The Evolution of Private Loan Agreements

Adab, Mesopotamia. ca. 2900 BC
LUM-ma: Hey, can I borrow some barley to feed my kids? Harvest didn’t turn out so good this year.
MUG-si: You’ll pay me back next season?
LUM-ma: Yeah, totally.
MUG-si: Can I get that in writing?
LUM-ma: Sure, here you go:

Source: Early Dynastic and Early Sargonic Tablets from Adab in the Cornell University Collections [1]. Names are made up.
Source: Early Dynastic and Early Sargonic Tablets from Adab in the Cornell University Collections [1]. Names are made up.
Akkad, Mesopotamia. ca. 2750 BC
Farmer #1: Dammit, I’ve been drafted to go fight in Sumer. I don’t have time for this, I have farm stuff to do.
Farmer #2: I’ll take care of your farm while you’re gone. When you come back, we’ll split the harvest.
Farmer #1: Hell no, last time we tried this you let my fields get overrun with weeds and crocodiles.
Farmer #2: My buddy will guarantee that I follow through this time. If I screw up, he’ll compensate you for damages. He’s a merchant right here in Akkad so you know you can trust him.
Farmer #1: Fine. Can I get this in writing?
Farmer #2: Yup! Here:

This represents the first known surety bond [2].
This represents the first known surety bond involving a third-party guarantor [2].
Babylon, Mesopotamia. 1820 BC
Ilshu-bani: Can you spot me a couple shekels of silver? I need to buy some seeds.
Sin-tajjar: Ugh, I’m so sick of you always borrowing money from me. Get a job, man.
Ilshu-bani: I’ll pay you back at harvest time!
Sin-tajjar: That’s seven months from now. Don’t you understand the time value of money? I’ll loan you the shekels at 20% interest.
Ilshu-bani: 20%?! Good grief! What if I can’t pay that back?
Sin-tajjar: I’m not too worried. If you can’t pay me back, I get to make you my slave. Apparently that’s a law now.
Ilshu-bani: Freaking Hammurabi.
Sin-tajjar: Do you want the silver or not?
Ilshu-bani: Fine.
Sin-tajjar: Cool. Just print your name here:

Contract terms on the front, names of participants and witnesses on the back.
Contract terms on the front, names of participants and witnesses on the back [3]. The Code of Hammurabi put the first legal code in place to turn tribal customs into common law. The Code included standard interest rates.
Arsinoites nome, Egypt. 172 BC.
Aristokles: Can I borrow 3 talents and 780 drachma for 13 months?
Theokles: Sure, I charge 24% interest.
Aristokles: No problem.
Theokles: What happens if you don’t pay me back?
Aristokles: You get to have my wife!
Theokles: I’d… really rather have the money.
Aristokles: Nah, take my wife. Here, I’ll even put it writing for you:

A note in the right margin seems to indicate that (after some time?) both participants were dead, the affair had devolved to the sons of the contracting parties, and only the wife was still alive [4]
A note in the right margin seems to indicate that (after some time?) both participants were dead, the affair had devolved to the sons of the contracting parties, and only the wife was still alive. Source: Advanced Papyrological Information System [4]
Rome, Roman Republic. 100 AD.
Pontius: May I borrow 500 denarii? I’m gonna go invest in a company.
Titus: Sure. How do I know you’ll repay me?
Pontius: I’m a Jew! We’re the most honest businessmen in the world!
Titus: ಠ_ಠ
Pontius: It’s 100 AD, I’m allowed to say things like that.
Titus: Look, I just need you to make an oral promise that you’ll pay me back.
Pontius: That’s it?
Titus: Yeah, that’s how Roman law works. If I ask you to promise something, and you agree, that’s legally enforceable.
Pontius: What happens if I later deny making that promise?
Titus: Then the gods will smite you.
Pontius: Oh. It’s olden times so I take that super seriously.
Titus: Ready to promise? I’m gonna ask you to promise now.
Pontius: Yes ready!
Titus: Spondere tu dabis mihi?
Pontius: Spondeo.

This was called a stipulatio. Verbal agreement was essential to having a valid contract under Roman law. Written documents could provide evidence for the agreement, but the contract itself had to be oral [5].

Turfan, Silk Road, China. 661 AD.
龍: May I borrow 30 bolts of silk? I wanna buy some camels and apparently silk is the standard form of money around here.
陳: Yeah, but I better get this in writing.
龍: Ok.
陳: Hold up. What if you get killed by bandits on the way home?
龍: Well my wife better not remarry. If she does, I’ll come back and haunt her, that wench.
陳: No, what happens to your debt if you get killed by bandits?
龍: Oh, take it up with my wife. Go ahead, put that in the contract. Mrs. 龍 has to make good on my debts. God, she was probably the one who sent the bandits. She totally would.
陳: How will I even find your wife? I’m from Iran, all you people look the same to me.
龍: That’s kinda racist. But if you can’t find either of us, take it to 唐 court. We have a good legal system here.
陳: Pleasure doing business with you, sir.

