Part II of IV—A Brief History of World Credit & Interest Rates • 500 A.D. – 1690 A.D. The Fall of Rome to End Dark Ages | Armstrong Economics

The fate of the Roman Empire of the West had been cast with the sack of Rome in 410 AD by the Goths followed by the Vandals in 455 AD. What was once Rome was divided with the Franks in Gaul (France), Visigoths in Spain, Angles, Saxons and Jutes in Britain and theOstrogoths followed later by the Lombards in Italy. However, the barbarians had long admired Roman culture and subsequently became civilized. Much of the Roman culture and monetary system was thereby retained. While many of these new barbarian states continued to mint coinage in Roman style and denomination, eventually gold began to disappear from the money supply to be replaced by silver coinage in the form of a denier, denaro, phenig and penny all taking their name from the old Roman denarius.

The Byzantine Empire was certainly not immune to crisis concerned debt. The moneylenders and moneychangers were quite unpopular. They were forbidden to hold public office as time went by. The empress Sophia in 567 A.D. summoned the moneylenders before her and confiscated all agreements to, and pledges of, debt thereby simply forgiving all debts – a move that was obviously welcomed by the populace.

By the year 622, the Arab nations were on the rise. They had conquered Egypt, Syria and Persia and in 669 they took Asia Minor by storm. In 698, the Arab armies captured even Carthage and followed with an invasion of Spain in the year 711. The Arab goal to conquer the balance of Europe was finally thwarted at the Battle of Tours in 732. Nevertheless, the Arabs controlled the Mediterranean, which had essentially cut off all trade in Western Europe. The economy diverted to one of agriculture and mercantilism died a quite death. Cut off from world trade, the Latin tongue began to disappear and the emergence of independent languages began throughout Western Europe.

This was the atmosphere that history has labeled the “Dark Ages” and while coinage existed, the lack of commerce and increased hoarding had seriously reduced circulation. It was the rise of Charlemagne that brought light to this dark period in man’s history. Much of the circulating currency was still old Roman coins. Charlemagne brought forth a great monetary reform that has survived into our present day. He introduced the “denier” which was a silver coin eventually referred to as a penny. Twelve of these silver pennies equaled one “sou” which later became known as a shilling in many parts of Europe. Twenty shillings equaled one pound.

The Capitularies of Charlemagne, circa 800 A.D., also dealt with the issue of credit. Undoubtedly, this legal code had been highly influenced by the severe inflationary trends and debt crises that had plagued the final years of the Roman Empire. The charge of interest on loans was strictly forbidden. It was during this period when the evils of excessive debt were viewed not only as destructive socially but as a sin under church law known as usury. Any exception to this view on charging interest remained highly controversial for the following thousand years well into the Middle Ages.

The tenth century was a period of slow advance. While much of central Europe did not benefit, the Venetians gained major concessions in trade from Constantinople and the uptrend in trade brought with it wealth. Moneylenders in Venice were actually respected while banking facilities re-emerged out of the need to finance maritime ventures. The Vikings began to settle back into the position of traders rather than raiders and secure a dominant role in maritime trade between Northern Europe and the Mediterranean. Meanwhile, the Arab power, that had dominated the previous century and brought about the Dark Ages in Western European culture, gave way to decay. By the eleventh century, the Europeans were pushing the Arabs out of Sicily and Sardinia. By 1096, the First Crusade had re-established Italian dominance in the Mediterranean once again.

Nonetheless, the eleventh century was not void of its speculations and inflations. Currency was in a constant state of confusion and the practice of debasing the precious metal content, which had been absent in the West since the final days of Rome, reappeared. Merchants became wealthy enough that they emerged as the new bankers capable of lending to the king. The economic power of Venice had continued to expand and more sophisticated financial transactions, such as insurance, began to emerge.

Records of interest rates in Western Europe during this time are hard to find. When transactions were recorded, most have not survived unlike the clay tablets of Babylon. But documents have survived largely beginning with the late twelfth century. Of the evidence that has emerged, again we find that interest rates were rather high in poor nations, such as Britain, and significantly lower in the major trading nations. Although interest rates in Britain were 43% per annum or much higher, it must be kept in mind that long-term loans were not the norm. Interest rates were typically quoted on a weekly basis – 2 pence on the pound per week (43 1/3% per annum). This was the going rate for the best-secured loan. Those with poor collateral or credit were paying 80-120% per annum.

