Whether you’re an economy major or someone who just wants to learn new things each day, you would be interested to know that interest and interest rates have a long history throughout the ages. Though you might think that lending and interest would have been a relatively newer concept that just came in within the last 200 years, you would be surprised to know just how far back it originates.
Older than you think
Loans actually existed as early as about 4000 BC. Though the loans back then in pre-urban societies were loans consisting of seeds and grains and animals and tools. People still had some sort of interest in paying their debts, as the seeds that they borrowed would yield more grain.
A similar concept of interest was applied to people borrowing animals. Usually, the interest was in the form of newborn animals. Though not exactly like the system of interest and interest rates you find today, these things went on to play a big part in the history of interest rates.
Early Economic Organization
Later on, as society got more civilized and developed, thriving places like Egypt developed usuries. Usury, their term for the interest rate, were decided according to the type of loan made and made payment by a primitive money system as weighing the payments. Later, the Greeks developed a more advanced type of usury that issued usury loaned on coinage. Later on, as the technology and thinking of the people advanced further, the money system that we know now came into existence.
Involvement of the Church
Sometime along the way, the church has noticed that many people were being taken advantage of under the usury and the system of loaning with large interest rates that many common folk could not afford. You may remember that the Jews of biblical times were forbidden to include an interest rate from their fellow Jews and were discouraged in applying usury to strangers. Lots of other moral institutions and codes also limited interest rates and usury like the code of Hammurabi, which limited interest rates to 33%, and Justinian’s code that reduced the rate from 12½ % to 4-8%.
During Leo the Great’s time (a pope), clerics and laymen were prohibited from taking usury in a form of following bible ethics. Excommunication was the penalty faced by Christians who insisted on giving loans with interest rates. In the times of the reformation, the usury ban was lifted and people were again free to go into the usury business.
Interest Rates as We Know Them
Years went by and slowly but surely, the usury became the loan system you see today. Many changes came along to protect both the lender and the borrower. Interest rates have been regulated since medieval times.