Part I of IV—A Brief History of World Credit & Interest Rates
by Martin A. Armstrong
3000 BC – 500 AD—The Rise and Fall of Babylon – Greece – Rome
Credit is usually thought of as a modern invention of perhaps only a few hundred years old. It is true that a few more clever forms of credit have emerged during our current century such as plastic credit cards. But beyond that, credit has existed long before man invented an official form of money. Credit has existed from the very dawn of civilization. Man has always attempted to borrow from his neighbor if not cold hard cash, then at least a cup of sugar now and then. Some say that prostitution is the oldest profession; history actually suggests that the oldest profession may indeed be that of the moneylender.
As civilization emerged, a gradual need for a legal system became apparent. Much of the earliest recorded laws concerned the issue of credit and the price thereof – interest. A chap named Hammurabi, King of the first dynasty of Babylon, authored the earliest known formal laws around 1800 B.C., within which we find the first recorded attempt to regulate interest rates. Hammurabi established a ceiling or maximum interest rate that a moneylender might charge a borrower. On loans of grain, which were repayable in-kind, the maximum rate of interest was limited to 33 1/3% per annum. On loans of silver, the maximum legal rate was established at 20% – although some records have revealed a few rare instances when the rate of interest charged was as high as 25%.
Although interest rates of 20-25% in Babylon may appear excessively high, in India, comparable rates of interest were quite similar. The legal limitation on interest rates during the 24th century B.C. in India was established at 24%, according to the Laws of Manu.
Nonetheless, every loan in Babylon, according to the laws of Hammurabi, had to be witnessed by a public official and recorded in a written contract. The penalty for charging more than the legal rate through any means was quite severe – the debt was canceled. Collateral could be pledged in the form of land or some possession. A debtor could also pledge his wife, children or slaves. In extreme cases, the debtor could even pledge his person, but the law forbids the personal slavery of a debtor beyond three years.
The Law of Hammurabi remained unchanged for most of the next 1200 years. It is quite evident that interest rates had often been charged well in excess of 33 1/3% during previous periods. Unfair practices also existed, and many of these were addressed by Hammurabi. For example, creditors were forbidden from calling a loan made to a farmer prior to harvest. If the crop failed due to weather conditions, all interest on the loan would be canceled for that year. In the case of houses, due to the scarcity of wood, a door could be used as collateral and was considered to be separate from a house. Architects were held responsible for construction defects and could be put to death if the building collapsed and killed the occupant.
One who is unfamiliar with archaeology might suspect the ability to trace the price of gold, commodities, or interest rates back thousands of years. Nevertheless, contracts etched into clay tablets have been uncovered, recording all aspects of man’s early social and economic behavior several thousand years before Christ. Many loans took the form of a bearer note or bill, which the creditor could then sell to another party. Some loans were subject to call, while others bore a fixed interest rate and a fixed maturity.
Records of international loans from one nation to another have also survived in clay tablets involving the Babylonians, Assyrians, Elamites, Hittites, and Syrians. The Egyptians were more of a state-run economy highly authoritarian in nature leaving few records of interest and credit.
Another popular belief is that modern banking began following the Reformation, which marked the dawn of Capitalism. Again, this notion gives far too much credit to modern civilization while ignoring the archives of history. Although, in early times, moneylenders existed, they rarely accepted deposits. But in Babylon, records have revealed two major banking establishments that closely parallel the functions of our modern-day bank. The banking houses of the Egibi Sons and the Muradsu merchant bankers engaged in large-scale operations. Lending took place to individuals, merchants, and governments. Deposits were accepted and transferred to another account upon a draft being presented. Deposits also earned interest, and notes would be discounted as well as bought and sold. Even venture capital transactions took place where the bankers became the financing partner.
The sophistication of early banking institutions is quite surprising to most. There may not have been instantaneous transfers, but there was evidence of drafts, accounts, transfers, deposits, bearer notes, and even overnight rates of interest during some periods.
As a result of formalized banking and the widespread use of credit, history is littered with countless debt crises that have occurred regularly since the Babylonians right through into modern times. It appears that the endless cycle of borrowing more than one can repay has sealed the fate of just about every government that has ever existed.
Records of the Babylonian era illustrate quite clearly that cyclical regularities in the rate of interest charged existed from the very beginning. Silver loans at one point were over the legal limit reaching 25% clearly as a result of a short-term credit crunch. Nevertheless, the state during other periods granted silver loans as low as 12%. Additional evidence of the period establishes some temple loans of barley given at 20% and silver at 6.25%.
