A History of Lending: Part I
The idea of lending arose as early as the birth of the written script. Tokens found at a 1929 excavation site of the once powerful city state of Uruk in Mesopotamia (ancient Iraq) are thought to represent commodities for an ancient system of what we now think of as lending. Uruk’s cultural and political influence extended through the valley of the Tigris and the Euphrates 5,000 years ago, and it is now considered one of the first great ancient cities.
Research by Professor Denise-Schmandt Besserat of the University of Texas explored the tokens found at the site at Uruk. Tokens were kept in clay envelopes the shape of softballs called bullae and their contents were marked on the outside. The Bullae continued to be used even after the development of written script which lead to the assertion that they were more than just accounting tools- they were actual contracts. The contracts were representative of obligations individuals had to the temple. While researchers are unable to discern whether or not the obligation is the return of a loan, they were formalized commitments of future payments.
As the scale of the city and economic contracts grew, tablets began to be used instead of the bullae. While the economy of the Sumerian city was primarily based upon herding and agriculture during the fourth millennium, there was a certain “urban economy” whereby the people were taxed by the temple who then redistributed the economic resources. The importance of this central distribution system contributed to the movement of people closer to the city and the temple, further growing the city and the sophistication of it’s economic system.
A natural consequence of greater numbers of people moving towards a centralized area was the need to formalize lending transactions. In small communities where families knew each other lending resources was simpler, involving implicit agreements. As people began to live in larger communities with increasingly complex needs and more specialized skill sets, explicit agreements became necessary alongside transactions. It was in this milieu of population growth, scientific and financial development, that the idea of charging interest was born.
The Sumerian word for interest was mash which also meant calves. The latin term pecus or flock is the root word for “pecuniary”, and the Egyptian word is ms which means “to give birth.” As stated in Financing Civilization by William N. Goetzmann, these terms point to the derivation of interest rates as the natural multiplication of livestock. Since cattle was treated as the standard currency in pastoral societies, the idea of interest was applied to other commodities as well.
In the centuries following the Uruk period, ancient Akkadian (the peoples who succeeded the Sumerians around 2,500 BC) scripts show detailed cuneiform tablets that include what we now would consider mortgages, loan contracts, land deeds and partnership agreements. Studies of this period show the origins of early exploitation of the time value of money. The Persian period was a cosmopolitan era for the eastern Mediterranean and Asia. Many of the ideas and insights that were born during the time were spread to the Greeks who lagged in financial sophistication until around fifth century BC.
The Athenian financial system primarily revolved around maritime trade, so much of the financial institutions and lending practices were related to that rather than pastoral activity. Lenders invested money in trading and voyages and would receive returns as great as 25% if the ships returned safely, sometimes nothing if the ships were destroyed at sea. The Greeks tended to have a moralistic attitude towards lending however, and found it to be more exploitative than beneficial to the economy as a whole. Despite conflicting moral attitudes, the Greek shipping and financial system flourished throughout the Mediterranean. In Roman times pawnbrokers offered borrowers loans similar to what would now be considered payday loans where farmers would borrow money to plant crops then repay the loan when the crops were harvested. Pawnbrokers would hold borrower’s valuable items to keep the risk down.
The Middle Ages saw the commencement of governmental and religious regulation of lending practices. Christianity forbade usury, but Jews were permitted to lend to non-Jews. Even though usury was technically forbidden, Church officials manipulated and selectively used the usury laws to bolster the financial power of the church. For example, at times when it wanted to keep its own borrowing costs low, the church enforced the usury prohibition but when it wanted to loan money for interest, became more lax on the rules. Money lenders did their business from benches, when he stopped trading he would break his bench saying, “Banca Rupta” which is where the term bankrupt stems from. Indentured loans were popular through the middle ages up until the 18th century, where the borrower would work as a servant on the lender’s estate (sometimes indefinitely) to pay off debt. The period following saw yet another major transformation in the sophistication of banking and lending…Stay tuned to the blog as we continue to take a look back at the history of lending!