Update: 4/13/20
The Lord will open to you his storehouse of the heavens to give the rain for your land at the right time, and to bless all the work of your hand; you will lend to many nations, but you will not borrow. The Lord will make you the head, and not the tail; you will be only above, and you will never be beneath, if you listen to the commandments of Yahweh your God that I am commanding you today, so as to observe and to do them, and if you do not turn away from any of the words that I am commanding you today, to the right hand or to the left, so as to go after other gods to serve them (Deuteronomy 28:12–14).The foreigner who is among you will rise up above you higher and higher; you yourself will come down lower and lower. He will lend to you, but you will not lend to him; he will be the head, and you will be the tail. All these curses will come on you and will pursue and overtake you until you are destroyed. This will happen because you did not listen to the voice of the Lord our God, so as to keep his commandments and his regulations that he commanded you (Deuteronomy 28:43–45).
I discussed these passages in detail in Chapter 70 of my commentary on Deuteronomy: "Credit as a Tool of Dominion." The theocentric issue here is God as the source of both positive and negative economic sanctions. These sanctions lead either to the corporate inheritance or disinheritance of nations. The nations will become Israel’s inheritance if Israel obeys God. Israel will become the owner of the other nations’ capital. This will in turn elevate Israel’s political power over them. In short, “Rich people rule over poor people, and one who borrows is a slave to the one who lends” (Proverbs 22:7). [North, Proverbs, ch. 67]
These parallel passages reveal the fundamental nature of consumer debt. Consumer credit and consumer debt are not neutral ethical issues. They are covenantal issues. They reveal the outworkings of two rival ways of life: covenant-keeping and covenant-breaking. Moses’ listeners fully understood the difference between a creditor and a debtor. It was a blessing to be a creditor; it was a curse to be a debtor.
If we were to look at specific debt arrangements today, they would appear to be voluntary. Someone wishes to increase his consumption of goods and services, and he can do so by taking on a debt. Someone else wishes to increase his net worth by sacrificing consumption in the present for greater income in the future. He lends money to the person who wishes to increase consumption. But in the era of the Old Testament, and in fact prior to about 1920 in the United States, consumer debt was primarily generated by a crisis in some families’ lives. Consumer credit was the result of major setbacks in the lives of certain individuals.
Collateralized credit for business purposes existed in the Old Testament era. Such arrangements can be found in the records of ancient civilizations. There was a developed credit market in Babylon and even earlier civilizations. Entrepreneurs made decisions about the likelihood of profitable ventures. They would sometimes borrow in order to fund these ventures. Without the funding, the businessman would be unable to launch the ventures. But these were highly risky debts. A person’s failure to meet his debt obligations could lead to severe negative sanctions. The person could lose whatever he had used as collateral for his debt. He might even be sold into servitude.
So, there is always an element of subordination in any debt relationship. The borrower really is servant to the lender. As long as he can make his payments, he maintains his independence, but this independence is based on an economic contract. If he fails to meet the terms of this contract, he can lose his independence.
The two passages clearly reveal that the ability to extend debt is based on greater wealth. The individual who is in a position to lend money is already economically successful. He has already received the blessings of God. The first 14 verses of Deuteronomy 28 deal with God’s visible blessings in the lives of covenant-keepers. These blessings involve economic blessings, but they are not limited to economic blessings. They are part of a general pattern of causation in history. Moses had already revealed that the blessings of God in history are there to ratify God’s covenant with the people of Israel. “He fed you in the wilderness with manna that your ancestors had never known, so that he might humble you and test you, to do you good in the end, but you may say in your heart, ‘My power and the might of my hand acquired all this wealth.’ But you will call to mind the Lord your God, for it is he who gives you the power to get wealth; that he may establish his covenant that he swore to your fathers, as it is today. It will happen that, if you will forget the Lord your God and walk after other gods, worship them, and reverence them, I testify against you today that you will surely perish” (Deuteronomy 8:16–19). [North, Deuteronomy, chaps. 22, 23]
The earlier passage in Deuteronomy 28 is a call to money lending. In other passages in the Mosaic law, covenant-keepers are forbidden to extract interest payments from other covenant-keepers who have fallen into hard times. This was an aspect of charitable giving. The lender forfeited the rate of legitimate return that he could have received if he had lent money to covenant-keepers who were involved in business ventures, or to covenant-breakers who had fallen into hard times. Instead, he lent to covenant-keepers in distress.
