Occasionally Burdensome, Debt Fueled Civilization
Lending and debt have been around since the dawn of history. Historian Larry Neal, a professor of economics at the University of Illinois and co-author of “A Concise Economic History of the World,” contends that advances in lending practices have been critical to the economic development of Western culture.
Question: You obviously believe lending and debt have played an important role throughout history.
Answer: We don’t know of any case of sustained economic growth that has not been preceded by an earlier sustained increase in indebtedness. The way we put it as economic historians is that industrial revolutions are always preceded by financial revolutions.
Q: What do we know about lending practices in the ancient world?
A: We have had these thousands and thousands of clay tablets, and archaeologists typically have just ignored them because they just dealt with economic matters. They are invoices and essentially descriptions of means of payment.
Q: How did it work?
A: We know that there were individuals who wanted to get loans to cover one harvest to the next or later sea voyages or caravans. There might be a delay before you get your remittances coming back from products that you put on a ship. You knew there was probably going to be a good market out there, so you wanted to pay the crew or the caravan up front.
Q: Was there any formal system of lending?
A: We know that most of Hammurabi’s code, for example, is devoted to issues that are involved in lending among individuals. These were crop loans indicating what delivery should be and if the crop failed what recourse the lender had.
Q: Do we have any idea what the going interest rate was back then?
A: There was a legal limit in the Mesopotamian interest rates. The first one we have was in Babylonia in 1900 B.C. The legal maximum was 33 1/3 percent on grain and 20 percent on silver.
Q: What form did collateral take?
A: They would usually pledge something. Any property, real or personal, could be pledged land, utensils, wife, concubine, children, slaves.
Q: That doesn’t sound very nice.
A: Well, you could pledge yourself and servitude for debt could not last more than three years.
Q: Did the Greeks have any idea how to do this better?
A: Well, we know the legal interest rates fell from the sixth century B.C. to the first century B.C. from a range of 16 to 18 percent down to a range of 6 to 12 percent.
Q: Falling interest rates? Why is that?
A: There would be better markets for the collateral. You were gong to have resale markets for the collateral that people posted for these loans so that moneylenders knew that in case of default they didn’t have to go through a whole lot of stuff like enslaving the defaulter. They could seize whatever was posted as collateral and resell it.
Q: Were there any banking practices not exactly on the up and up?
A: When archaeologists started going into Phoenician temples, they saw a statue of Astarte, the fertility goddess. They also found evidence of ritual prostitution. It turns out these temples made loans and kept records because they wanted to have these loans repaid.
Q: Did the traditional Christian prohibition on usury retard economic development during medieval times?
A: I think the church’s role was to argue what would be a just price for this lending, depending on the risk that the lender would have recouping the loan. If the cargo was lost at sea or stolen en route, then the individual who received the loan was no longer liable. It’s forces beyond their control. But if they actually succeeded in completing the transaction, then the lender got to share in the profit. It had to be just.
Q: Did peasants have any access to credit?
A: You get the development of pawnshops, which were devised in Europe in the Middle Ages to allow the poorer people to pawn smaller personal objects so they could buy food or support their family. When towns started to establish city pawnshops, they would charge around 6 percent, compared to extortionist rates like 32, 45 percent that would be charged by the loan sharks.
Q: Is it true that our corner notaries date back to medieval times?
A: Notaries would record loans being made among individuals. The city or the local province would give them the authority. Once you have done that, you have a well-known body of law that defines both the rights of the borrower and lender in cases of default. The records are especially rich in the city-states of Italy.
Q: What about lending in this country?
A: We get this spectacular increase in indebtedness over the course of the 19th century. Initially it’s government indebtedness and then, when the railway age comes in, it’s increasingly railway indebtedness. Then it became city debt, water work debt. Private debt explodes as well.
Q: And even before the age of the credit card, households were borrowing and getting into debt?
A: We always had book credit. People would be getting book credit from their local shopkeeper. The shopkeeper is going to record the value of the purchase made by a local customer and then anticipate the person would pay up so they wouldn’t get humiliated by their neighbors. In that sense, consumer credit has always been there.
Q: As an economic historian, do you consider the rise of on-line banking to be revolutionary?
A: Absolutely. You can expect lots of structural changes in the economy. The possibilities are great, but the possibilities for market manipulation and fraud and opportunism are there, too. And, of course, individuals can always screw up getting too indebted. They pledge too much of themselves their collateral.
Banking gets its start in the temples and palaces of Mesopotamia, where deposits of grains, precious metals and other goods are accepted for safekeeping. Accounts are documented on clay tablets.
In Babylon, Hammurabi codifies laws governing lending, such as when a lender can seize collateral. Commercial lending revolves around caravans and other trade.
In ancient Israel, lending develops under principles outlined in the Old Testament, which condemns usury among family members but allows it among unrelated males.
The earliest coins are minted in Asia Minor out of an amalgam of gold and silver, easing monetary transactions, trade and lending.
400 B.C.-410 A.D.
Banking flourishes in the Roman Empire as trade expands between Rome and outlying cities and regions. Financing is also needed to pay for public works projects such as aqueducts.
Rome falls to the Visigoths, and Catholic Church begins to dominate economic activity. Prohibitions against usury gain strength in Vatican councils. As a result Jews dominate lending activities.
The need to finance the Crusades again spurs development of banking in Europe.
Large trading fairs become common throughout Europe, and traders come to rely on the use of credit to buy items in one region and sell them in another before repaying the creditor.
Charging interest on loans is ruled legal in Florence despite the traditional Christian prohibition on usury. Large Italian banking houses such as the Medici in Florence develop, helping spur Continental trade.
England’s Henry VIII breaks with Rome and legalizes the charging of interest at no more than 10 percent annually. Later the limit is reduced to 8 percent.
Notes issued by goldsmiths begin to be exchanged as an alternative to coins or bullion. Ultimately leads to circulation of bank notes in England.
London furniture merchant Christopher Thornton advertises merchandise that can be bought and paid off weekly, presaging the “buy now, pay later” consumer culture.
Financier Jay Cooke in Philadelphia helps sell over $1 billion in war bonds to finance the Union effort in the Civil War.
The U.S. banking industry mushrooms to help finance railroads, factories and other elements of the country’s rapidly expanding industrial base. By the early 1920s there are 30,000 banks, 19 times more than Civil War days.
Start of the credit card age and widespread availability of unsecured consumer credit. American Express launches its card and Diners Club issues its first card in 1951 to 200 customers who can use it at 27 restaurants in New York.