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5000 years of risk … and we still can’t get it right

As mentioned yesterday, the Sumerians invented writing, accounting, money, credit and debt. 1500 years later, interest on debt was causing a lot of issues. For example, Aristotle wrote:

The most hated sort (of wealth getting) and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. For money was intended to be used in exchange but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth, this is the most unnatural.

This view of interest on money as evil is now embedded in many religious texts and views, as discussed last year.

However, if you go back to the origins of value, interest was a natural development and was based upon the Sumerian word “máš”, meaning “lamb”.

This practice is therefore based upon the expansion of the herd, and had a dual meaning in origin.

In Sumeria, a tenant could graze animals on rented fields but, as the herd expanded thanks to the availability of the landlord’s land, the increase in the herd was taxed by the tenant handing over a few lambs to the landlord.

In exactly the same way, the view was that borrowings could be used to build wealth and to grow more capital. Hence, the tax on wealth expansion is interest and, surprisingly, was charged at 20% on silver and 33.33% on barley.

These figures were chosen carefully, and related to farming practices.

Shockingly today, those interest rates aren’t per annum either, but could be applied on a one-year loan or a one-month loan. The rates were standard for any borrowings in other words, no matter how short or long the period.

Modern analysts were also surprised at the sophistication of interest charging. For example, some loans applied different borrowing rates within a single transaction based upon the borrower’s profiles.

For example, historian Marc van de Mieroop has found records where two business partners borrow for their business, with one partner charged a higher interest rate than the other. This was due to the varied circumstances of each borrower and reflects the early origins of credit risk practices that are still around five thousand years later: think Experian and Equifax, Fitch, Moody’s and Standard & Poors.

Finally, there was a strong aspect of compound interest on loans. Therefore, even though they might typically be short-term, if they were unpaid then interest balances could be carried over.

For example, Jerrold Cooper’s book on Ancient Sumerian Royal Inscriptions found one that states:

“The leader of Umma would exploit one guru of the barley of Nanshe and the barley of Ningirsu as a loan. It bore interest, and 8.64 million guru accrued.”

Marc van de Mieroop postulates that this implies the concept of compound interest was well established as the amounts had grown so large due to unpaid interest on arrears of an interest-bearing loan.

For example, Umma had farmed the then ruler’s land but had failed to payback. After forty years or more, the unpaid amount had grown to the value of 8.6 million guru, or 4.5 trillion litres, of barley owed.

The amount didn’t matter that much … just enough to start a war.

Nothing much changed there then …

 

This blog entry owes a lot to the book: "Origins of Value"

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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