Lending was a means of extending dominion over the lives of covenant-beakers. Put differently, lending was a program of dominion. It was the dominion of covenant-keepers at the expense of covenant-breakers.
One Mosaic law authorized money lending at interest to aliens in the land who were not regular participants in the worship of God. The Hebrew word for these people was nokree. They were spiritual outsiders living inside the boundaries of the nation of Israel. “To a foreigner you may lend on interest; but to your fellow Israelite you must not lend on interest, so that the Lord your God may bless you in all that you put your hand to, in the land which you are going in to possess” (Deuteronomy 23:20). [North, Deuteronomy, ch. 57] But there was another kind of foreigner, a resident alien who did worship God, but who was not a member of the congregation yet. There was a prohibition on lending at interest to him. “If your fellow countryman becomes poor, so that he can no longer provide for himself, then you must help him as you would help a foreigner or anyone else living as an outsider among you. Do not charge him interest or try to profit from him in any way, but honor your God so that your brother may keep living with you. You must not give him a loan of money and charge interest, nor sell him your food to earn a profit” (Leviticus 25:35–37). The sojourner (to-shawb) was to be treated as a brother: kindly. He was to be granted charity when needed. [North, Leviticus, ch. 28]
In the New Testament, Jesus extended this principle. “If you only lend to people from whom you expect to be repaid, what credit is that to you? Even sinners lend to sinners, to get back the same amount. But love your enemies and do good to them. Lend, expecting nothing in return, and your reward will be great, and you will be sons of the Most High, for he himself is kind toward unthankful and evil people. Be merciful, just as your Father is merciful” (Luke 6:34–36). [North, Luke, ch. 10] In the New Testament, lending to people in distress is a form of mercy. It is a form of evangelism. It is a way to testify to God’s mercy. This is an extension of the famous passage in the Lord’s prayer: “Forgive us our debts, as we also have forgiven our debtors” (Matthew 6:12). [North, Matthew, ch. 12:C] The extension of credit to people in distress is therefore not to be evaluated in terms of profit and loss. It is also to be seen as a means of evangelism. It has to do with a personal universe governed by a God who has shown mercy to covenant-keepers.
The general outlook of the Bible regarding debt has not changed. Debt is still seen as a liability. It is still seen in terms of a hierarchical system of economic authority. The borrower is servant to the lender. The apostle Paul wrote this: “Owe no one anything, except to love one another. For he who loves his neighbor has fulfilled the law” (Romans 13:8). [North, Romans, ch. 12] It is a good thing to be a lender. It is a good thing to be the recipient of sufficient wealth in history to enable you to lend. But lending should be governed by the principles of evangelism, not simply by the principle of increased wealth. God is entitled to a positive rate of return. He expects this. This is what the parable of the talents is about. But this process of extending the kingdom of God is twofold. There is a profitable element in becoming a money lender, but there is also a charitable element. A person who is in a position to lend money should be aware of both aspects of credit and debt.
As I have already discussed in Chapter 29, lending is an aspect of time orientation. Some individuals are highly future-oriented. They discount the value of future wealth at a much lower rate of interest than a person who is present-oriented. They are willing to forfeit present consumption for the sake of greater future consumption. They are willing to lend at a low rate of interest. They transfer the control of money over to a borrower, but only on this condition: the borrower agrees to pay back the loan, plus a positive rate of return, which we call the interest rate. The fact that some people are present-oriented, and are therefore willing to become debtors, is indicative that there are fundamental differences between people with respect to time preference. I have cited the work of Harvard political scientist Edward Banfield, who in the late 1960s described present-oriented people as lower-class individuals. I think this is a correct assessment. There is an ethical component to both credit and debt. It is far better to be future-oriented than present-oriented. Being future-oriented is a blessing of God. Being present-oriented is a curse of God.
