply into debt.
Fractional Reserve Banking
The modern banking system is a fractional reserve system.(8) Depositors (lenders) are encouraged by bankers (debtors) to deposit funds in banks. The bank offers a rate of interest to its depositors. The banker then lends out all but a small fraction of the money deposited. He makes an interest rate return on the money lent out. He pays a lower rate to depositors. The bank earns income through the spread between these two rates. The small percentage of the deposits kept in reserve can be used to pay to depositors who come in and withdraw their money. The banker assumes (correctly) that on most days, the amount of money deposited will be close to the amount of money withdrawn. The bank keeps a small reserve to make up any excess of withdrawals over deposits.
The system rests on a lie. The bank offers all of the depositors a guarantee: you may withdraw your money on demand. Yet it then lends the deposits to debtors who by contract need not repay for months or years. The bank is, in the investment world's phrase, "borrowed short and lent long." The bank cannot make good its promise of "withdrawal on demand" if too many depositors come in and demand their money on the same day. If depositors believe that a bank is in trouble -- suffering from excessive withdrawals -- fear spreads. A bank run begins. When this happens, a line of would-be withdrawers forms in front of a bank. Lines spread to many banks. Even if one bank can be bailed out by other banks, or the nation's central bank, a large number of banks cannot be bailed out at once, except by printing money to hand out to depositors.
The banks' guarantee is then exposed for what it was from the beginning: no better than the banking system's ability to fool depositors about the inherent risk in a payments system that rests on a statistical impossibility. The banking system as a whole cannot fulfill its guarantee sufficient funds for depositors to withdraw at any time. The banking system can fulfill it only when most depositors believe that the banking system can fulfill it. When a large number of depositors simultaneously reach the conclusion that the guarantee is not only impossible to fulfill (logic should have told them this), but is about to be defaulted on, the bank run begins.
When a large number of banks cannot meet their obligations, the domino effect begins. The payments system begins to collapse. An economy rests heavily on promises to buy or sell, to pay and deliver. This highly complex system of mutually interrelated obligations rests on the central promise of the banks regarding money: "You can get your money out of this institution on demand." If the banks default on this promise, all of the other promises in the economy are at risk. When the banks cease making payments to their depositors and to each other, almost every economic promise is called into question. It is not just the banks that have made promises; everyone has made promises. Employers have made promises to employees. Suppliers have made promises to deliver goods and services. Producers have invested resources in making available goods and services that cannot be sold under the new conditions. They stop making any further investments. They fire employees.
The social division of labor rests on a reliable means of payment. But the fractional reserve banking system is inherently unreliable. It rests on a known lie that is called into question by depositors periodically. When this happens, the payments system breaks down. As a result, the social division of labor shrinks rapidly. This destroys the market for specialized production. The greater the degree of specialization, the more vulnerable the seller is to falling demand. Unemployment increases. Fear spreads. The downward spiral accelerates.
The breakdown in the payments system has an effect very much like the effect caused by a creditor who takes the debtor's upper millstone. In a breakdown in the payments system, the miller still owns the upper and lower millstone, but he cannot sell the output of these stones at the previous high price. There is insufficient demand at the previous price, or perhaps at any price. Yet he has built his way of life -- his pattern of expenditures -- on the expectation of a particular stream of income. The breakdown in the payments system dries up his stream of income. He must now seek other forms of income. This usually means producing less specialized goods or services. Yet he enters this less specialized market at a time when large numbers of other specialized producers are abandoning their occupations in an attempt to replace their dried-up income streams. We call this event an economic depression. It can come in one of three forms: a collapse of the banking system and a reduction in the supply of credit (deflation), a vast increase in the money supply through the printing press (inflation), or inflation with legislated price ceilings (shortages and rationing).
The breakdown in the payments system destroys the accuracy of the array of prices in the economy that had been established under the older payment conditions. It is as if all the information in a computer became erroneous. The crucial information previously generated by the price system is undermined by the breakdown in payments. The intricate web of supply and demand is shredded. Forecasts made in terms of the previous array of prices are exposed as wasteful. Capital projects are exposed as loss-generating. Promises made to employees threaten the survival of their companies. Everyone's life style is threatened by the breakdown in promises caused by the breakdown in the payments system. This is the inevitable effect of the fractional reserve banking system. The lie is universally exposed as a lie. Statistically, this time of exposure -- this day of reckoning -- has to happen eventually. Yet most men are surprised when it does.
