A History of Interest and Debt

Ancient Civilizations

Murat Ustaoğlu, Ahmet İncekara, Murat Ustaoğlu, Ahmet İncekara

• Editorial: Routledge
• Año: 2020
• ISBN:
  9781000089936
• Edición: 1
• Categoría: Business
• Categoría: Sistemi bancari e finanziari nei paesi islamici

With the spread of interest-based transactions, major problems such as inequality, poverty and debt-based slavery have emerged. Those who practiced professions such as usury have, despite the negative connotations attributed to them, contributed extensively to the construction of the conventional financial system in the global economy, suggesting that the core concepts in this practice need to be analyzed in greater depth and from a historical perspective.

This book analyzes the evolution of interest-bearing debt transactions from ancient times to the era of Abrahamic religions. In modern times, interest is strictly prohibited by Islam, but this book demonstrates that it is a practice that has been condemned and legally and morally prohibited in other civilizations, long before Islam outlawed it. Exploring the roots of this prohibition and how interest has been justified as a viable practice in economic and financial transactions, the book offers deep insight into the current nature of finance and economics, and the distinctive features of Islamic finance in particular and enables researchers to further delve into a review of interest-free financing models. Islamic finance, or alternative financial methods, have become extremely popular particularly in the aftermath of global financial crises, suggesting that they will attract further interest in the future as well.

The book is primarily aimed at undergraduate and graduate students but, as it avoids the use of technical jargon, it also speaks to a general readership. It will appeal to those who have an interest in financial history, particularly the history of debt as well.

Chapter 1

Introduction to interest and debt

Murat Ustaoğlu, Halil Şimşek and Servet Bayındır

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.

Albert Einstein

Introduction

The quote attributed to Einstein best explains the sphere of influence of financial instruments. Despite all arguments, interest is the most important tool that promotes and facilitates monetary debt. Even though many civilizations and religions have adopted a critical stance against it, it is not possible to isolate interest from economic transactions. This reality points out to an interesting dilemma: how does interest become an integral part of economic life despite strong opposition and criticism? What dynamics have played a central role in integrating interest with social and economic activities? What are the cultural, religious, legal and economic causes? If interest is unavoidable, why? Answers to these questions will help us clarify the social dynamics of the interest-bearing debt interactions. It is not an easy task to offer a conclusive solution because even those who argue that interest does irreparable damage to the social life have no clue of how to replace interest. For this reason, an analysis of how interest has emerged and been transformed and under what conditions deserves a closer examination.

Regardless of how it is labeled, it is essential to analyze this transformation/evolution in order to understand whether or not interest is actually inevitable from economic climate. If this analysis reveals that interest has emerged in a certain period of history under certain conditions, it will at least mean that it is possible to avoid interest. Therefore, such an analysis would reveal both the conditions that created the interest and those that would possibly eliminate it. Additionally, such an analysis will also unveil the motivations of the mechanisms, institutions and actors that have made interest a general tool of application in economic transactions and identify the methods they have relied on. Thus, identification of these motivations and methods is crucial to alleviate the repercussions of interest-bearing debt if they bear some undesired outcomes.

The interest-bearing debt: conceptual framework

Almost in all religions, cultures and ideologies, interest-bearing debt is strictly prohibited. However, despite this clear stance in original sources, unlike many other similar prohibitions, currently there is no commonly held agreement on the interest. For instance, gambling or adultery, even if legally allowed, have always been condemned in all cultures and civilizations. But this is not the case with interest which raises conflicting stances within people. We believe that the reason for this state of confusion is lack of a commonly accepted definition of the notion of interest and of a strong justification for its prohibition.

Despite lack of a working definition, interest has been a tool to exploit the wealth and prosperity of the societies. The exploiters channel the economic and political power they have accumulated to different walks of life including religion, philosophy, education, art and cultural life where they maintain their domination. Due to the lack of definition and the ambiguity surrounding the term, interest has been presented in political and economic literature as an inevitable and indispensable economic tool. For this reason, how religions approach the concept of interest and its negative impact upon economic life have become a matter of debate; in some arguments, it is presented as a fundamental instrument of economic system without making any reference to its destructive impacts. In other words, practice of interest-bearing debt was justified by a broad argument that interest is a necessary component of economic activities and the entire economic system.

