The Origins of Interest
The first appearance
of the concept of interest goes back to the days of the ancient
Sumerians. It was based on the concept that if you had a herd of
cattle (let’s say 100 head), and you lent that herd of cattle to
someone else for a year, you would expect that at the end of the
year you would get your 100 head of cattle back plus some extra
cattle, because of new births. That extra amount was interest.
We see roots of the
word “interest” in the Sumerian language. The word for interest is
“mash”, which was also the word for “calve”. For the Greeks, the
word was “tokos” which refers to the “offspring of cattle”. And for
the Egyptians, the word is “ms”, which means “to give birth”.
In a society like
the ancient Sumerians, where the size of your flocks and herds
indicated the size of your wealth, it is easy to conceptualize that
natural occurring offspring (interest) would add to your wealth.
The Early Years
In more modern
America, we are familiar with the concept of raising or lowering the
interest rate to stimulate the economy or avoid inflation. But this
idea is not so new.
In England, during
the 18th century, the economy also reacted to the amount
of interest charged. Normally, interest ran at about 4%. When the
rate was lowered, business increased. When the rate was raised,
business slowed down.
In the Roman days,
were similar to our current America. Normal interest rates were at
about 12%. When they wanted to get things moving, they would lower
it to about 6%. For risky loans, they would raise the amount
charged to 24%.
Good or Evil
In some circles, the
concept of making money from loaning it out is sinful or
un-natural. The Ancient Greeks struggled with the concept of
interest. Philosophers such as Plato and Aristotle felt that money
was “barren”, and that no offspring can arise from something that is
barren, therefore no interest should be collected. But this may
have stemmed from the fact that in early Greek days, there was no
imposed restriction on the amount of interest that could be charged
therefore greedy creditors got very rich. So, to counteract this,
they banned interest.
Over time, as the Greek empire gave
way to the Roman empire, the Roman’s reinstated interest, but
ensured that “gouging” did not occur, by regulation and establishing
Hmm…What to call it
To stay within the
law (or avoid the law, depending on how you look at it), various
types of interest have been established over the years. For
example, to skirt the issue of charging a certain interest rate,
some lenders have charged a “fee for service” which eliminates the
term “interest”. The end result is the same for the borrower, it’s
just called something else.
Another way to circumvent the term “interest” was to charge a
penalty fee for late repayments of principal. The penalty amount
was agreed upon before time, and it was also agreed that the
borrower would “breach” the contract by making a late payment,
therefore insuring that the lender received his penalty payment, or
Sometimes the “interest” would be collected as a fee for lost
opportunity cost. It was reasoned that a borrower really needs that
money today, and they will promise to pay back more in the future
after making profits with the money. The lender receives a payment
because of his lost opportunity cost.
Another thought is that if the money loaned was for the purpose of
investment, then the lender and borrower could agree on a
compensation from the profits of the investment. The exact amount
of the profit sharing would be determined before hand.
Here to Stay
But one thing remains apparent, “interest” or whatever we have
wished to call it through the ages, is here to stay. In fact, for
the most part, it’s always been with us, because there is always a
cost for the use of money.
About The Author
Diane French is a successful
freelance writer providing tips and advice for consumers on
personal loans and
equity loans. Her many years of
mortgage industry experience have helped others understand the
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