The History of Lending - Part 1
How do we calculate interest when we have barely invented math? (And the collateral is you.)
May 20, 2015
If you haven't read our five-part series on the history of money, now would be a good time to check it out. Now, we are going to go back to the beginning to explore the history of loans.
During the time periods in which barter and trade of commodity goods was the norm, lending with interest was not feasible because there wasn't a numerical basis for the calculations. If you need to borrow a cow and I have a cow, you can't really pay me back with one cow plus 10 percent. Assuming 20 percent interest, you would have to borrow five cows to pay back six after a year, and this isn't a very flexible loan program. So, because of the late invention of coin (about 750 BC), most of Ancient Sumerian and Egyptian history is simply out of the lending game. In the ancient world, we have a small window at the end of Babylon and the start of Persia, and we have the bulk of classical Greek and all of Roman history during which rather complex banking and lending arrangements develop.
Now, for all of these ancient cultures, the limit on how loans would be calculated was due to the development of mathematics. Decimal notation was invented in China during the first century BC and slowly made its way west. That means that it was not available for any of Babylonian, Persian, or Classical Greek history, and would not arrive in Rome until the Empire was teetering on the brink of collapse. So, the calculation of interest was constrained by the differing numeric systems and archaic mathematics of these distinct cultures.
It Started in Mesopotamia
In Mesopotamia (late Babylon and then Persia took over), when the invention of coin had spread south from Lydia in modern Turkey, the coins were based on the weight unit called the Shekel. Mesopotamian mathematics was all based on units of 60, from which we take our method of counting minutes and seconds of time and angle. Loans given at interest, which may have been invented here, basically had one method of accrual. At the end of every month, for every sixty shekels you owed, you paid one. This accrual basis of 1/60 per month equates to an annual interest rate of 20 percent. We have no information from contemporary records regarding how loans in Babylon and Persia were secured.
In the Greek World
The Greek world, which was contemporary with Persia, consisted of a few dozen independent city-states, each minting their own coins, all (for the most part) called Drachma. We had Athenian Drachma, Spartan Drachma, Corinthian Drachma, to name a few. In general, the market only took the local coin, so what were you to do if you wanted to get a lamb kebab shortly after arriving from Sparta with your purse full of Spartan Drachma? You went to the temple of Athena where a moneychanger would evaluate the condition of your coins and change them to the local coins for you. The fee would be one out of each sixty coins. For your 120 Spartan Drachma, you would get 118 Athenian Drachma. These would be sold to a traveler or merchant planning on going to Sparta soon. Or if there was no demand, they would be melted down, and the silver sold to the city government to be minted into Athenian Drachma.
The First "Bankers"
The temple priests, being those members of society most likely to be able to read and write, were the best equipped with the skills required for record keeping. In those cases where the temples acted as the money-changers, it became common practice for people who frequently turned in coin for changing to keep a sum "on account" rather than take the local coins. So, our man with 120 Spartan Drachma could turn them in for a voucher, redeemable for the sum of 118 Athenian Drachma. The temple did not pay interest, but the temple did find itself with a surplus of coin on hand. It probably wasn't long before someone realized that the economy of Athens could be stimulated by allowing merchants the use of that money.
What Happens with Delinquent Loans
In Athens, interest on loans was calculated on an annual basis at a rate of 10 percent. There were no subdivisions. If you borrowed 1,000 Drachma for one year, you paid back 1,100 Drachma at the end of the year. If your agreement was to borrow it for two years you paid back 1,200 Drachma. If you failed to pay it back, your creditor could renew the loan for a year or take you to court.
In the Athenian Democracy, a court consisted of 200 men chosen at random. If the case was over a dispute of a sum greater than 1,000 Drachma, the court would consist of 401 men, making a tie impossible. This "jury" would listen to both sides in the case and then render a decision.
In a case of non-payment of debt, the court had the option of nullifying the debt (only in the case of fraud by the creditor), ordering the confiscation of the debtor's property in a case where the debtor had the means to pay but for whatever reason had refused, or ordering the creditor to renew the loan if the jury felt that the borrower could pay if given more time. This last option would increase the amount of interest by an additional 10 percent. If the majority of the jury felt that the debtor did not have the means to pay the ever increasing amount of the loan under any circumstances, the debtor would lose his liberty, becoming the property of the creditor.
This form of debt-bondage was different from the practice of slaves taken in battle. An owner of a debt slave was required to "pay" the slave a set amount for each day of work, and when that amount added up to the amount owed, the liberty was restored. If the owner wanted to sell the slave, he had to pay the accumulated amount to the slave's new master as a deduction from the amount paid for the slave. In essence, the new master would be buying the remainder of the debt. A debt slave retained certain citizen rights that war slaves did not have.
In Part 2, we will look at the developments in lending in Rome and beyond.