Most civilizations of the past, relying on religious arguments and precepts, have adopted a negative stance vis-à-vis the practice of interest; despite this objection, interest-bearing debt has been legitimized by similar approaches that place emphasis upon the allegedly indispensable role of interest in economic life. Scarcity problem is the basis of economic life; Attali (2014) argues that the first economic-political lesson that the Bible teaches is that desire creates scarcity, not the other way around. In the satisfaction of desires by economic goods, there are limited economic options. It is either labor and reason will be used for further consumption or the accumulation of others will be borrowed. There is general agreement over the legitimacy of the first option, but there are conflicting views on where to draw lines in the borrowing options because what motivates the lenders is also the major source of the problem. Theological teachings that often promote moral principles including solidarity and charity fail to generate strong motivation that will be sufficient for financing economic activities. The main factor that led the economic actors to maintain debt is revenue made out of interest despite strong objection by monotheist religions to the practice.

A mainstream economic justification for interest refers to the unearned revenue of the money. French statesman Turgot, a leading Physiocrat, developed a whole new approach to the issue in 1750s. Turgot’s theory underlines that when lent, money which ensures transfer of property of the land that generates unearned income should attract a certain amount of interest at least equal to the amount of that income. In a sense, Turgot maintains connections between interest and unearned income and thus laid the ground for the legitimization of interest in modern capitalism. Additionally, however, he also stressed the need for state intervention in determining the interest rate (Groenewegen, 1971).

Theory of interest

Despite efforts since ancient times to come up with a common definition of interest that applies to economic transactions, no universal definition has so far been proposed. There are still a variety of definitions on the concept of interest; this diversity is also visible in its conceptual framework, types and legitimacy. On the one hand, interest is despised and discouraged because it contributes to social inequality and does harm to the existing social order; on the other hand, it is justified because it plays a role in transformation of economic structure and provision of capital. A proper definition of interest is a matter of importance to discuss its legitimacy.

The religious, philosophical and economic aspects and circumstances of the time have often shaped the approach employed toward in the concept of interest in different segments of history. In ancient times and the medieval age, interest has been a matter of discussion in respect to its social, moral and religious aspects whereas the changing socioeconomic environment made a matter of economic debate due to the increased need for capital (Pıçak, 2012). Plato (bc 427–347) underlines that interest is of immoral nature, adding that due to the economic and social outcomes of the practice, the structure of the ideal state shall be impaired; for this reason, he favors its prohibition (Gül, 2001). Aristotle (bc 384–322), as an inspiration of the approach that money does not generate money, suggests that money is only a means of exchange and that use of money as a means of revenue is an act that deserves condemnation (Aristoteles, 1975). The views of the thinkers and philosophers who oppose the concept of interest laid the ground for the emergence of a notion that is referred to as “absolute condemnation” (Işık, 2006).

In Medieval times, Thomas Aquinas (1225–1274), an Italian Catholic thinker who initiated a new era with novel ideas on the practice of interest, made a distinction between consumption and use, justifying the excessive amount paid in the debts associated with use. This was followed by the emergence of simple and compound interests which led to a separate discussion; based on this discussion, a distinction was made between lender on simple interest and a usurer who asks for compound interest (Kuran, 1997).

In modern times, Martin Luther and Jean Calvin pushed the boundaries of the church and the established orthodox approach and proposed ideas to bend the interest ban. These two famous thinkers, although suggesting that interest is something that should be opposed in normative and moral terms, paved the way for its justification under certain conditions. Luther and Calvin opposed Aristotle’s doctrine and argued that the merchants who borrowed money make profit out of it and for this reason, the capital lenders should take their shares as well (Akdiş, 2015). Particularly Calvin, noting that not every type of interest should be banned, supported the idea of promulgating Anti-Usury Laws (Pıçak, 2012). Interest has been redefined as rent of the capital after the arrival of mercantilism that dominated the field of economic thought in late modern era; proponents argued in this period that the low interest rate specified by the state was both useful and legitimate (Demirgil & Turkay, 2017). In late 18th century, in his seminal book, The Wealth of Nations, Adam Smith (1723–1790) defined interest as revenue of capital instead of revenue of land and laid the ground for the classical theory of interest which focused on the time value of the interest.

