Our financial instruments are new, but our understanding of debt is not

Written by Carl Packman Sunday, 17 June 2012 19:29
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Extracted from Carl Packman's forthcoming Loan Sharks (to be published by Searching Finance in September 2012)


Credit has always been a very confusing thing.


Not confusing to understand how it works but confusing to understand whether or not it is good. The image that credit evokes, through history, has only amplified this confusion. While the image of credit in the ancient world, as told by philosophers, might bring up attitudes of 'bans and shame,' as Rosa-Maria Gelpi and François Julien-Labruyère in their book The History of Consumer Credit Doctrines and Practices[i] mention, it was the only means by which anybody could acquire goods and purchases in the marketplace. Also within religious communities,  though one may think about the sin of usury, it was with Thomas Aquinas that the Christian compromise on interest came about, as well as 'just' compensation that could be raised by a creditor.


For nearly every story there is about the perceptions of credit in times gone by, there is a counter-narrative.


To say that there was a single way in which credit was viewed in the ancient world and through to the Middle Ages, is as erroneous as suggesting that credit itself is a recent development.


Though it is not coincidental that the image of credit, as well as lending, personal debt and profits raised on payments has a negative image, it is very interesting how we come by ideas of how such matters were generally thought of at the time. Popular histories and literary figures have done the most to raise our consciousnesses to how such things were considered, back in those days, and shape our opinions as to how far we have come.


When we delve into the subject of finance we may well think of how negatively perceived the moneylenders were, how villainous Shylock was in Shakespeare's The Merchant of Venice, and how noble a demand it was to give to ones brother without the expectation of profiting personally from doing so. And just as much as we have good grounds on which to think these things, they certainly have truth to them – but it was never so black and white.


The debates and discussions on matters of finance were very rich indeed, and we have a lot to learn from them. Further still - and whether we like it or not - with credit, history does tend to repeat itself. It is for this reason that I have chosen to contextualise this book by dipping far into financial history. Certainly to do so gives us pause about some of the more contemporary debates we have around personal debt, and in doing so we often find that familiar truism rings true: first as tragedy, then as farce.


My point here is that so many of the debates we have today have been had before.


Notions of how much a person should reasonably be able to profit from lending, as well as the ethics of the business, are as old as financial transactions themselves. Issues concerning what measures to take when payments are deferred are no more unfamiliar to history than war and conflict. In the section to follow I will not be giving the detailed account of the history of credit that the subject deserves – though for information I do borrow from the best that is currently out there. Instead I am using this space to develop ideas of historical legacy, public and intellectual attitudes, and what challenges arose on the subject in the past, for consumer credit. Though mainly this section is here to show that those very same complaints about injustice concerning debtors, and the efforts that lawmakers went to in order that this be rectified, or indeed maintained, have all happened before, and rather than putting us off of the struggle for fairness, should remind us of the historical legitimacy of our demands.


Ancient usury – The shape of things to come


When one reads of days gone by it is expected to see that people had it far harder.


Certainly on the subject of debt in the ancient world there is a lot of truth in this. But perhaps contrary to instinct, there is to be found some rather attractive elements also. For example in Ancient Babylon, aside from the horrors of child slavery and concentrated riches, peasants were not ordered to pay back capital or interest of debt in the event of a long spell of flooding or drought. There were many other perks, too, such as the view that (for example under the Code of Hammurabi - a Babylonian law code, dating back to around 1772 BC) land and goods must not be forfeited to private creditors, on the grounds that this would have ultimately weakened the kingdom militarily.


While Babylonian loans, for example, would be levelled interest free between family members, business partners and other colleagues, it was typical for aristocrats to lend to each other through eranos clubs interest free. Generally speaking, according to Michael Hudson, a research professor at the University of Missouri, among Mesopotamian rulers, it was thought that the dynamics of interest-bearing debt were not self-stabilising. Therefore in order to apply their own very simple stabalising mechanisms, rulers intervened by annulling unpayable debts. Just like that. As Hudson points out in an essay entitled The New Economic Archaeology of Debt[ii], modern wisdom sees fit to punish debtors by obliging them to forfeit land and goods to the rich – in some cod-Darwinian shift of property from the lesser off to the wealthy. This according to the Babylonian leaders, did not make good economic sense.


Of course this did not mean it was a society free of victims of debt.

[i]               Rosa-Maria Gelpi and François Julien-Labruyère, The History of Consumer Credit: Doctrines and Practice, UK: Palgrave Macmillan, 2000

[ii]              Michael Hudson, “The New Economic Archaeology of Debt”,, April 23, 2002. Accessed May 18, 2012.

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