The Origins and Nature of Bronze-Age Interest Rates
Michael Hudson examines some of the specific conditions that led to the practice of charging interest.
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Introduction[edit | edit source]
Charging interest was invented in Sumer in the third millennium BC. No contemporary evidence for interest‑bearing debt has been found in the Indus civilization or the Hittite kingdom. The Hittite debt cancellation edict of Tudhaliya IV refers to wergild-type compensation owed for personal injury, not interest-bearing debt.[1] Egypt’s sed festivals, unlike their Mesopotamian coronation or New Year-type counterparts, did not allude to debts. The fact that no archaic Egyptian debt records exist might theoretically be the result of destruction of the papyrus writing medium, but nearby regions that used clay tablets for public administration, such as Crete and Mycenaean Greece during 1600‑1200 BC, likewise have left no hint of commercial credit, no pooling of money by partnerships, and— most telling of all—no agrarian debt cancellations. It is the nature of interest-bearing debt to be strictly calculated and documented. The absence of debt records outside of Mesopotamia prior to the first millennium BC is thus a strong argument for its absence.
Neither gift exchange, dowries or fines have stipulated interest rates. Gift exchange might involve customary repayments, and even the one-upmanship of an increased valuation—what Marshall Sahlins called “negative reciprocity.” But that is not interest according to the formal economic definition of the term: a stipulated rate of return on a debt obligation (the principal) payable on a specific date. A failure to add something to the reciprocating gift does not lead to legal foreclosure, nor are sureties or contracts involved. Interest-bearing debts typically entail written contracts backed by witnesses and sureties, pledges of collateral, and the rate of interest often is publicly regulated (although the degree of enforcement varies).[2] These formalities indicate arms-length transactions, usually among unequals, in contrast to the more free‑floating gift-exchange obligations familiar to anthropologists. (Obligations among equals often are interest-free, as e.g., the eranos loans among classical Greek aristocrats.)
Six Features of Early Interest[edit | edit source]
1. Although ancient economies were predominantly agricultural, the practice of accruing interest seems to have been invented in the commercial sphere of Sumer, apparently with temples playing a catalytic role.
2. The terms máš in Sumerian and Akkadian, tokos in Greek and fænus in Latin signified a young animal, and hence the idea of birth. In time the terms came to mean interest. Rather than deriving from the pastoral economics of herding and the literal birth of animals, these terms referred to the periodic accrual or “birth” of the local unit fraction. The practice of using birth metaphors for interest started in third-millennium Sumer and diffused over about two thousand years to classical Greece and Italy.
3. Mesopotamia's commercial rate of 1/60th per month made it easy to compute interest regularly. This practice found its counterpart in other regions—1/10th in Greece, and 1/12th in Rome, reflecting their own respective systems of calculating fractions. It is thus a false trail to try to explain the long-term decline in interest rates on “economic” grounds. The apparent decline was an accidental byproduct of the numerical fraction system in each region, not reflecting economic rates of return or the debtor’s shrinking ability to pay.
4. Interest rates in the commercial and agricultural spheres remained distinct throughout most of antiquity. Rates for agrarian debts tended to reflect land rents. In Sumer’s case this was the sharecropping rate. Rents and agrarian interest rates both tended toward a norm of 1/3 by Ur III times, but there was more variation in agriculture than in the commercial sphere.
5. Although commercial lending in Mesopotamia did not seem to cause major society-wide problems, agrarian rates were above the “economic” rate that many cultivators were able to pay. The normal resolution of debt problems was to lose one's family members and land-rights, until such time as the ruler might proclaim an agrarian debt cancellation. But such Clean Slates became less frequent after the Middle Bronze Age. Interest-bearing debt without such royal cancellations led to economic polarization of the Babylonian, Greek, Roman and Byzantine economies.
6. There seems to have been a long tradition of considering the loan to be amortized when its interest payments had fully reproduced the principal. A hint of this idea is found in Hammurabi’s law §117 liberating bondsmen after three years of service. His choice of three years may reflect the fact that agricultural interest rates typically were 1/3 per year. In three years the value of the crop payments or personal services provided by the debt-pledge would have repaid the original debt. Two thousand years later, Justinian’s laws explicitly considered the debt was to have been paid off once the interest paid by cultivators had matched the initial principal.[3] This ruling seems to reflect a long-standing Roman practice since the time of Julius Caesar.
References[edit | edit source]
- ↑ Raymond Westbrook and Roger Woodard, “The Edict of Tudhaliya IV,” Journal of the American Oriental Society, Vol. 110, No. 4, (Oct.–Dec. 1990), pp. 641–59.
- ↑ Charging interest is different from imposing a penalty for late payment of an obligation. Archaic penalties often doubled the sum owed, but interest typically represented only a fraction of the debt obligation.
- ↑ John T. Noonan, Jr., The Scholastic Analysis of Usury, (Cambridge, Mass.: Harvard University Press, 1957), pp. 39–41. Marjorie Grice-Hutchinson, Early Economic Thought in Spain, 1177–1740, (London; Boston: G. Allen & Unwin, 1978), p. 29, citing Justinian’s Laws (Codex 4:32:3; Institutions 3:14:2; Digest 12:1:2:1; 13:6, f. 3, n. 6 and f.4; 44:7:1:4; 50:16:121).
