Michael Hudson
January 02, 2019
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It’s hard enough for economists to explain whether interest rates will go up or down in today’s world. How can we possibly hope to understand how the practice of charging interest began in the first place? When did people begin issuing interest-bearing loans? And how did they decide how much to charge for the privilege of borrowing money?

The answer to these questions turns out to be quite simple, once one understands how ancient Sumer, Babylonia, Greece and Rome set their interest rates. Indeed, simplicity of calculation was what these ancient economies strove for above all else.

Unlike today, interest rates in the ancient world did not rise and fall. Instead each society had its own steady or “normal” interest rate. This rate was often fixed by law—Hammurabi’s code and Roman law both codified interest rates—though surviving contracts show an array of variations around the norm. Sumerian text exercises, used to train scribes, confirm the prevalence of these normal interest rates.

How did this customary rate of interest come to be charged? And how did the rate manage to remain so steady decade after decade and century after century? Obviously the rates were not set by market forces of supply and demand, for economic conditions must have changed every year, and even seasonally within each year.

A quick review of a few ancient civilizations’ interest rates reveals that a strong, non-economic factor was at work.

Starting around 2000 B.C. in Mesopotamia, the normal commercial rate of interest was equivalent to 20 percent per year. I say “equivalent to” because the Sumerian interest rate was not expressed as a percentage. Ancient societies did not use percentages, they relied on systems of fractions instead. The Sumerians, for example, used a sexagesimal (60-based) system to calculate fractions. (This system was later borrowed to divide the hour into 60 minutes, the minute into 60 seconds, and the circle into 360 degrees [see Origins: **“Inventing Time,”** *Archaeology Odyssey*, Fall 1998].) They thus divided the ancient mina (their basic unit of currency) into 60 shekels. Like the fraction 1/10 in our own decimal system, the shekel was the “unit fraction” of Sumerian mathematics.

This sexagesimal fraction system made it easy for the Mesopotamians to compute interest rates: creditors simply charged all debtors 1/60 of the principal amount per month. Over the course of a year, this worked out to an annual interest rate of 12 shekels per mina or 12/60 of the principal amount (20 percent in our own decimal system).

In ancient Greece, the normal interest rate was fixed at 10 percent. This rate was no doubt tied to the common Greek fractional unit, the *dekate* (1/10). The *dekate* was a standard unit of measurement for many economic transactions—for instance, the Greek military traditionally donated one *dekate* (or 1/10) of its booty to the temples.

The Romans used the duodecimal system, based on the fractional unit 1/12 (a system probably derived from the number of months in the Julian calendar). Their interest rate was fixed in law for centuries at 1/12 of the principal. In our base-10 decimal system this interest rate would be expressed rather cumbersomely as 8 1/3 percent (0.08333333). But in Rome’s numerical system it worked out neatly to one “ounce” of interest per “pound” of credit. (The value of Roman currency was determined by its weight. The basic unit of measurement was the *libra*, or pound, which weighed about 3/4 of one of our English pounds and was divided into 12 *unciae* or ounces.)

These examples clearly illustrate how ancient economies based their interest rates on ease of computation: The local numeric system’s basic unit-fraction—1/60, 1/10 or 1/12—was simply adopted as the normal rate of interest.

*Learn about the ancient origins of other inventions—from the calendar to medicinal pills—in* **The Origins of Things (Or How the Hour Got Its Minutes)**.

This simple method of fixing interest rates seems to have persisted through the Byzantine era. Initially, the Byzantine Empire’s 12 percent interest rate worked out to a simple payment of one *nomismata* (Byzantine penny) per month. But after the reign of Constantine, the imperial currency was devalued, reducing the number of *nomismata* from 100 to 72 per pound of gold. The Byzantine interest rate was also adjusted accordingly, climbing from 1/100 of the principal amount to 1/72.

For many years, economists were baffled by the long-term fluctuations in ancient civilizations’ interest rates. Clearly, the normal annual interest rate declined over time from Mesopotamia’s 20 percent to Greece’s 10 percent to Rome’s 8 1/3 percent. But why?

The discovery of this pattern led some economists to imagine that there was some innate law of civilization by which the rate of interest tended to decline. With our modern ways of thinking, it is easy to imagine that interest rates were being set according to a borrower’s expected earnings or some other rational economic factor.

According to this explanation, loan profits and productivity rates fell as a result of population growth and technological innovation. Certainly, an investor’s degree of financial risk seems to have diminished with the progress of civilization. In more advanced, relatively stable economies, creditors no longer had to protect themselves by charging the exorbitant interest rates of the distant past.

These sophisticated economic theories fail to take into account the simple fact that ancient interest rates were rooted in the local system of weights and measures. Clearly, interest rates in the ancient world declined over the millennia not because of any complex economic transformations, but rather because of simple changes in the systems of arithmetic and fractions being used.

The very fact that ancient civilizations set their interest rates in this non-economic way may help to explain why chronic debt plagued so many ancient cultures. Driven by abject need, agrarian debtors in ancient Babylon, Judea and Israel were often forced to borrow money at much higher rates of interest than they could possibly afford to pay. With interest rates regularly exceeding profit and crop-surplus rates, these societies inevitably experienced widespread economic polarization and financial instability.

The problem of debt arrears (including unpaid taxes) was so common in Mesopotamia that the royal government periodically had to step in and regulate the economy (see Michael Hudson, **“‘Proclaim Liberty Throughout the Land,’”** *Bible Review*, February 1999). Between 2400 and 1700 B.C., the government issued the royal *amargi*, *andurarum* and *misharum* “Clean Slate” proclamations, canceling all non-trade-related agrarian debts—in part, no doubt, a means of restoring balance to an economy plagued by overly high interest rates. Today’s credit card holders with large balances may well long for a similar reprieve.

**Origins: “Interesting Developments”** by Michael Hudson originally appeared in *Archaeology Odyssey*, July/August 1999.

**Michael Hudson** is a Professor of Economics at the University of Missouri-Kansas City and the President of the Institute for the Development of Long Term Economic Trends. Hudson is editor of several books, including *Debt and Economic Renewal in the Ancient Near East* (CDL Press, 2001) and *Urbanization and Land Ownership in the Ancient Near East* (Peabody Museum, 1999).

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*Ancient economics revealed*

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In 2000 BCE there was no money as such. There was debt, and thus interest, but no metal coinage or fungible currency. So the last sentence of the bit about Mesopotamia referring to minas and sheckels is anachronistic, certainly for the Sumerian or old Babylonian eras. Was this normalized to measures of grain by weight?