New theories advanced to challenge the classical theory of interest were influenced by the circumstances associated with the new economic style in the modern age. For instance, Alfred Marshall (1842–1924) referred to interest as the price of waiting period, not of the capital (Marshall, 1920). Like Marshall, Eugene von Böhm-Bawerk (1851–1914) relied on time preference to explain the concept of interest, adding that the monetary value of a commodity at the present time is not equal to its value in the future, thus concluding that the excessive amount should be considered legitimate (Seyrek & Mızırak, 2009). John Maynard Keynes (1883–1946), on the other hand, noting that interest is a monetary phenomenon and that the interest rate is determined by money supply and demand, offered a different perspective. According to Keynes, interest is the price of the money holder giving up having it in cash (Keynes, 2010).

Interest-bearing debt in ancient civilizations

Economic historians believe that interest-bearing debt is as old as the history of humankind. The initial findings on the presence of such transactions refer to the permanent lifestyle in the aftermath of agricultural revolution. Data retrieved from tablets reveals insights and information on the evolution of interest in the ancient civilizations. The way interest-bearing debt has been treated varies by geography, culture, religion, political and economic climate; however, it has been discouraged in societies where moral values were promoted. Yet there have been differences in the definition and practice of the interest in different societies. Interest-bearing debt was subjected to simple norms in ancient civilization where repayment was mostly scheduled according to the harvesting times. The Interest-bearing debt became popular particularly after the invention of money-like instruments in economic transactions. Now it is possible to offer a more comprehensive definition of interest thanks to the use of money in economic activities; but there are still visible disagreements. In general, interest can be defined as an addition or extra to the original amount of the loan over the time. Even the modern economies suffer from repercussions of the practice of interest. For this reason, it is useful to review the evolution of interest-bearing debt with reference to ancient sources.

The economic climate in the ancient ages was appropriate for the spread of interest-bearing debt. For this reason, a huge number of people from different backgrounds have been suffering from interest-bearing debt in different ages. The local people in general received loans for consumption purposes whereas the traders relied on long term loans on interest for their commercial activities (Ildız, 2013). As interest has become widespread, the interest rates also become diversified; the rise in interest rates put the local people in a difficult position as they experienced troubles with repayment which led to emergence of debt-slavery. In response to the growing problems associated with the practice of interest, political authorities introduced solutions including introduction of maximum interest rate, legal penalties that applied to the situations of the repayment of the consumption goods, requirements that debt should be concluded in the presence of public authorities, scheduling the mortgages according to the harvest times, limiting the debt-slavery to three years, stipulation of participation of the spouses in the concluding of the debt contract and restrictions to the debt transactions concluded by the temples. However, these attempts have rarely worked because of the social, political and economic conditions specific to the ancient times. On the other hand, even the modern societies have been unable to properly address the problems associated with high interest rates.

Most of the tablets excavated in different parts of the world, particularly the Mesopotamia, are borrowing bills which offer insights on the economic life of the ancient times. References to fixed interest rate, changing interest rate and types of interest in the tables give the impression that the interest-bearing debt enjoyed a broad application in the ancient societies. The changing interest rates with the loans offered by temples were particularly important as they caused serious economic problems for those who failed to repay their debts. Ancient Mesopotamia was a typical agricultural economy in many respects. For this reason, in rural areas, local people used consumable products such as wheat, oat, bread, butter and honey as means of repayment whereas those who lived in urban areas relied on metals for this purpose (Mews & Abraham, 2007). In this era where the money was in its primitive form, the society generated money for the economic system through production. The consumption goods which functioned as money were also popular means of repayment for the interest-bearing debt (Ildız, 2013).

Means of payment have varied according to time and region. Valuable metals such as silver were used as means of payment in commercial agreements and borrowing bills whereas grains were mostly used in rural areas. The changes in the grain productions due to the natural and climatic conditions led to fluctuations in interest rates. The public authorities, seeking to take the interest rates under control, made interventions in an attempt to standardize the methods and means of payment (Homer & Sylla, 2005). Interest rates were the most influential tools in such attempts; public authorities introduced restrictions to the interest rates applicable to the loans offered by the temples in order to address the issues associated with the interest-bearing debt. In most cases, however, these efforts failed. The temples, the most important fund-providers of the time, were well-organized structures in the economic sphere. They did not hesitate to impose punitive measures against those who failed to repay their debts. One of these measures is the enslavement of the debtor. Such practices led to spread of the debt-slavery within the society and created distress. In some instances, the local people, rioting against such practices of injustice, posed a threat to the public authority. The temples held authori...