A history of credit and interest reveals one major trend that has been consistent throughout all time. The stronger an economy, the lower the rate of interest. Interest rates are always at their lowest level internationally when capital reaches its point of maximum concentration. This usually results in a strong currency and high levels of confidence in general.
Interest rates also remain substantially above world rates in nations where confidence is low. Currently, this is true for South and Central America as well as in most third-world nations. This observation does not arise merely from the events of today. Even during the days of Babylon, we find the same variance in rates, with the lowest rate dominant in the strongest economy, which was the center of the Babylonian Empire. However, interest rates were usually much higher in neighboring nations which at times were more than twice those in Babylon. As the decline of Babylon came about during the fourth and fifth centuries B.C., interest rates soared, with minimum rates reaching around 40% on silver loans. During the sixth through ninth centuries B.C., silver loans in Assyria and Persia were often in the 40-50% range.
The Bronze Age (2400-1200 B.C.) produced a vibrant economy around the Aegean Sea. Few records have survived, so our knowledge of credit and interest is a bit vague for this period in time. It is known that the standard value was cattle – not gold. Gold formed the medium of exchange, but it was not the standard unit of value. This is similar to our period of the modern Gold Standard insofar as cattle would be gold and gold would be the paper currency. We also know that there were fluctuations in gold relative to the standard unit of value – cattle. It is also highly probable that credit was once again abused and contributed to the economic decline along with changes in weather and increases in natural disasters.
This was the “golden age” of the Minoan-Mycenaean era that came to an end with the fall of Crete in 1400BC followed by the Dorian invasion of 1200BC. This was the period of which Homer wrote so memorably recording the great Greek Heroic period and the glory of the Trojan War. It was followed by barbarism and the period known as the Dark Ages.
As the world emerged from this dark period, civilization began to flourish once again. It was during this period when money was first coined by the Lydians – known today as a part of modern Turkey. This invention of money greatly aided in the expansion of international trade. The Greeks were the rising stars of the period much like the Japanese of the late 20th century. Capital began to flow back to mainland Greece bringing with it inflation, hoarding, and wild speculations. A new age of materialism was dawning in Athens The invention of coins moved from Lydia in modern Turkey to mainland Greece. next to no time the commercial genius of the Greek rises to the notion of speculation…capital accumulated is only an investment with a view to accumulating more.”
As history has shown time and time again, every tremendous speculative boom has been inevitably followed by the proverbial bust. A severe credit crisis had materialized in Athens in 594 B.C. that had prompted major reforms in credit prescribed by the Laws of Solon. Solon was a poet who was named by Athens to revise her laws in hopes of correcting the economic devastation. Farmers were threatening rebellion in Attica and a debtor not only risked personal slavery but that of his entire family as well. Once a slave, creditors could do with them as they saw fit. Many families were broken up and sold in overseas markets. The debt crisis was indeed severe and the widespread personal slavery had become a major problem that threatened to destroy the Greek Empire.
The Laws of Solon were the first major reform to the legal code of Hammurabi. Although the Greeks lifted all maximum limitations on the legal rate of interest a moneylender might charge, personal slavery was banned entirely. All those who had been enslaved for debt were freed and those sold into slavery in foreign lands were brought back at the expense of the state. Many debts were canceled, and others were secured by land when possible. The issue of inflation was dealt with by devaluing the drachma by 25% and weights and measures were increased in size. Political power had shifted from landowners to capitalists and this was reappointed once again back in the hands of the property owners. Citizenship was also granted to skilled immigrants. The speculations had indeed prompted stories throughout the Aegean that must have been similar to those concerning the United States with its streets paved in gold. You might say that this was perhaps one of the worst debt crises in ancient history. The Laws of Solon in 594 B.C. was indeed a major reform that dealt directly with the issues of a major debt crisis.
Over the following 100 years, the laws of Solon had helped insofar as avoiding massive debtor slavery but interest rates were still free to float without legal limitation. The customary rate on secured loans tended to move back and forth between 16%-20% per annum. The scarcity of precious metals also aided in creating somewhat of a depressionary atmosphere at times. This may have been a contributing factor to the widespread political upheavals that came in 508 B.C. – the birth of democracy in Athens. Often overlooked, however, was a similar political change in the new emerging empire – Rome. In light of modern-day political change, which first attempted to emerge in China during 1989 and quickly spread to Eastern Europe, the period of 508-509 B.C. was just such a period in ancient times. Revolution broke out in Rome in 509 B.C. less than a year following the political changes in Athens. This revolution in Rome marked the birth of the Roman Republic.