The thirteenth century was an age of accelerated economic expansion. The Mongol conquest of Asia played the final role in destroying the Arab Empire. This also opened the door for trade with China and it was the era of Marco Polo. Genoa rose to challenge Venice and Florence emerged as the strong international banking center. But even in the thirteenth century, the credit of merchants and landowners was viewed to be much better than that of government. Nobles were on the decline and much of the land became freehold.

Interest rates to a prince were often 30-40% as in the case of the Emperor Frederic II. Legal limits on interest rates began to rise once again. In Modena, the maximum rate was set at 20% while in Milan and Genoa the maximum rate was established at 15%. The trading cities remained quite wealthy and the legal maximum rates of interest were typically much less. In Verona, the maximum rate was 12.5% while in Sicily it was set at 10%. The maximum legal rate in Britain, however, remained at 43 1/3%. Germany perhaps had the highest during this period – 173%.

The prosperity of the thirteenth century brought with it inflation and speculation once again. Commodity speculating was common and many bankers participated with depositor’s funds. Currency was still being debased and new gold coinage was struck in Florence (florin) and in Venice (ducat). Economic prosperity had reached it peak.

The fourteenth century brought with it the Hundred Years War and the Black Plague. Both the kings of England and France defaulted on their national debts and most of the banks in Italy went broke. Financial chaos had become so widespread that in Venice, the bankers were forbidden from speculating in commodities and the government required that two fifths of all deposits be invested in the public debt. The world economy was in severe decline. Interest rates during the fourteenth century rose dramatically. Italy often charged 50% on loans to the once prosperous Netherlands and questionable loans demanded rates of interest as much as 100% per annum.

The fifteenth century was one of transition and expansion. The early part of this century still suffered from periodic plagues and the evils of unsound finance. But the wealth of nations also began to shift. Both the Dutch and English began to emerge as important international traders. In the central part of Europe, the cities of Geneva, Augsburg and Nuremberg rose in importance serving as the trade bridge between the new economic powers of the Dutch and English linking them with the Italians. Florence regained her glory and the Medici Bank of that city became the largest in Europe with branch offices scattered throughout Europe and into Northern Africa and Levant. Venice, however, continued to lead in trade ahead of Genoa.

Contemporary writers of the era have recorded much of the atmosphere. Once again this century brought forth the re-emergence of the capitalist. These were individuals who were extremely wealthy and no longer needed to be merchants or traders. They profited as moneylenders and were held in high esteem once again. This set the tone for a new age of capitalism. Trade was no longer the main goal – everyone wanted to acquire more money instead of land. This was a similar atmosphere that had existed in Socrates day. Nations sought new gold deposits more so than trade, which resulted in wars that were often fought for financial consideration.

The credit of government or the crown was still very dubious. In both France and England loans to the crown were forced upon the people who were paid no interest whatsoever. This quickly laid the foundation for greater organized taxation that followed in the centuries thereafter. Those who were willing to lend to the crown did so at high rates of interests. Charles VIII of France was reported to have paid 42% to 100% on a loan to the Genoa banking house of Sauli to fund his invasion of Italy after the Medici refused.

Commercial business rates declined from the 10-12% range in Italy down to 5%-8%. The emergence of local savings and loans known as “montes pietatis” were formed in many towns beginning around 1462. The montes pietatis were intended to provide much more reasonable rates charging 6% in comparison to the normal pawn rates of 32.5%-43.5%. Some pawnshops during this period were legally limited to 20% as was the case in Florence.

The sixteenth century was a powerful period in time. This was the century that opened the world leading with the discovery of the Americas. But the vast hoards of precious metals brought back from the Americas created sharp increases in inflation. Commodity prices rose dramatically – nearly 300% during 1550 to 1620. England, Spain and France all competed for dominance in the Americas and in Europe. This rapid rise in inflation and the loss of a monopoly on trade through the Mediterranean caused a decline in Italian influence. Royal debtors defaulted on the Italian banks and Italy was on its way toward becoming a second class economic power.

Despite the fact that usury laws still prevailed in church doctrine, the expansion of debt was prolific. Much of the debt was incurred for war. There were but only 25 years during this century when large-scale wars in Europe were absent. Local towns and cities had gained in credit worthiness and when funds ran out, the crown exploited the credit of the towns and cities sending most of them into financial ruin.