These rival views of time manifest themselves in children as early as age four. There was a famous psychological experiment conducted by a psychologist at Stanford University, Walter Mischel. It was conducted in the 1960s and 1970s. It involved dozens of young children. A young child would be left in a room with a marshmallow. The psychologist would tell the child that the child would receive a second marshmallow if he did not eat the marshmallow in front of him. Then the psychologist would depart for 15 minutes. This rate of return was of course astronomical: 100% in 15 minutes. There was a moving picture made of each child. Some of them squirmed. Some of them ate the marshmallow. Some of them avoided eating the marshmallow, generally by not looking at it. There were follow-up studies of the performance of these students in high school and early adulthood. The students who had resisted eating the marshmallow generally had superior academic performance as teenagers and young adults.
From a biblical standpoint, individuals should be trained from a young age in the benefits of future-orientation. This is part of training for dominion. Christians should be taught to trust God’s providence in their lives. They can therefore rely on God to provide sufficient income to maintain their families, their businesses, and their specialized callings in life. They believe in ethical cause-and-effect in history. They learn not to trust their money, their brains, their entrepreneurship, and other earthly advantages. These advantages are not the result of impersonal luck, impersonal fate, or random events in history. They are part of a providential decree of God to extend the kingdom of God in history.
There is nothing immoral with lending at a rate of interest to the equivalent of the nokree: the covenant-breaker who has little self-discipline, and who is not interested in conforming himself to the ethics of God. He should be put in a subordinate position to the covenant-keeper. He should be reminded that he is subordinate to God, and one manifestation of this subordination is his position of indebtedness. Similarly, Christians should be taught from an early age not to become debtors in such arrangements for exactly the same reasons. They should not be subordinate to covenant-breakers.
When an asset is a productive asset, the borrower has to make an assessment of his degree of liability and risk in the that relationship. The purchase of a house by means of a mortgage is a common way for young people to establish ownership of an appreciating asset. If the contract does not allow the creditor to receive anything in return from a default except the collateral, namely the house, then such a debt may be legitimate. But if the debt contract enables the creditor to attach a lien against the wages of an individual, then it is better to rent and thereby avoid debt. The key issue is the collateral. If the loan’s collateral is a person’s future income, then the debt does place him in a position of servitude. It should be avoided.
When a person sells an item to another person, there is either an immediate exchange of present assets or the establishment of a credit/debt relationship. In the first case, one participant receives goods, services, or money from the other. The other party to the transaction receives the reciprocal: money. In the second case, one participant receives present assets in exchange for a promise to pay future assets: money. Credit and debt are simultaneous and reciprocal. One person surrenders ownership of goods, or legal claims on future goods, or else he supplies present services. For this, he receives the other person’s promise to pay future goods or services, or ownership of a third party’s promise to provide goods or services in the future. There is present value received on both sides of the transaction. Promises to pay often possess present value. The more trustworthy the promise-maker is, the greater is the economic value of his promise, i.e., the lower the risk of default. Because promises to pay possess present value, there is value for value exchanged. Neither party in the exchange is asked to surrender something for nothing. Neither party is expected to gain something for nothing. Each party exchanges in order to receive something of greater value to him than what he surrenders. But there is not an exchange of presently consumable wealth. One (or more) party in the transaction promises to pay future consumable wealth. In most exchanges in a modern economy, there is an element of delayed payment. Most exchanges have an element of debt and therefore credit. Most exchanges are by check or digital transaction. Only a comparative handful of exchanges involve currency, which means current payment. Very few exchanges are pure barter.
Barter is characteristic of a low division of labor society, i.e., a backward society. Therefore, the greater the division of labor, the greater the level of debt/credit. The greater the division of labor, the greater the specialization of both production and consumption, i.e., the greater the number of choices. The greater the number of choices, the greater the wealth of the society. If credit produces wealth through thrift, then so does debt. Credit and debt are two sides of the same legal relationship. We can accurately say, then, that debt produces wealth. There is no way around this fact until such time as all electronic payments are cleared instantaneously.
