Empirical Record for the Presence of Interest in History

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Tilman Hartley and Giorgos Kallis:

"The presence of interest in historical cases:

  • For example, Strunz et al. (2017: 346) note the existence of interest in Egypt, Mesopotamia, America, India, China, and medieval Western Europe.
    • Is there a monetary growth imperative? Peter Victor, B. Dolter (Eds.), Handbook on Growth and Sustainability, Edward Elgar Publishing, Cheltenham, England (2017), pp. 326-355
  • Similarly, Cahen-Fourot and Lavoie (2016: 167) write that “interest [was] in existence long before modern capitalist economies relying on economic growth as their ultimate goal took shape in the Western world. It was for instance the case in ancient Mesopotamia, ancient Italy, the young Islamic world and Middle-Age India”. (Cahen-Fourot and Lavoie (2016: 167) ... write that “debt money and interest were at work only in a few sectors of these non-capitalist socio-economic formations, so there is no direct comparability with monetary economies of production where the production and the monetary circuits fully overlap”.)
    • Louison Cahen-Fourot, Marc Lavoie. Ecological monetary economics: a post-Keynesian critique. Ecol. Econ., 126 (2016), pp. 163-168

The kinds of measures attempted by these different societies to try to avoid or to mitigate the consequences of unpayable debts:

We place these different measures into four broad categories: forgiving accumulated debts; eliminating the charging of interest altogether; preventing the compounding of interest; and limitations such as rate caps and setting maxima on the size and duration of loans. Our specific focus here is on historical cases where the accumulation of interest renders debts unpayable.3 The solutions we identify here thus either prevent the accrual of interest resulting in unpayable debts, or mitigate such debts when they do occur. The measures we discuss in our historical cases all fit into one of these four broad categories.

First, cancelling debts could resolve the problem of debt accumulation. Such debt forgiveness measures may take place on the individual level as well as more broadly. More narrowly, creditors may be motivated to forgive individual debts through informal norms such as a desire to behave charitably, or may be compelled to forgive loans through the formal mechanisms provided by bankruptcy legislation, for example. More broadly, debt jubilees provide for the cancellation of debts of large numbers of indebted individuals. We find the broad approach of regular jubilees in ancient Mesopotamia and among the Hebrews, and more occasional debt write-offs, as well as narrower individual cases of debt forgiveness, in Athens, Rome, and China.

Second, banning the charging of interest altogether is another obvious way to prevent the accrual of interest into unpayable debts. Interest bans might be partial, such as when interest is permitted on some forms of loan such as for trade or production, but forbidden on loans that might be expected to quickly become unpayable such as consumption loans to the poor. We find interest bans attempted in Rome, China, Christianity, and Islam, and a variety of partial bans among the Hebrews.

Third, the compounding of interest might be prevented. The compounding of interest is particularly problematic in non- or slow-growing economies, since the compounding of interest leads to exponentially growing debts. The broadest possible measure to prevent compound interest would be to prevent creditors lending any of their interest income, since then no interest would be paid on interest. In Christianity, we find charitable lenders allowed to charge interest only to cover the costs of lending, effectively preventing interest income being lent, and in China interest income was often earmarked for specific spending purposes. In these cases the intention seems to have been to prevent charging excessive interest and to raise funds, respectively, rather than to explicitly prevent interest compounding, though that would have been the result. A narrower version of preventing compounding is to prevent a creditor charging interest on the interest owed by any individual debtor. This is often effected as a ban on adding interest to the loan principal. Such a measure would at least prevent the exponential accumulation of interest on individual debts, if not in the economy as a whole. Such a ban seems likely to have been much easier to police than attempting a broader ban on compounding by trying to prevent lenders lending their interest income. We find such bans on charging compound interest in Rome, China, India, and Christianity.

Fourth, limitations capping the maximum interest rate, the maximum size of a loan, or the maximum duration of a loan could be applied. Though they would not prevent the accrual of unpayable debts altogether, such measures would limit the number of debts that become unpayable and the rate at which those debts increase. We find such measures in Rome, India, China, Christianity, Islam, perhaps among the Nahua, and among the Tolai.

Finally, we found no cases of a society imposing a condition of zero net saving on their population – the condition which renders positive rates of interest compatible with zero growth in recent theoretical models (Berg et al., 2015; Cahen-Fourot and Lavoie, 2016; Richters and Siemoneit, 2017). A ban on all saving would be equivalent to a ban on borrowing, since nobody would have anything to lend, though we did not find a ban on saving or borrowing in any of our cases. Historically, perhaps the closest we found is some suggestion of a ban on borrowing among the Persians around 430 BCE – clearly an effective way to avoid unpayable debts, since if there is no debt then no-one will ever find themselves with a debt they cannot pay. But we have not included this in our case studies since the available information consists of a single sentence from the Greek historian Herodotus: “They hold lying to be the most disgraceful thing of all and next to that debt; for which they have many other reasons, but this in particular: it is inevitable (so they say) that the debtor also speak some falsehood” (I.138, trans. Alfred Denis Godley). Although societies can effectively operate without individuals saving or lending (Hartley, 2019), they tend to be small-scale and, given the absence of saving or lending, will not have experienced the problems associated with interest-bearing loans that we find in the ten cases we describe below."