There was a sufficient quantity of debt issued from around Europe that the first major exchange emerged in Antwerp. The exchange grew to 5000 members and bills of exchange, bonds, demand notes, deposit certificates and credit instruments of all sorts were traded back and forth daily. An exchange emerged trading commodities in Antwerp and the city became the new financial capital of Europe with hundreds of ships visiting its port each day.

The ravages of debt were soon to worsen. Antwerp was forced into default by the unsound finances of the Spanish Crown in 1570. In 1576, unpaid Spanish mercenary armies sacked Antwerp and the exchange was destroyed. The marauding armies also sacked Rome and financial chaos grew. The financial turmoil in Italy and Spain, combined with the surge in inflation, aided greatly in creating the Protestant Reformation.

The French & Spanish Defaults
During the seventeenth century, the practices of unsound finance finally took their toll. The Crowns of Spain and France defaulted on all their debts and they destroyed their Italian and German bankers in the process. In fact Spain defaulted on her debts in 1607, 1627 and again in 1649. Despite the seemingly rich gold and silver flows coming from the New World, everything had been pledged as collateral often five to ten years in advance. All the gold and silver flowed straight to the Genoa bankers and the Spanish money supply became greatly debased and reduced to a mere copper standard.

The Spanish default destroyed the Fuggers who had risen during the sixteenth century to be perhaps the largest banker up until that time. They were located in Augsburg and had been the first great German bankers with a reported capital base of 5 million guilders. This once great banking establishment was completely ruined by the defaults of Spain.

The French defaults were also dramatic. There were two main periods of severe debt crisis in France in 1589 and 1648. The crisis of 1648 essentially destroyed the remaining Italian bankers – primarily Florentines. An exchange in Paris had emerged in 1639 where credit instruments traded regularly. The French government “rentes” (perpetual loans) traded rather well until the debt crisis of 1648. The French finances were again reformed where interest rates on previous government notes was arbitrarily reduced to 5% while other perpetual notes were simply paid off at a fraction of the previous agreements.

Out of this turmoil, the Dutch gained independence from Spain. The southern provinces had been given to Spain in 1598 as a dowry for the daughter of Philip II who history recalls as Isabella. Quickly after independence, the Dutch built a trading empire instituting new rules and banking practices that would serve as a model for other nations decades later. Germany went through the Thirty Year’s War (1618-1648) which was largely a struggle between Protestant and Catholic factions. This kept Germany as a collection of small states and the demise of the Fugger banking house more or less sealed the fate of Germany during this period in time.

England was ruled by the Stuarts and practiced reasonably sound finance in comparison to that of France and Spain. Gresham had revised the finances of the British government actually instilling a sense of honor to finance. His famous law for which he is best known, bad money drives out good, struck at the heart of depreciating currencies through debasement. Another major advantage of Britain was that it stayed away from foreign moneylenders for the most part. This helped to concentrate wealth within the domestic economy. However, England had practiced the art of forced loans to the Crown so one should not look upon England as a well managed affair during this period. Debts began to rise but the practice of forced loans came to an end under Charles II during the last quarter of this century.

The phrase most commonly used for two people going out to dinner when each party pays their own way is “going dutch.” This saying has its roots in the seventeenth century. The small Dutch Republic fought wars against England and France. The French actually invaded Holland but were defeated when the Dutch opened the dikes. But a large part of the success of the Dutch was owed to their efficient credit system within which even the government enjoyed honorable status and low interest rates.

The efficient Dutch government brought much faith and prosperity. There was more capital in Holland than borrowers. Speculation emerged as always whenever capital has concentrated to such an extent. The first stock market trading emerged in Amsterdam in 1613. Debt issues began trading on the exchange in 1672. Of course one has to mention the famous Tulip Speculation. The highest recorded price paid for a single tulip bulb took place in 1636 for the incredible sum of 4600 florins. In 1985 U.S. dollars, this would be close to $460,000 using gold at $400 per ounce.

The financial transformation of Britain came with the revolution of 1688. Previously, the Stuarts and Tudors restricted and controlled affairs. England never had a significant bank, exchange or organized money market and its national debt was never organized either. As capital began to concentrate during the later part of the seventeenth and primarily during the eighteenth century, prosperity and the emergence of the capitalist developed.