The high per capita output of modern society rests on an extensive division of labor and therefore extensive credit/debt. Without credit/debt, most of the world’s population would die within a few weeks. There is a tendency for traditional critics of modern life to disparage debt. Christians may quote Paul (Romans 13:8). But the debt discussed by Paul, which Paul rejected, was not the debt of 30-day deferred payments (credit cards) or the period needed for checks to clear the banks. The debt in question was long-term debt. As to how long a debt period must be before critics begin to challenge its legitimacy, there is no way to say in advance.
Debt establishes a legal bond between creditor and debtor. A person who writes a check or uses a digital credit instrument to buy something has established a legal relationship with the seller. This relationship lasts until the check clears and the seller’s bank account is credited with the money. Then the legal relationship ends, unless there was some sort of guarantee with respect to the good or service.
A guarantee is another form of debt. When an automobile manufacturer sells a vehicle with a six-year or 100,000-mile (or kilometer) guarantee, the manufacturer becomes a debtor to the buyer. This is not usually called a debt, but the sales contract establishes a debt. There are people who claim to be opponents of debt who would accept the legitimacy of a performance guarantee of some kind. This indicates that they have not thought through the meaning of debt.
We do not think of an automobile manufacturer as being subservient to the buyers, but it is. It has issued legal guarantees. From time to time, we read of vehicle recalls by a manufacturer. The firm offers to make a free repair of a faulty part. It costs millions of dollars just to inform the buyers of the recall, let alone make the repairs. The buyers may be subservient to the automobile manufacturer. Buyers usually buy on credit. The credit may be issued by a bank, but it also may be issued by the manufacturer, who has set up a division for making loans. The extension of debt by the seller of goods is part of the overall sales campaign. There may be more profit in the debt contract than in the sale of the product. A manufacturer may be using the product as a means of persuading buyers to accept debts. So, for buyers and sellers, mutual promises over time may extend for years. Each party is subservient to the other in some way. Each has extended credit and accepted debt in order to facilitate the original transaction.
Then why does the text say that the nation that has extended credit is the master, and the nation that has accepted a debt is the servant? What have nations got to do with anything, analytically speaking? The transactions are all individual. In what way are national entities involved? I discuss these issues in the next section.
God says clearly in these passages that the extension of credit is a means of dominion. There are winners and losers. These individual winners and losers belong to specific covenantal associations, called nations. Gains and losses, when added up, establish criteria for winning nations and losing nations, or rival groups within a nation. There can be no question of God’s assessment of credit and debt. First, it is better to lend than to borrow (Proverbs 22:7). Second, this is as true of nations as of individuals. Third, the extension of credit is a tool of dominion. If you wish to rule, become rich. If you wish to rule, extend credit. What is not said here, but is surely implied, is that one means of becoming rich is to extend credit. The creditor gains present legal title to future goods by surrendering present title to present goods. He values the future goods promised by the debtor more than he values the present goods that he surrenders to the debtor in order to establish the creditor/debtor relationship. He presumably is more future-oriented than the debtor. He is therefore in a higher class.
High present-orientation is not true of a debtor who is using the debt to build a business or gain an education or in some other way become more productive. He has adopted an economic position described by the Bible as subservient, but he does this temporarily for a purpose: to become a ruler later. This pathway from servant to ruler is basic to the entire Bible story, from Adam, who was required to obey God in the garden before becoming a ruler over the earth, to Joseph, who served Potiphar and the prison master, to Moses, who was God’s servant, to Christ, as the archetype of servant become master (Philippians 2:5–11). [North, Epistles, ch. 20] This is why debt for productive purposes is legitimate for a dominion-oriented covenant-keeper. Nevertheless, the debt-burdened covenant-keeper should acknowledge the reality of his subordinate condition during the period of the debt. He is paying for his future authority to rule by spending a period in bondage. This is not a cost-free arrangement. Israel was a servant of Egypt, but at the exodus, Israel collected what was owed (Exodus 12:35–36). There are periods of subordination for a nation, and then there may be periods of dominance. During the nineteenth century, England was the world’s money-lender and investor. The United States was a debtor nation to England. But the debt was productive debt. It was used to build canals, railroads, and other capital projects. After World War I bankrupted nations in Europe, the United States became a creditor nation. The same legal relationship—creditor/debtor—changes character when the debt is used for consumption.
