Summary of the History of Interest Rates

As civilization emerged, a gradual need for a legal system became apparent. Much of the earliest recorded laws concerned the issue of credit and the price thereof interest. A chap named Hammurabi, King of the first dynasty of Babylon, authored the earliest known formal laws around 1800 B.C. within which we find the first recorded attempt to regulate interest rates. Hammurabi established a ceiling or maximum rate of interest that a moneylender might charge a borrower. On loans of grain, which were repayable in kind, the maximum rate of interest was limited to 33 1/3% per annum. On loans of silver, the maximum legal rate was established at 20% although some records have revealed a few rare instances when the rate of interest charged was as high as 25%. Although interest rates of 20-25% in Babylon may appear excessively high, in India comparable rates of interest were quite similar. The legal limitation on interest rates during the 24th century B.C. in India was established at 24%, according to the Laws of Manu. Nonetheless, every loan in Babylon, according to the laws of Hammurabi, had to be witnessed by a public official and recorded in a written contract. The penalty for charging more than the legal rate through any means was quite severe the debt was simply cancelled. Collateral could be pledged in the form of land or some possession. A debtor could also pledge his wife, children or slaves. In extreme cases, the debtor could even pledge his person but the law forbids personal slavery of a debtor beyond three years. The Law of Hammurabi remained unchanged for most of the next 1200 years. It is quite obvious that interest rates had often been charged well in excess of 33 1/3% during previous periods. Unfair practices also existed and many of these were addressed by Hammurabi. For example, creditors were forbidden from calling a loan made to a farmer prior to harvest. If the crop failed due to weather conditions, all interest on the loan would be cancelled for that year. In the case of houses, due to the scarcity of wood, a door could be used as collateral and was considered to be separate from a house. Architects were held responsible for defects in construction and could be put to death if the building collapsed and killed the occupant. One who is unfamiliar with archaeology might suspect the ability to trace the price of gold, commodities or interest rates back thousands of years. Nevertheless, contracts etched into clay tablets have been uncovered recording all aspects of mans early social and economic behavior several thousand years before Christ. Many loans took the form of a bearer note or bill, which the creditor could then sell, to another party. Some loans were subject to call while others bore a fixed rate of interest and a fixed maturity. Records of international loans from one nation to another have also survived in clay tablets involving the Babylonians, Assyrians, Elamites, Hittites and Syrians. The Egyptians were more of a state run economy highly authoritarian in nature leaving few records of interest and credit.