Prior to the revolution of 1688, banking began to evolve in the form of goldsmiths. These chaps quickly began to learn what the Italian bankers had discovered more than a hundred years before that only a small portion of the deposits needed to be retained to cover withdrawals. The large part of the deposits could be lent for interest or invested. Goldsmiths began to pay interest on deposits once this was discovered. But still many of the most prominent goldsmiths were ruined when Charles II suspended all payments on his debts to them in 1672.

Nonetheless, English banking contributed to the evolution of the industry. Checks were known to have been used dating as far back as the 1670’s. Receipts for deposits of gold with the goldsmiths circulated as paper money transferring assets from one person to another without physically handling the gold. The charging of interest had been considered to be a sin under the Catholic Church doctrine. Most Italian bankers got around this through clever means of disguising the interest as foreign exchange fees or transfer costs. In Britain, however, there were legal limitations on how much interest could be charged, but there were no laws against usury. Therefore, the receipts and contracts of debt circulated much more freely since they were drafted in British pounds rather than in some confusing foreign exchange contango.


Source: 500 A.D. – 1690 A.D. The Fall of Rome to End Dark Ages

Part I of IV—A Brief History of World Credit & Interest Rates • 3000 B.C. – 500 A.D. The Ancient Economy | Armstrong Economics

3000 BC – 500 AD—The Rise and Fall of Babylon – Greece – Rome

Credit is usually thought of as a modern invention of perhaps only a few hundred years old. It is true that a few more clever forms of credit have emerged during our current century such as plastic credit cards. But beyond that, credit has existed long before man invented an official form of money. Credit has existed from the very dawn of civilization. Man has always attempted to borrow from his neighbor if not cold hard cash, then at least a cup of sugar now and then. Some say that prostitution is the oldest profession; history actually suggests that the oldest profession may indeed be that of the moneylender.

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 man’s 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.

Another popular belief is that modern banking began following the Reformation, which marked the dawn of Capitalism. Again, this notion gives far too much credit to modern civilization while ignoring the archives of history. Although in early times moneylenders existed, they rarely accepted deposits. But in Babylon, records have revealed two major banking establishments that closely parallel the functions of our modern-day bank. The banking houses of the Egibi Sons and the Muradsu merchant bankers engaged in large-scale operations. Lending took place to individuals, merchants and governments. Deposits were accepted and transferred to another account upon a draft being presented. Deposits also earned interest and notes would be discounted as well as bought and sold. Even venture capital transactions took place where the bankers became the financing partner.

The sophistication of early banking institutions is quite surprising too most. There may not have been the instantaneous transfers but there was evidence of drafts, accounts, transfers, deposits, bearer notes and even overnight rates of interest during some periods.

As a result of formalized banking and widespread use of credit, history is littered with countless debt crises that have occurred regularly since the Babylonians right through into modern times. It appears that the endless cycle of borrowing more than one can repay has sealed the fate of just about every government that has ever existed.

Records of the Babylonian era illustrate quite clearly that cyclical regularities in the rate of interest charged exist from the very beginning. Silver loans at one point were over the legal limit reaching 25% clearly as a result of a short-term credit crunch. Nevertheless, the state during other periods granted silver loans as low as 12%. Additional evidence of the period establishes some temple loans of barley given at 20% and silver at 6.25%.

A history of credit and interest reveals one major trend that has been consistent through all time. The stronger an economy the lower the rate of interest. Interest rates are always at their lowest level internationally when capital reaches its point of maximum concentration. This normally results in a strong currency and high levels of confidence in general.

Interest rates also remain substantially above world rates in nations where confidence is low. Currently, this is true for South and Central America as well as in most third world nations. This observation does not arise merely from the events of today. Even during the days of Babylon, we find the same variance in rates with the lowest rate dominant in the strongest economy, which was the center of the Babylonian Empire. However, interest rates were usually much higher in neighboring nations which at times were more than twice those in Babylon. As the decline of Babylon came about during the fourth and fifth centuries B.C., interest rates soared with minimum rates reaching around 40% on silver loans. During the sixth through ninth centuries B.C., silver loans in Assyria and Persia were often in the 40-50% range.