When an individual borrows money to purchase goods that depreciate, he consumes his capital. What capital? First, it is his ability to borrow, which is a capital asset. He uses it for present consumption rather than future production. Second, he consumes his future income, which is now owed to the creditor. This income could have been used to lend out or create a business, but it belongs to the creditor until the debt is repaid.
Long-term capital consumption is the road to poverty and servitude. This process reduces a person’s future options, i.e., his choices. This is the meaning of poverty: few choices. Capital consumption reduces a person’s ability to become more productive. If done in old age, it reduces one’s economic legacy.
We must consume in order to live. Some luxury spending is part of God’s rewards in history: post-production, not pre-production. Charity is also positive. But only in emergency conditions should a person use borrowed money to buy consumer goods, which are usually consumed rapidly. Charity creates long-term dependence on the donor by the recipient, unless it is designed to avoid this effect. Charity that establishes dependence is like credit that establishes dependence. It is a tool of dominion. Charity that is financed with borrowed money creates a hierarchy of dependence: from the creditor to the borrower to the recipient. A nation whose members are expanding their credit through their thrift is extending its dominion. Properly put, a nation whose residents have extended credit, net, to residents of other nations have extended the dominion of their nation or society. As individuals acting in their own self-interest, they have extended their nation’s corporate dominion. This market-produced fusion of personal dominion and corporate dominion was not widely understood prior to the publication of Adam Smith’s Wealth of Nations. Conversely, Deuteronomy 28:43–44 indicates that a nation that is a net borrower may be under a long-term curse, or it may be involved in a capital-formation program. It depends on what the debt is being used for: consumption or capitalization. [North, Deuteronomy, ch. 70:B] This assessment of a corporate condition implies that the reason for individual indebtedness is influenced by a shared corporate worldview and a shared corporate rate of time orientation. Individuals within a group view dominion in much the same way: it is either worth sacrificing present consumption in order to attain it, or else it is not worth it. This means that corporate groups are more than the individuals who compose them. It also means that exclusive methodological individualism is not biblical. Three of the four specific covenants of God are corporate: familial, ecclesiastical, and civil. Confessions can also be national (Exodus 19:7–8). Covenant sanctions are corporate.
If the means of establishing a credit/debt relationship between individuals is trade, then so is the means of establishing a credit/debt relationship among groups, including nations. Trade across borders is conducted between individuals: across national borders, across state borders, across city borders, and across the street. Despite the fact that trade is between individuals, trade has corporate effects within borders. A familiar proverb says, “Birds of a feather flock together.” So do people. People with a shared worldview tend to adopt similar spending and saving habits. These habits create corporate patterns of thrift.
In the late twentieth century, market researchers discovered the existence of a series of comprehensive, statistically significant correlations among people who live in the same zip code, i.e., a postal delivery neighborhood. These correlations are lifestyle correlations. Over 60 separate postal code lifestyle classifications were known to exist in the United States in the 1990s. These correlations are geographical. Marketers make accurate decisions in terms of these geographical correlations. This phenomenon has been called clustering. To limit a discussion of trade to pairs of individuals would lead the analyst to overlook clustering. This clustering can be intensely local. It can also be international. Most of the time, the extent of clustering is not perceived by residents. While most people can recognize differences of neighborhood income and such neighborhood phenomena as mowed lawns, painted homes, and other aesthetic identification markers, the techniques of scientific surveying reveal subtle differences that residents do not consciously recognize, such as favored brands of products or favored forms of recreation. Because such detailed and objective local distinctions can be identified scientifically and verified by the results of test marketing by profit-seeking companies, local characteristics can accurately be said to exist. There are also well-known characteristics of nations that residents inside and outside readily acknowledge. The old joke about purgatory being a world in which Germans are the comedians, the French run the bureaucracies, Italians own the banks, India runs the transportation system, and the English are the chefs, is amusing because national characteristics are widely recognized. Racial and national characteristics provide the most familiar distinguishing marks of “them vs. us.” People identify themselves as members of a group that provides them with meaning, security, and a sense of belonging to an inter-generational group that offers personal significance. Less meaningful in industrial societies are tribal distinctions that once were matters of life and death. Clan membership used to be significant for survival in Scotland, but no longer. And, because of the effects of humanism, theological confession has been relegated to official insignificance in the civil realm. Yet humanism proclaims an intensely theological confession regarding the nature of God, man, law, causation, and time.