Tang (唐) courts along the Silk Road were accustomed to hearing disputes from participants all over the land. They were friendly to creditors and would receive cases even after contracts had been lost.
Tang (唐) courts along the Silk Road were accustomed to hearing disputes from participants all over the land. They were friendly to creditors and would receive cases even after contracts had been lost [3]. This contract requires interest payments of 4 bolts of silk per month until the principal is due.
Oxford, England. 1250 AD.
Nigel #1: Say, chap, can I borrow fifty quid?
Nigel #2: Sure thing mate. You’ll pay me back?
Nigel #1: Of course! I’ll even make you a contract!
Nigel #2: Bloody hell! I can’t read or write!
Nigel #1: Blimey! Nor can I!
Nigel #2: No worries, I’ve got this pointed stick. We’ll mark off 50 tallies to show what you owe me.
Nigel #1: Brilliant!
Nigel #2: Here, let’s split it down the middle so we each have a piece. I’ll keep the stock, and you take the short end of the stick. Each time you pay back a quid, we’ll connect them together and cut off a tally.
Nigel #1: And if I should skive off?
Nigel #2: Well I’ve got this pointed stick!
Nigel #1: Cheers!

Tally stick 2

Antwerp, Netherlands. 1611 AD.
Hans: I would like to borrow 500 Flemish pounds.
Jan: And what do you have to offer as collateral?
Hans: I have two shares of the Dutch East India Company.
Jan: How do I know you aren’t already using those shares to collateralize another loan?
Hans: My notary here can guarantee that.
Jan: Are you going to use this loan to buy more Company shares?
Hans: Maybe.
Jan: We’re almost in the Early Modern Age. How bout we leave the private lending to poor people and create sophisticated financial instruments for the rest of us? What you really want here is a forward contract.

Handwritten contract for future delivery of two shares of Dutch East India Company [3]. An edict issued the States of Holland in 1623 to regulate forward trading in shares of the Dutch East and West India Companies mentioned not only the borrowing of money against company shares but also specified the procedure for foreclosure of shares in case borrowers defaulted.
Handwritten contract for future delivery of two shares of Dutch East India Company [3]. An edict issued the States of Holland in 1623 to regulate forward trading in shares of the Dutch East and West India Companies mentioned not only the borrowing of money against company shares but also specified the procedure for foreclosure of shares in case borrowers defaulted [6].
California, USA. 1990 AD.
Alice: Can I borrow $100?
American Express: Of course. We’ll be charging 24% interest.
Alice: Aren’t there laws against usury?
American Express: Those are state laws. Your credit card is issued by a Federal bank. We can charge whatever we want. Here’s your cardholder agreement.
Alice: Why is it 50 pages? What the hell is in this thing?
American Express: Basically you agree to have your information sold to third parties. Also you consent to having our marketing associates call whenever they like, and they can record the call without telling you about it. Also we can change the rules whenever we want.
Alice: Why are you guys such assholes?
American Express: If you’re not happy with us, feel free to take your business to a payday loan shark.

credit-cards

California, USA. 2016 AD.
Alice: Bob, can I borrow 20 ether? I’ll put up 50 Alice tokens as collateral.
Bob: Okay sure. Can I get that on the blockchain?
Alice: Here’s a smart contract!

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

Bob: Wait a minute. The market price of Alice tokens fluctuates like crazy. I need to be able to issue a capital call in the event that your collateral falls below the value of the loan.
Alice: Oh good point. Let’s add a function to the contract that queries a Price Oracle. Then my collateral can always be marked to market.
Bob: Who operates the Price Oracle?
Alice: This new exchange, it’s called Mt. Sox.
Bob: Sounds legit. How do I know I’ll be able to claim your collateral? What if you secretly drain it?
Alice: I can’t do that, it’s on the blockchain.
Bob: That happened to the DAO.
Alice: If the contract is exploited, then Vitalik will tell miners to adopt a fork that restores the ether to its rightful owner.
Bob: What if we disagree about the rightful owner? What if I claim that you exploited a vulnerability in the code, while you claim that that was the intended functionality of the contract?
Alice: Then we’ll turn to the decentralized Supreme Court.
Bob: Are you serious?
Alice:
Bob: This is dumb. What about using some service like www.contractorbond.org or how bout I just give you a hundred bucks and you send me a nude selfie as collateral?

References:

  1. 50-03-131, CUSAS 11, 056 (CUNES 50-03-131). Early Dynastic and Early Sargonic Tablets from Adab in the Cornell University Collections.
  2. W. Morgan. History and Economics of Suretyship. Cornell Law Review, Volume 12, Issue 2, Feb 1927.
  3. W. Goetzmann, K.G. Rouwenhorst. The Origins of Value: The Financial Innovations that Created Modern Capital Markets Hardcover. August 1, 2005
  4. U-M Library Digital Collections. Advanced Papyrological Information System (APIS UM).
  5. A. Watson. The Evolution of Law: The Roman System of Contracts (1984). Available at: http://digitalcommons.law.uga.edu/fac_artchop/496
  6. O. Gelderblom and J. Jonker. Completing a Financial Revolution: The Finance of the Dutch East India Trade and the Rise of the Amsterdam Capital Market, 1595-1612. The Journal of Economic History, Vol. 64, No. 3 (Sep., 2004), pp. 641-672

5 thoughts on “The Evolution of Private Loan Agreements

    1. Antwerp was in the Union of Utrecht, which was part of the Netherlands at the time. I was trying to figure out of the forward contract was written in Amsterdam or Antwerp. The “Flemish pounds” made me think it was Antwerp.

      1. Antwerp was part of the Union of Utrecht in 1579, but was recaptured by the spanish in 1585. It became part of the so called Spanish Netherlands, roughly current Belgium. It has never been part of the Dutch Republic. You refer to an edict of the Staten van Holland (the government of the province Holland), which I think only had judicial power in Holland, which was a part of the Republic. Amsterdam is part of Holland.

        So I would be surprised if the document is from Antwerp indeed.

        I have tried to read the document but I am afraid the resolution is not sufficient for me to decipher it. Do you have a better version?

        Mat

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