The Bronze Age (2400-1200 B.C.) produced a vibrant economy around the Aegean Sea. Few records have survived so our knowledge of credit and interest is a bit vague for this period in time. It is known that the standard value was cattle – not gold. Gold formed the medium of exchange but it was not the standard unit of value. This is similar to our period of the modern Gold Standard insofar as cattle would be gold and gold would be the paper currency. We also know that there were fluctuations in gold relative to the standard unit of value – cattle. It is also highly probable that credit was once again abused and contributed to the economic decline along with changes in weather and increases in natural disasters.

This was the “golden age” of the Minoan-Mycenaean era that came to an end with the fall of Crete in 1400 B.C. followed by the Dorian invasion of 1200 B.C. This was period of which Homer wrote so memorably recording the great Greek Heroic period and the glory of the Trojan War. It was followed by barbarism and the period known as the Dark Ages.

As the world emerged from this dark period, civilization began to flourish once again. It is during this period when money was first coined by the Lydians – known today as a part of modern Turkey. This invention of money greatly aided in the expansion of international trade. The Greeks were the rising stars of the period much like the Japanese of the late 20th century. Capital began to flow back to mainland Greece bringing with it inflation, hoarding and wild speculations. In the Ibid we find references to this new age of materialism…”In next to no time the commercial genius of the Greek rises to the notion of speculation…capital accumulated is only an investment with a view to accumulating more.”

As history has shown time and time again, every great speculative boom has been inevitably followed by the proverbial bust. A severe credit crisis had materialized in Athens in 594 B.C. that had prompted major reforms in credit prescribed by the Laws of Solon. Solon was a poet that was named by Athens to revise her laws in hopes of correcting the economic devastation. Farmers were threatening rebellion in Attica and a debtor not only risked personal slavery but that of his entire family as well. Once a slave, creditors could do with them as they saw fit. Many families were broken up and sold in overseas markets. The debt crisis was indeed severe and the widespread personal slavery had become a major problem that threatened to destroy the Greek Empire.

The Laws of Solon were the first major reform to the legal code of Hammurabi. Although the Greeks lifted all maximum limitations on the legal rate of interest a moneylender might charge, personal slavery was completely banned. All those who had been enslaved for debt were freed and those sold into slavery in foreign lands were brought back at the expense of the state. Many debts were cancelled and others were secured by land when possible. The issue of inflation was dealt with by devaluing the drachma by 25% and weights and measures were increased in size. Political power had shifted from landowners to capitalists and this was reappointed once again back in the hands of the property owners. Citizenship was also granted to immigrants who were skilled. The speculations had indeed prompted stories throughout the Aegean that must have been similar to those concerning the United States with its streets paved in gold. You might say that this was perhaps one of the worst debt crises in ancient history. The Laws of Solon in 594 B.C. was indeed a major reform that dealt directly with the issues of a major debt crisis.

Over the following 100 years, the laws of Solon had helped insofar as avoiding massive debtor slavery but interest rates were still free to float without legal limitation. The customary rate on secured loans tended to move back and forth between 16%-20% per annum. The scarcity of precious metals also aided in creating somewhat of a depressionary atmosphere at times. This may have been a contributing factor to the widespread political upheavals that came in 508 B.C. – the birth of democracy in Athens. Often overlooked, however, was a similar political change in the new emerging empire – Rome. In light of modern-day political change, which first attempted to emerge in China during 1989 and quickly spread to Eastern Europe, the period of 508-509 B.C. was just such a period in ancient times. Revolution broke out in Rome in 509 B.C. less than a year following the political changes in Athens. This revolution in Rome marked the birth of the Roman Republic.

Interest rates in general tended to decline in Athens following the emergence of democracy from the customary rate of 16% down to 10-12% for fully secured loans on real property. This was also aided by the major silver discoveries of Athens in 483 B.C. that vastly expanded the money supply. After 400 B.C., speculation and the capitalistic system re-emerged in full bloom. Hoarding of coinage had become quite commonplace – particularly when dealing with the temples. The temple at Delphi is often referred to as the financier of the Greek Empire lending money for interest regularly. Not only were there typical moneylenders, but professional money managers also emerged. Socrates was reported to have entrusted his capital for investment with just such a personal friend. Finance and capital had become very sophisticated. Interest rates rose during this period quite sharply. Common rates of interest for a merchant voyage were 30% during wartime and 22.5% in peacetime. But as speculation flourished, maritime interest rates rose as high as 60% and in some isolated records appeared to be as great as 100% for more risky ventures.