Trade between individuals can and does result in corporate assessments regarding corporate winning and losing, kingdom-building and kingdom-surrendering. The assessments in Deuteronomy 28 regarding the comparative success of Israel among the nations points to the possibility of corporate progress over time. Trade by individuals is rarely discussed in the Mosaic law, other than in the context of oppression or sabbath-breaking. The personal benefits of trade are rarely mentioned. Yet the national effects of debt are discussed here in terms of covenant-keeping and covenant-breaking. The Bible’s main passages that discuss economic results—Leviticus 26 and Deuteronomy 28—begin with a nation, not individuals. The text makes it clear that it is better to extend credit than to amass debt. Yet to extend credit is to indebt the recipient. The context of these passages is the exercise of lawful rule. The passage discusses international politics, not wealth-creation. It discusses the results of a series of voluntary exchanges between sellers and buyers. The corporate results are national debt, meaning national subordination, and national credit, meaning national domination. Out of millions of politically unplanned, mutually agreed-upon voluntary exchanges comes national servitude or dominion. Out of many, two.
How can this be? How can a series of unplanned individual exchanges produce long-term corporate results that are described here as covenantal curses and blessings? Because of causation in history. Social causation is covenantal. It has to do with confession and lifestyle, with word and deed. The confession and lifestyle that God mandates in Deuteronomy rests on His national covenant. Those who had covenanted with God—Israelites—were distinguished from resident aliens and residents in other lands. The individual covenant is structured so as to produce dominion for God’s corporate kingdom. So are the familial and ecclesiastical covenants. They are of one piece. They are a “package deal.” All work together to extend God’s kingdom in history. (I deliberately use the present tense.) If a society abandons one of the pieces, it has compromised its status as covenantal under God. God’s covenants capitalize the kingdom of God. They create a lifestyle that is favorable to economic growth. This means that the laws of the covenants promote personal thrift, hard work, careful planning, honest money, private property, and entrepreneurship. Yet the actual words of the four specific covenants do not require the oath-taker to pursue allegiance to most of these economic means to the larger end, namely, the extension of God’s kingdom in history. The eighth commandment (Exodus 20:15) does require the oath-taker to forego theft. [North, Exodus, ch. 28] This is an affirmation of private property. The tenth commandment (Exodus 20:17) against covetousness reinforces this affirmation. [North, Exodus, ch. 30]
The New Testament’s clearest statement with respect to lending is found in Jesus’ parable of the talents (Matthew 25:14–30). [North, Matthew, ch. 47] The parable is about the stewardship of a man’s God-given resources in history. The man who buried his talents, returning nothing extra, had misunderstood the biblical principle of value-added investing. He was criticized harshly by the owner, who told him that he should have lent the money at interest. This passage legitimizes banking and interest. The money returned to the owner should have been more than the money delivered because interest was available to the risk-aversive steward. By forfeiting any interest return, the steward cheated the owner of a legitimate return on the use of his money.
The great advantage of debt is that it provides leverage. Let me illustrate the power of leverage.
