THESIS: Nations hoping to bless people and grow the economy should draft laws that (1) help small businesses thrive, create jobs, and earn a profit for shareholders, (2) protect the nation from war and protect its citizens from crime, (3) use courts to protect the sanctity of contract and resolve conflicts between people and businesses, and that (4) provide some features of a safety net for the downtrodden.
You see it in the newspaper headlines. Every day people protest that the rich are not paying their fair share, that the “wealth gap” between the rich and poor is widening, that taxes are too high for the middle class and too low for the rich, that the capitalist system is corrupt and unfair. While these complaints are not entirely false, they often indicate a poor understanding of economics.
One of history’s great economic experiments took place when Canada and the United States were settled largely by the English, and Mexico and the nations of Central and South America were settled by the Spanish and the Portuguese. “Impose British rule on North America, and Spanish and Portuguese rule on South America, and see which one does better economically.”[1] Who would win the proverbial race to riches? “The early British colonies faced continual risk of starvation, while the Spanish to the south were planting tropical gardens and mining mountains of silver.”[2]
Yet, it is hardly controversial to state that the heirs of the British economy won the economic experiment. Why? A big part of the answer lies in the nature of Anglo-American law.
A nation’s economy is shaped less by its natural resources than it is by the environment the nation’s laws create around those resources.
“The north had [private] property rights, representative government, religious pluralism, and the rule of law. The south had none of these things.”[3]
As an example of the impact of the law on the economy, consider lending laws. Those who have money can increase it by lending to those in need and charging interest. If the borrower does not repay both the principal and the interest, the creditor may take from the borrower the agreed collateral, often the borrower’s house, farm, or the tools of his trade. And until it was outlawed in 1833, another option in the U.S. was to lock the borrower in a debtor’s prison and leave him there until the debt was paid. Individual lenders may have profited from such arrangements, but they were bad for society because they removed able-bodied workers from their families and from the economy.
The man who could be providing for his family and adding to the wealth of the nation through his labor was doing nothing, his energy and talents wasted in a prison cell. To cure this societal ill, we used the law to create bankruptcy protection, a system that allows most creditors to be paid a portion of what they are owed, while the defaulting borrower retains enough assets that he can enjoy what the law calls a “fresh start.” Legal arrangements such as this are one of the reasons our economy continues to thrive.[4]
When the King of Persia appointed Nehemiah the governor of Israel during a famine, the people came to Nehemiah in protest with complaints that sound a lot like today’s headlines:
“Now the men and their wives raised a great outcry against their fellow Jews. Some were saying, ‘We and our sons and daughters are numerous; in order for us to eat and stay alive, we must get grain.’ Others were saying, ‘We are mortgaging our fields, our vineyards, and our homes to get grain during the famine.’ Still others were saying, ‘We have had to borrow money to pay the king’s tax on our fields and vineyards. Although we are of the same flesh and blood as our fellow Jews and though our children are as good as theirs, yet we have to subject our sons and daughters to slavery. Some of our daughters have already been enslaved, but we are powerless, because our fields and our vineyards belong to others’” Nehemiah 5:1-5.
Nehemiah learns wealthy Jews have been lending to poorer Jews. And when the borrowers missed payments, lenders foreclosed, leading to circumstances so dire, borrowers sometimes sold their own children into slavery just hoping for enough money to be able to eat and keep everyone alive.
Such predatory lending practices are bad for the nation. But they also show a deep disregard for people and families. Where was the compassion?
Charging interest on a loan is not wrong. A man expects to pay for the privilege of borrowing another man’s money.
But unreasonably high interest or usury is wrong. And when lending to a countryman in need, even interest is not to be charged.
“If you lend money to one of my people among you who is needy, do not treat it like a business deal; charge no interest” Exodus 22:25.
Governor Nehemiah is outraged to see Hebrews taking advantage of each other during a famine.
“I was very angry … I told them, ‘You exact usury! … You are selling your own people … What you are doing is not right. Shouldn’t you walk in the fear of God? … I and my brothers and my men are also lending the people money and grain. But let us stop charging them interest! Give them back immediately their fields, vineyards, olive groves, and houses, and also the interest you are charging them” Nehemiah 5:6-11.
I disagree with some of the most conservative financial advisors. Borrowing money is not wrong in every situation. As my father once told me, “if we didn’t borrow money, you would have been grown before we could have gotten into this house. And if the church did not borrow money, we would have been stuck downtown for twenty years in a crumbling building.”
Borrowing has its place.
But lending laws should help people prosper, buy a modest home, and flourish. Lending laws should not result in defaulted loans, foreclosures, and people and businesses going bankrupt because of usurious interest rates. Remember the economic collapse of 2008? That happened because lending laws had been pushed to a point where borrowers were defaulting on far more loans than normal.
Although foreclosures and the Re-Po Man are a part of a working credit/collateral system, the best loans—and the best laws—are designed to allow both parties to gain. Both parties should benefit from the transaction.
That is what real compassion looks like. That is what Nehemiah wanted: we must have a system of finance. But we must also take care of our citizens and their businesses. High interest loans (in a system without bankruptcy protection)* are dangerous and hurt the society because they hurt so many of its borrowers. Loans that result in financial ruin should be extremely rare.
When a nation takes care of its poorest citizens, God will bless that nation.
“He that giveth unto the poor shall not lack” Proverbs 28:27.
God promises blessings on the nation that obeys Him:
“The Lord shall open unto thee His good treasure, the heavens to give the rain unto thy land in its season, and to bless all the work of thine hand. And thou shalt lend to many nations, and thou shalt not borrow” Deuteronomy 28:12.
“There should be no poor among you [if you obey], for the Lord will greatly bless you in the land the Lord your God is giving you as a possession to inherit” Deuteronomy 15:4.
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[1] See Andrew Wilson’s discussion of Adam Smith’s THE WEALTH OF NATIONS, in Wilson’s book, REMAKING THE WORLD: How 1776 Created the Post-Christian West.
[2] Id.
[3] Id.
[4] The economy also benefits from a strong national defense (fear of invasion has a chilling effect on business!), the enforcement of contracts in court, the prosecution of financial crimes including fraud, burglary, and robbery, laws that encourage small businesses, laws protecting inventions and other intellectual property, a tax regime that does not overly-burden businesses or their employees, and so on. Do I over-state the case? I guess I’m enthusiastic, having taught college students the “Legal Environment of Business” for years!
*Some argue high-interest loans have their place, because they allow those who are the worst credit risk to nevertheless borrow money. Pawn shop loans (200% APR), car title loans (300% APR), and payday loans (400% APR) do charge excessive interest but are allowed because the total amount loaned is small, the collateral lost in the event of default is not that significant, and the repayment term is short enough it should not become a burden, and again–it allows a person in need to get their hands on cash during desperate times.
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