Ancient Babylonian Banking and Our Modern Financial System
Ancient Babylonia is known as the “cradle of civilization,” because it helped develop many important parts of our modern society, from laws (Code of Hammurabi) to advancements in astronomy and architecture. It also helped establish rules and procedures that have influenced modern day banking institutions. A quick look back at Babylonian finance provides insights into the basics of how our financial systems work today.
Social Divisions
For many Babylonians, society meant you were born either as someone who owned land or someone who worked on it. Although individual rights within Babylonia pale in comparison to our own liberties today, many people were legally free. That is, having no required allegiance or ties to kingships, courts, or religious institutions. This was a relatively new development for society. The legally free made up the majority of the private sector economy, which included landowners and hired labor.
Even though the growth of private enterprise and a merchant class had begun to emerge, palaces and temples continued to own large portions of land worked by indentured servants who promised military or civil duties in exchange for land use. Essentially, these were tenant farmers who promised to protect the current ruler or religious group who owned the land.
Farmland itself had different value depending on its anticipated yield. A typical arrangement between an owner and worker was a one-third to one-half cut of the crop yields. These arrangements differed depending on who furnished tools, bought seed, or paid taxes.
Weighted Transactions
Religious temples hoarded precious metals and stones like gold, silver, and lapis lazuli, but Babylonian citizens held much humbler possessions. The local currency was the shekel, which was a unit of standard weight for transactions before it eventually became coinage.
It is believed that traders began marking their own shekels in order to avoid the time-consuming process of weighing each transaction. Merchants who “issued” their own shekels could then trade them to patrons as IOUs. Any returning customers could then trade the marked shekel for a quantity of goods or services and the merchant would know that their standard weight secured the payment. This method eventually developed into coinage system where rulers and states developed their own sovereign currency as a standard for exchange.
Babylonian Banking
Since land was such an essential part of Babylonian life, banking firms at the time were heavily involved in real estate matters. Banking firms like the House of Egibi acted as land managers, renting fields for absentee landlords, while other firms dealt strictly with royal-owned lands. For example, the House of Murashu, operating in the last half of the 5th Century BCE, became successful by “renting royal lands to tenant farmers and acting as agents in converting agriculture profits into metal.”
Merchant Bankers
During the latter part of the 6th Century, social and economic stability gave rise to the accumulation of wealth from land revenues, rents, slavery, etc. With prosperity came merchant bankers. Private archives written on cuneiform tablets from the time period show a large sector of the population participating in commercial and financial operations, whose operations were based on a silver standard and modeled on promissory notes.
A typical contract listed the following:
- Object of the transaction
- Names of lender and borrower
- Duration of the loan
- Method of reimbursement
- Interest to be collected
- Collateral to be held by the lender.
These elements are still standard parts of financial contracts today. However, ancient Babylonians didn’t have computers and the internet. Nevertheless, accuracy in recording was still just as important to ensuring trust between parties.
Because paper had not been invented yet, contracts were written on clay, cuneiform tablets and included a notarization by witnesses, with an added note of the location and date. All goods to be paid by the borrower would be weighed in silver and totaled for an amount payable. After debt was repaid, the creditor would usually break the promissory note tablet to show the debt was extinguished.
Private Babylonia banks also supported venture capitalists seeking a “commercial expedition”. Similar to a modern hedge fund, a group of individuals would pool their resources to invest a specific amount of capital. This pool was then turned over to an individual to carry out commercial transactions and make a profit that would be divided proportionally among the initial individual investments.
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