1. Leverage Is Two-Way
An investor borrows 90 ounces of gold to make an investment. He may be an entrepreneur who has a business. He may be a speculator. He uses ten ounces of gold of his own money, and he borrows the 90 ounces. He makes an investment that is worth 100 ounces of gold. Let us say that the value of that investment doubles over the next year. He now has 200 ounces of gold. If he borrowed the 90 ounces at 5% interest, he repays the lender 94.5 ounces. This leaves 104.5 ounces of gold in the account. On the basis of his investment of his own ten ounces of gold, he has made 94.5 ounces of gold. That is almost 9 ½ times his initial investment. If a person invests wisely with borrowed money, his rate of return on his investments will be very high. Had he invested ten ounces of gold with no leverage, he would have 20 ounces of gold at the end of the year. That is a profit of 100%, but that is nothing compared with 9 ½ to one.
The problem with leverage is that it is a two-way street. If the person borrows 90 ounces of gold, and the investment falls to half of the initial investment of 100 ounces of gold, he will owe the investors 94.5 ounces of gold at the end of the year. The investment will be worth only 50 ounces of gold. How will he repay the creditors? He has a liability of 104.5 ounces. He has lost his initial investment of ten ounces. Where will he get the extra money to repay the lenders?
The threat of loss reduces people’s degree of leverage. They do not borrow 90 ounces of gold in order to make a 100-ounce investment. They may borrow 50 ounces to make a 100-ounce investment.
In the commodity futures markets, people do borrow at very high ratios. But if the investment declines in value, the borrower receives what is called a margin call. He must come up with additional money to maintain the contract. If he does not do this, his commodity broker will sell the contract, and he will be out whatever money he invested. Under extreme circumstances, he could become liable for a great deal more than his initial investment. This does not happen often, but it can happen. He is at risk for all of the money. The brokerage firm can then force him to pay this money out of his existing capital base. The commodity futures market is a highly uncertain market, and most investors do not profit in this market. It is a market limited to people with a great deal of money or middle-class people who are willing to bear a great deal of uncertainty.
The existence of debt enables successful investors to accumulate enormous wealth within one lifetime. What would have taken a family several generations to accumulate, one individual can accumulate within two or three decades. Most investors do not successfully use debt, and they disappear from the market. Successful investors do use debt, and they become dominant in their particular markets. This has led to large corporations that have significant market share. But these corporations rarely survive three generations. They accumulate enormous wealth by means of debt, but they dissipate this wealth over time. They do not maintain dominance on a permanent basis. In this sense they are like most families. The founder of a family may accumulate enormous wealth, but, over time, the heirs dissipate that wealth. The regression to the mean reasserts itself. These families no longer remain dominant in whatever field the founders initially established what looked like a dynasty. The market process enables the creation of large, successful companies in relatively brief periods of time, but then this same process shrinks the profitability of these older established firms. The more debt they have, the more vulnerable they are in times of recession.
2. Asymmetric Credit/Debt
Beginning in the late nineteenth century, this arrangement began to be modified by the advent of limited liability corporations. As these corporations multiplied after World War II in the United States and around the world, the risk of liability fell dramatically. Loans made to corporations have a limit: the net value of the corporation. Creditors cannot extract more money out of the corporation than the corporation possesses if the corporation defaults on its debts. It can declare bankruptcy, and the creditors will divide whatever assets remain after the sale of the corporation. They are not allowed to demand payment by investors in the corporation. So, the liability associated with loans to corporations is borne more by lenders than by investors and managers of the corporation. This arrangement has led to escalating debt. Investors are willing to lend money long-term to corporations, even though they cannot be repaid beyond the money raised by the sale of the corporation’s assets in a bankruptcy.
There is another aspect of corporate debt that is rarely discussed. It is an asymmetric investment. Let me explain. If an investor buys a 30-year bond from a corporation for one ounce of gold, and the bond pays 5% per annum, the bondholder becomes an entrepreneur. This is because the market value of the bond will vary inversely to the rate of interest that is applicable to the expiration date of the bond. If an investor buys when bonds of this risk pay 5%, and the interest rate falls to 2.5% shortly after the person has purchased the bond, the value of the bond will double or close to it. Why? In order for someone to gain the same rate of return on his investment that the previous bondholder gained on his investment, he will have to spend two ounces of gold to purchase the bond. The bond holder has reaped a speculative reward.
