Loans and Contracts

A credit system deals with an uncertain future. Many things can go wrong in the time between the start of the loan and the time for repayment. The chances that an individual borrower may be unable to repay are ever present. The credit system has to have incentives to encourage both lending and borrowing under risk. If orderly loan markets are to be maintained, they must have strongly enforced rules to resolve the impasse when a borrower is unable to repay the loan.

The insolvency and bankruptcy laws are, in essence, a public good provided by society which delineate the amount of risk society as a whole is willing to accept when failures have to be resolved.

The illustration is of a Sumerian debt contract where the payment is in silver and the security for the secured loan is the son of the borrower.

There is an ancient tradition of debt forgiveness. In the Hebrew Bible this is manifested in discussions of the sabbatical and jubilee years. In Babylonia the Laws of Hammurapi provide an idealization of royal solicitude for debtors. In Babylonian and other Near Eastern societies such as certain Jewish polities the concept of some level of debt forgiveness existed; theoretically in Babylon, it occured every three years, the biblical sabbatical was seven years, while the jubilee was every fifty years.

In practice, a regular and easy way to predict forgiveness of debt would have dried up credit. The evidence does not support the proposition that debts were forgiven in a strictly periodic manner.

A fragment of an edict promulgated by the son and successor of Hammurapi and limiting release from bankruptcy in the form of a release from debt-slavery is illustrated.