Even some of the earliest economies had systems of credit. And wherever there are systems of credit there are periodic debt crises. Many wars and revolutions have had their roots in problems of debt and debt remission.
Tally sticks and similar records of credit trace back at least as far as ancient Mesopotamia – as do offers of interest-bearing loans. Wherever such loans were available, there was always the chance that borrowers could fall into arrears and have their possessions seized, or, worse, have members of their family taken into slavery as ‘debt peons’. To solve the social problems this caused, and to retain their subjects’ loyalty, Sumerian and Babylonian kings announced periodic ‘jubilees’ in which consumer debts were annulled. Later Greek and Roman leaders responded to threats of debtor revolt by issuing payments to citizens, for instance through negative tax rates.
Knowledge of the problems debt could cause was also reflected in moral pronouncements, whether religiously sanctioned or not. In The Republic the Greek philosopher Plato put the rhetorical question: ‘Is not justice just a matter of paying one’s debts?’ – to which the answer was that justice is far more complex than that. Usury (the issue of interest-bearing loans) was banned by the medieval Christian Church. At the same time, Islam permitted only profit-sharing loans (where the lender could claim only a share of profits from the debtors’ investment, not interest) and banned debt slavery. But the banking systems that developed in Europe (starting in Italy in the later Middle Ages) and that underwrote a great expansion of commercial activity were based on lending money for profit.
It can furthermore be argued that without the relaxation of laws on usury in England in 1545, the Industrial Revolution that got under way two centuries later (see here ) would simply not have happened: the lure of a return on capital encourages people to risk their money by investing it. And so the prospect of income through lending would become a key feature of the capitalist system as it has since developed. The foundation of the Bank of Amsterdam in 1609 (precursor of all modern central banks) and of the Bank of England in 1694 gave the Netherlands and Britain more sophisticated and stable credit systems than existed anywhere else, and both countries saw significant growth in their economies.
‘Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.’
Mr Micawber, a character in Charles Dickens’s novel David Copperfield (1850). Like Dickens’s own father and thousands of others, Micawber was put in a debtors’ prison for failing to repay his creditors
The increasing use of paper money encouraged further growth in debt issuance. It made it easier to borrow, but also harder to value a borrower’s assets and thus to gauge how much that person should be able to borrow at an acceptable level of risk. This situation was impaired by the unpredictability of the economy. Factors like storms and disease could wreck production and trade. Nor could such misfortunes be adequately offset by insurance, which was another feature of the economic system that gradually grew over time.
The combination of paper money and debt issuance means that liquidity – money available to lend – cannot always be relied on. Changes in credit availability, sometimes in the shape of cycles of credit expansion and contraction, create patterns of economic booms and busts and lead to the differing problems posed by high rates of inflation and deflation. For example, in France, speculation in share values and a massive spurt in the amount of paper money led to a financial collapse in 1720 in which banknotes were no longer valid: the system of paper currency had collapsed.
The underlying causes of economic recessions and depressions in the modern world are the same as those that affected the early economies of Mesopotamia, and it may well be that issues of debt and debt forgiveness at both local and international levels will continue to weigh on the political and economic choices of the future.