Strangely enough, there is more recorded history on interest rates of this late Greek period than there is in much or early Rome. Perhaps the most interesting fact is that public credit of the state was considered to be the worst. Government more often than not simply never repaid its debt. Interest rates to a state or city were recorded to be as high as 48% annually. This was also the case during the Middle Ages in Western Europe. The credit of Greek states was so poor that often the only means of obtaining a public loan required the co-signature of a wealthy citizen willing to guarantee that state’s obligation. At times, the states were forced to pledge all revenues as security. Some states even resorted to borrowing based upon what was known as a life annuity. In return for a loan of 5000 drachma, the state agreed to pay the creditor 500 drachma each year for the remainder of his life. In the record of the Delos temple for the years 377-373 B.C., only two out of thirteen loans to Greek states or cities were repaid resulting in a loss of nearly four fifths of the original principle. This illustrates why there was such a low-level of confidence in government during this period.

At the dawn of the Roman Empire, credit regulation was again part of the legal code and as always was prompted by severe debt crisis. The legal limitation on interest was established at 8 1/3% per annum as set forth in the Twelve Tables – circa 450 B.C. Anyone who violated the maximum limit was subject to a fourfold penalty. The Roman law did substantially lower the maximum rate of interest. Nonetheless, personal slavery was permitted but provisions in the law did protect the well-being of the debtor slave.

The Roman experience with credit forms yet another long list of trial and tribulation. Major widespread debt crisis affected the Roman State many times through the early Republican era. In 367 B.C., the debt crisis was alleviated by charging all previous interest payments against principle and then writing off the balance of all debts. Julius Caesar used a similar tactic during the debt crisis of his era which had undoubtedly provided some incentive for his assassination since many of the moneylenders were in reality the senators of Rome.

Interest rates during the Roman Empire reached their lowest levels of about 4% during the reign of Augustus by 25 B.C. but soon gave way during the debt crisis of 33 A.D. when it was difficult to borrow at the legal limit of 12%. This debt crisis or 33 A.D. marked the beginning of a long rise in rates that continued for the following 400 year period. Nevertheless, the trend toward lower rates of interest that came under Augustus was confined to the core of the Roman Empire largely in Italy. Interest rates ranged between 12% and 48% in the provinces similar to what took place during the Babylonian era.


Interest rates during the Roman Empire reached their lowest levels of about 4% during the reign of Augustus by 25 B.C. but soon gave way during the debt crisis of 33 A.D. when it was difficult to borrow at the legal limit of 12%. This debt crisis or 33 A.D. marked the beginning of a long rise in rates that continued for the following 400 year period. Nevertheless, the trend toward lower rates of interest that came under Augustus was confined to the core of the Roman Empire largely in Italy. Interest rates ranged between 12% and 48% in the provinces similar to what took place during the Babylonian era.


The chaos of unfunded pension brought a collapse to the social structure during the third century. The collapse in the currency contributed to massive reforms and tax-hikes as well as the introduction of passports that people could not travel until they paid their tax. The chaos also led to the rise in Christianity as people prayed to their gods and nothing happened. This economic chaos of the 3rd century set in motion the eventual outgrowth to the collapse in interest rates and banking after the fall of Rome in the West in 476AD.

Ironically, the last Western Emperor took the name Romulus who was the founder of Rome and Augustus the firm Emperor. Hence, Rome died with a man named for the beginning.

Consequently, with the fall of Rome, there was a view that borrowing was evil and we ended up with the Sin of Usury – the charging of interest of any kind as Christian philosophy began to emerge. We can see from the above chart that as capital shifted to the East, the lowest interest rates emerged there and Roman rates rose singaling the fall was on schedule.

Much of the recorded history of early Byzantine economic policy is littered with this battle over interest. Justinian’s Code of the sixth century favored the bankers who were quite important to the state. He declared that “the ancient rate of interest is exorbitant” and thereby reduced the old Roman legal limit of 12.5% set by Constantine The Great down to a range of 4-8% according to the creditor. Bankers were allowed to charge the highest interest rates of 8% while private citizens were limited to charging a 6% rate. Curiously enough, public officials were restricted to charging 4% rates of interest per annum. Maritime loans were always much higher due to risks at sea and these were capped at 12%.


Source: 3000 B.C. – 500 A.D. The Ancient Economy | Armstrong Economics