The company that issued the bonds earlier at 5% may have a large debt on its books. It may want to reduce that debt. So, it borrows money at 2.5% from new bond purchasers, and it uses this money to repay the original bondholders. The original bondholders had hoped to get 5% of their money for 30 years, but now they will not be able to do so. The companies reserve the right to pay off the bonds early.
On the other hand, what happens to the bondholder if the rate of price inflation rises, and the rate on the bond goes to 10%? Now the value of the bond falls by 50%. It takes only half as much money for a new investor to gain the same return on his investment that the original bondholder agreed to. So, the new investor is not going to buy a bond from an existing bondholder for anything like the amount of money the existing bondholder paid. Under these conditions, the company finds that it can pay off the 5% bonds because it is gaining more money as a result of its operations. The money is worth less, but it is useful for paying off bondholders at 5% per annum.
This is an asymmetric investment. An asymmetric investment is rather like this one: “heads, I win; tails, you lose.” If the interest rate drops, the companies have the option of paying off the bond early, and thereby escape the obligation of paying off bondholders at the higher rate of interest. On the other hand, if the interest rate rises, the companies then pay off the bonds on schedule with money that is worth less than it was when the original bondholders made the investment. The bondholders see the market value of their bonds fall because of rising interest rates.
This arrangement has placed bondholders at a disadvantage. It is better to be a borrower under these circumstances than it is to be a creditor. The combination of corporate ownership and central-bank inflation has created liabilities for bond holders that did not exist until the early twentieth century, and which accelerated in the second half of the twentieth century.
3. Government Debt
There is one form of indebtedness that does not suffer from the threat of early repurchase by the borrower. This is government debt. Governments issue debt that they are not legally allowed to pay off early. Furthermore, because governments are able to use the tax power to pay off their debts, they usually do not default. Hyperinflation is a form of default, but it has not been used in the industrial West above the equator since the hyperinflations of Germany, Austria, and Hungary after World War I. So, investors assume that they can safely invest in government debt, especially long-term bonds. For as long as central banks do not inflate sufficiently to create price inflation, thereby driving up long-term interest rates, and as long as governments continue to make regular payments on their debts, investors purchase government debts. The rise of government indebtedness, beginning with the outbreak of World War I in 1914, has proven to be relentless around the world. This money is not used for the purpose of increasing production. It is used to fund existing government policies and programs. The liabilities associated with government-guaranteed retirement programs, and especially government-funded medical programs for the aged, have now risen to levels that cannot possibly be repaid. The promises are a form of debt on the part of governments, and the governments will default on these debts. Those who have trusted in the governments to continue to make payments for their retirement pensions and their medical services will find that, as creditors, they have made disastrous investments for their entire working lives.
God tells His people to become creditors to covenant-breakers. The alternative is for covenant-breakers to become creditors to covenant-keepers. This is evidence that credit and debt are inescapable concepts. It is never a question of avoiding credit/debt. It is a question of who extends credit to whom.
As individuals, covenant-keepers are supposed to run balance of payments surpluses, i.e., sell more to covenant-breakers than covenant-breakers buy from them. Covenant-keepers are to lend money to covenant-breakers. How can this take place? It can if covenant-breakers spend more of their money on goods and services sold by covenant-keepers than they spend on goods and services sold by covenant-breakers. The difference in the total is lent by covenant-keepers to covenant-breakers. Is this a way to enable covenant-breakers to enjoy additional income without present production? Yes.
The idea behind this arrangement is that covenant-breakers are more present-oriented than covenant-keepers are. They buy consumption goods now. Covenant-keepers thereby become owners of foreign capital, reaping a future return by lending in the present. By extending credit, they purchase the future productivity of covenant-breakers. This is another way by which God extends His rule over the earth in history. He allows His people to act as His stewards, purchasing the future output of covenant-breakers. Covenant-keepers buy back the capital of covenant-breakers. They establish a legal claim to an ever-growing proportion of the world’s output. This passage, as with all of Deuteronomy 28, establishes the principle of methodological covenantalism. There are economic issues that are not dealt with accurately on the assumption that we must begin our economic analysis with either the autonomous individual or the corporate state.
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