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Bonds Are Not Forever: The Crisis Facing Fixed Income Investors by Simon A. Lack

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CHAPTER 2

A BRIEF HISTORY OF DEBT

People have borrowed money since the beginning of recorded history. The seasonality of farming, in which a farmer’s financial net worth fluctuates with the times for planting and harvesting, was one of the earliest reasons for debt. Sidney Homer and Richard Sylla’s A History of Interest Rates finds evidence of loan rates as far back as 1800 B.C., almost 4,000 years ago. King Hammurabi of Babylonia specified the maximum rate that might be charged on a loan of grain as 331/3 percent per annum, to be repaid in kind. Sidney Homer finds that forms of credit existed as far back as 8,000 B.C. during the Mesolithic Age, although such evidence is derived since written records do not exist that far back (Homer and Sylla 2005).

INTEREST RATES IN ANCIENT TIMES

There’s reason to believe that trade between neighboring tribes 10,000 years ago represented a form of credit, as a gift from one tribe reflected the expectation of a reciprocal gift of similar value at some later date. This is a crude form of credit. Homer finds evidence of capital accumulation in the form of cattle and seed during the Neolithic Age (from 5,000 B.C.) (Homer and Sylla, 2005), and notes the derivation of words such as the Egyptian ms (interest) from another Egyptian word msj (to give birth) reflecting the concept of interest as coming from or derived from an asset. Some of the earliest interest rates are expressed in terms of a percentage of seed or cattle.

Many of the earliest records ...

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