Because the credit money system applies to all participants in the market, its breakdown endangers everyone. It is not a case of one debtor's default. Such a default may temporarily undermine the payments system of those to whom he previously bought and sold, but this disruption is temporary and local. But when the banking system collapses, the effects are widespread. There is no fall-back position for the vast majority of the producers in the economy, i.e., no reserves. The reserves were in the banks. They are long gone. Only those people who enjoyed a debt-free way of life based on a low division of labor can go through the payments adjustment period without experiencing a potentially devastating psychological crisis. The Amish and especially the Hutterites may go through the payments crisis unscathed, assuming that their gun-owning neighbors and well-armed local police force protect them from thieves. Residents in the deepest bayous of Louisiana may not experience a large change in their life style. Almost everyone one else will.
Conclusion The law prohibiting a creditor from taking a man's tools of production as a pledge supports a higher social division of labor.(9) By enabling the producer to stay in his chosen line of business, this law encourages him to supply the demand of consumers more efficiently. The debtor does not forfeit his way of life, just so long as he repays his loan on time, as he promised. He retains the ability to repay his debt. A debt incurred on the basis of his previous level of income is more easily repaid when he keeps his tools of production.
The problem comes when everyone has made pledges, i.e., contracts. They have promised to buy or sell at a specific price. They have become dependent on the promises of others to buy or sell at specific prices. Their way of life is based on the maintenance of an expected array of prices. The breakdown in the payments system destroys these expectations. It forces men to break their promises. The fractional reserve banking system cannot indefinitely fulfill its pledge to allow depositors to withdraw their funds at any time. At some point, the banking system's pledge will be broken: depositors cannot withdraw their money, unless the money is inflated, low-value paper money. Everyone's income falls because of the rapid and widespread shrinking of the division of labor.
When men move from a high level of income based on a high social division of labor to a low level of income based on a reduced social division of labor, they experience a loss of dignity. The economy's collective economic depression produces individual psychological depression. This is why fractional reserve banking is a threat to society. By violating the Mosaic law's restriction on multiple indebtedness, fractional reserve banking places society at great risk. At some point, the statistical risk of a breakdown in the payments system produces the event. Very few people are ever prepared for it. Personal self-esteem suffers a devastating attack. Men's dreams are wiped out.
The law prohibiting a lender from entering the home of a debtor to take possession of the debtor's pledge preserves the dignity of the debtor. It protects the boundaries of his home, which means the boundaries of his covenantal authority as the head of his household. Until he defaults on the loan, he maintains at least some degree of dignity. This is important for a man's productivity. It is therefore important for maintaining society's wealth. Men who have lost their self-confidence do not make effective entrepreneurs and workers.
Footnotes:
1. "And he took the book of the covenant, and read in the audience of the people: and they said, All that the LORD hath said will we do, and be obedient" (Ex. 24:7).
2. Ray R. Sutton, That You May Prosper: Dominion By Covenant (2nd ed.; Tyler, Texas: Institute for Christian Economics, 1992), ch. 2.
3. The great evil of social contract theory, whether Lockean or Rousseauvian, is that it is seen as a judicial bond among equals. These equals contract together to create a superior entity, the State. There is a hierarchy, but it is strictly a natural hierarchy. It is said to be governed by natural law, not supernatural law.
4. This is why fermented wine is also one of the sacraments. It is part of the full life, the good life. Being without it is a curse of God for sin. "Forasmuch therefore as your treading is upon the poor, and ye take from him burdens of wheat: ye have built houses of hewn stone, but ye shall not dwell in them; ye have planted pleasant vineyards, but ye shall not drink wine of them" (Amos 5:11).
5. Gary North, Victim's Rights: The Biblical View of Civil Justice (Tyler, Texas: Institute for Christian Economics, 1990).
6. "If thou afflict them in any wise, and they cry at all unto me, I will surely hear their cry; And my wrath shall wax hot, and I will kill you with the sword; and your wives shall be widows, and your children fatherless" (Ex. 22:23-24).
7. Gary North, Tools of Dominion: The Case Laws of Exodus (Tyler, Texas: Institute for Christian Economics, 1990), pp. 738-40.
8. Gary North, Honest Money: The Biblical Blueprint for Money and Banking (Ft. Worth: Dominion Press, 1986), ch. 8.
9. In the United States, a man who declares bankruptcy must turn over his assets to the court, which sells them to repay his creditors. But there is an exemption: the tools of his trade.
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