Interest rates in general tended to decline in Athens following the emergence of democracy from the customary rate of 16% down to 10-12% for fully secured loans on real property. This was also aided by the major silver discoveries of Athens in 483 B.C. that vastly expanded the money supply. After 400 B.C., speculation and the capitalistic system re-emerged in full bloom. Hoarding of coinage had become quite commonplace – particularly when dealing with the temples. The temple at Delphi is often referred to as the financier of the Greek Empire lending money for interest regularly. Not only were there typical moneylenders, but professional money managers also emerged. Socrates was reported to have entrusted his capital for investment with just such a personal friend. Finance and capital had become very sophisticated. Interest rates rose during this period quite sharply. Common rates of interest for a merchant voyage were 30% during wartime and 22.5% in peacetime. But as speculation flourished, maritime interest rates rose as high as 60% and in some isolated records appeared to be as great as 100% for more risky ventures.
Strangely enough, there is more recorded history on late Greek interest rates than in much or early Rome. Perhaps the most interesting fact is that the state’s public credit was considered the worst. The government, more often than not, simply never repaid its debt. Interest rates to a state or city were recorded to be as high as 48% annually. This was also the case during the Middle Ages in Western Europe. The credit of Greek states was so poor that often the only means of obtaining a public loan required the co-signature of a wealthy citizen willing to guarantee that state’s obligation. At times, the states were forced to pledge all revenues as security. Some states even resorted to borrowing based on what was known as a life annuity. In return for a loan of 5000 drachma, the state agreed to pay the creditor 500 drachma each year for the remainder of his life. In the record of the Delos temple for the years 377-373 B.C., only two out of thirteen loans to Greek states or cities were repaid resulting in a loss of nearly four-fifths of the original principle. This illustrates why there was such a low level of confidence in government during this period.
At the dawn of the Roman Empire, credit regulation was again part of the legal code and as always was prompted by the severe debt crisis. The legal limitation on interest was established at 8 1/3% per annum as outlined in the Twelve Tables – circa 450 B.C. Anyone who violated the maximum limit was subject to a fourfold penalty. The Roman law did substantially lower the maximum rate of interest. Nonetheless, personal slavery was permitted, but provisions in the law did protect the well-being of the debtor slave.
The Roman experience with credit forms yet another long list of trials and tribulations. The major widespread debt crisis affected the Roman State many times through the early Republican era. In 367 B.C., the debt crisis was alleviated by charging all previous interest payments against the principle and then writing off the balance of all debts. Julius Caesar used a similar tactic during the debt crisis of his era which had undoubtedly provided some incentive for his assassination since many of the moneylenders were in reality the senators of Rome.
Interest rates during the Roman Empire reached their lowest levels of about 4% during the reign of Augustus by 25 B.C. but soon gave way during the debt crisis of 33 A.D. when it was difficult to borrow at the legal limit of 12%. This debt crisis of 33AD marked the beginning of a long rise in rates that continued for the following 400-year period. Nevertheless, the trend toward lower rates of interest that came under Augustus was confined to the core of the Roman Empire, largely in Italy. Interest rates ranged between 12% and 48% in the provinces, similar to what took place during the Babylonian era.
The chaos of unfunded pensions collapsed the social structure during the third century. The collapse in the currency contributed to massive reforms and tax hikes as well as the introduction of passports that people could not travel until they paid their taxes. The chaos also led to the rise in Christianity as people prayed to their gods, and nothing happened. This economic chaos of the 3rd century set in motion the eventual outgrowth to the collapse in interest rates and banking after the fall of Rome in the West in 476AD.
Consequently, with the fall of Rome, there was a view that borrowing was evil, and we ended up with the Sin of Usury – the charging of interest of any kind as Christian philosophy began to emerge. We can see from the above chart that as capital shifted to the East, the lowest interest rates emerged there, and Roman rates rose signaling the fall was on schedule.
Much of the recorded history of early Byzantine economic policy is littered with this battle over interest. Justinian’s Code of the sixth century favored the bankers who were quite important to the state. He declared that “the ancient rate of interest is exorbitant” and thereby reduced the old Roman legal limit of 12.5% set by Constantine The Great down to a range of 4-8%, according to the creditor. Bankers were allowed to charge the highest interest rates of 8%, while private citizens were limited to charging a 6% rate. Curiously enough, public officials were restricted to charging 4% rates of interest per annum. Maritime loans were always much higher due to risks at sea, and these were capped at 12%.