When Was Interest Invented? A History of the Concept

Interest, a fundamental component of modern financial systems, represents the cost of borrowing money or the return earned on lending it. Despite its pervasive presence today, the origins and evolution of interest reflect a complex historical journey shaped by economic necessity, social values, and religious doctrines. Tracing its development reveals how societies have grappled with the implications of charging for the use of money over millennia.

The Earliest Records of Interest

The earliest documented evidence of interest practices dates back to ancient Mesopotamia, around 3000 BCE. Lending activities primarily involved commodities such as grain and silver, which served as early forms of currency. Cuneiform tablets detail these transactions, indicating structured early financial systems. Temples often functioned as proto-banks, storing wealth and facilitating loans to farmers and merchants.

The rationale behind charging interest in these agrarian societies stemmed from practical considerations. Lenders sought compensation for risk and delayed use of resources. The Code of Hammurabi, enacted around 1780 BCE, formally codified interest rates, specifying a maximum of 20% for loans in silver and 33.33% for loans in grain. These rates were designed to be easily calculable within the Sumerian sexagesimal numbering system. This legal framework provided a foundational structure for financial transactions, demonstrating an early understanding of the need to regulate lending practices.

Interest in the Ancient World

Following its Mesopotamian origins, the concept of interest continued to evolve across other major ancient civilizations, each adapting it to their structures. In ancient Egypt, loans and interest-bearing debt were present, though interest was sometimes viewed negatively as a factor that could destabilize social life. Regulations aimed to minimize negative impacts, encouraging debtors to work off obligations. Egyptian temples also played a role similar to their Mesopotamian counterparts, accepting deposits and extending credit for various ventures, with interest rates varying based on the transaction.

Ancient Greece saw interest become common in commercial and financial transactions, involving temples, banks, and private individuals. Philosophers like Aristotle, however, famously condemned usury, arguing that money was barren and could not naturally reproduce itself. Despite these philosophical objections, interest rates in Athens varied widely, with investments often yielding under 10%, normal loans between 5% and 20%, and loans to municipalities around 10%.

The Roman Empire integrated interest into its legal system, acknowledging its role in the economy. Roman law, specifically the Lex Unicaria of 88 BCE, established a maximum interest rate of 12%. Later, Emperor Justinian’s reforms in 533 A.D. further refined these regulations, setting a sliding scale that included 8% for business loans and 6% for general loans. The Roman concept of fenus referred to interest, and while rates were regulated, moral considerations regarding lending were also prevalent, often echoing Greek philosophical views.

The Medieval Stance on Interest

During the medieval period, a significant shift occurred in the perception and legality of interest, largely driven by religious prohibitions against usury. Major religions, including Christianity, Islam, and Judaism, condemned the charging of interest on loans. Christian theologians, from the fourth century onward, defined lending for gain as a sin, with St. Thomas Aquinas arguing that it constituted “double charging” by profiting from both the thing itself and its use. Church councils, such as Lateran III, went as far as to decree that those who accepted interest could be denied sacraments and Christian burial. This widespread condemnation stemmed from the belief that money was unproductive on its own and that charging interest exploited the poor.

Islamic finance strictly prohibits riba, an Arabic term often translated as interest or usury, considering it a major sin. This prohibition is rooted in principles of social justice, aiming to prevent exploitation and the widening gap between rich and poor. Islamic law views money as a medium of exchange, not a commodity that should generate profit without real economic activity or risk. To navigate these prohibitions, workarounds emerged, such as profit-sharing arrangements like mudarabah and cost-plus financing known as murabaha.

Jewish law also prohibited charging interest to fellow Jews, though it permitted lending with interest to “strangers” or non-Jews. This distinction sometimes led to Jewish lenders filling a financial void in medieval Europe, although rabbinic authorities still strictly condemned interest within the Jewish community and debated exceptions for commercial realities.

Interest in the Modern Economic Era

The condemnation of interest gradually receded with the advent of the Renaissance and Reformation, paving the way for its re-legitimization and integration into modern economic thought. As societies moved towards more commercial and capital-intensive economies, the necessity of interest as a financial tool became increasingly apparent. This shift recognized interest as a legitimate payment for the use of capital, reflecting factors such as opportunity cost, risk, and the time value of money. The time value of money asserts that a sum available today is worth more than the same amount in the future, due to its earning capacity.

Economists like Adam Smith and John Maynard Keynes contributed to a more nuanced understanding of interest, moving away from moralistic prohibitions towards economic principles. Interest became understood as the price of capital, compensating lenders for deferring consumption and taking on risk. This re-evaluation allowed for the development of modern banking systems, investment markets, and sophisticated monetary policies. Today, interest rates are a primary tool for central banks to manage economic activity, influencing everything from consumer spending and business investment to inflation and economic growth. The concept of compounding, where interest earns interest, further underscores the power of this financial principle in wealth accumulation over time.