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History's highway paved with IOUs

By Jay MacDonald •

Throughout history, wherever there's been money, it has been borrowed.

The first money is thought to be cowrie shells, introduced in China 3,200 years ago as a less cumbersome form of exchange than cattle or grain. And while there's no official confirmation, it's likely that the plea "Buddy, can you spare a dime?" (or variations thereof) was uttered soon thereafter.

Today in the United States, almost everyone carries debt: credit card balances, a home mortgage, a car loan. Borrowing in ancient times, however, was strictly for the adventurous, with the price of payback sometimes dangerously high.

According to A History of Money from Ancient Times to the Present Day by Glyn Davies, the ancient Greeks charged a flat 10 percent interest, but rates for risky businesses such as shipping could run as high as 20 percent to 30 percent.

Which quickly ushered in the delicate matter: What if a debtor defaults?

Paying through the nose
Depending on the culture, the consequences for nonpayment have been grim indeed. Death, disfigurement, imprisonment or indentured servitude have all been popular choices.

Unfortunate Britons who failed to pay the danegeld tax to keep the Vikings at bay would "pay through the nose" and have their nostrils slit.

Debt collection methods in other societies have been equally inventive through the ages, according to Bruce H. Mann, professor of law and history at the University of Pennsylvania and author of Republic of Debtors: Bankruptcy in the Age of American Independence.

"There was the ancient Chinese custom of a creditor committing suicide on the debtor's doorstep to pursue him in the afterlife. Some creditors in India still employ cross-dressing eunuchs to embarrass their debtors into paying," says Mann. "And there is a debt collection agency in Iowa that doubles as a motorcycle gang, complete with leather, beards and German army helmets."

But locking up or exacting "a pound of flesh" from deadbeats, while providing some satisfaction to the debtor, does little to compensate for the monetary loss. Case in point: Ancient Athens threw so many farmers into debtor's prison that there wasn't sufficient food to feed its people.

Different rules for rulers
Then there are the wealthy and powerful. They are different and the rules of debt have always been different for them.

Indeed, from as early as 330 B.C. when Phillip II of Macedonia simply minted more coins to finance his conquest of Persia, monarchs have meddled with money to pay their bills.

One popular method, called debasement, reduced the precious metal content of coinage, putting the remainder at the monarch's disposal. The emperor Nero started debasing coins in 54 A.D. Two hundred years later, Roman coins contained a mere 4 percent of their original silver content.

Henry VIII also favored this revenue-generating technique, which got so out of hand that in 1561, Elizabeth I collected all the debased coins and melted them down, ending the practice.

Debasement created quite a dilemma for coin makers. On Christmas Day in 1124, Henry I punished all the mint masters at the Assize of Winchester in England by cutting off their right hands in a novel approach to quality improvement.

There were other popular means of dealing with royal debt:

Emperor Aurelian (A.D. 270-275) simply decreed that the value of Roman coins were henceforth worth 2.5 times their face value.

Alfred of England (A.D. 871-899) bumped up production at the mint to pay for the cost of defending the realm.

Aethelred II, nicknamed "The Unready" during his reign from A.D. 978-1016, simply tapped the mints to pay the Vikings to stay away.

Charles I solved his cash crunch in 1640 by seizing a mint and keeping a third of its bullion for six months.

And in the late 15th century, Spain's King Ferdinand V and Queen Isabella used similar easy-term noble financing to launch three westbound ships under the direction of an explorer named Christopher Columbus. Within 10 years, his discovery of the Americas more than doubled the size of the world known to Europeans.

Fear of the "Great Creditor"
Debt arrived in the New World with considerable religious baggage, according to historian Mann.

"Early in the 18th century, the inability to pay one's debts was seen as a moral failure rather than an economic one," he says. "Ministers preached that 'debts must be paid, tho' all go for it' and addressed God as the 'Great Creditor' who casts insolvent souls into the debtor's prison of hell. There were no bankruptcy laws in America at the time and imprisonment for debt was routine."

Throughout the 17th and 18th centuries, Americans who defaulted were either cast into the local debtor's prison or bound to their creditors as servants to work off what they owed. But by the end of the 18th century, following decades of war and economic ups and downs, public attitudes toward debt had shifted markedly.

"People had learned to see debt and insolvency as part of economic risk. They still recognized their obligation to pay their debts, but they thought that to imprison debtors was to treat them wrongly as criminals, and merchants and traders clamored for a bankruptcy law," says Mann. "When Congress passed the Bankruptcy Act of 1800, debtors imprisoned in New York threw a party to celebrate and drank toasts to 'The Bankrupt Law, this godlike act.'"

Debt -- and the exodus from it -- also was a significant factor in America's westward expansion.

"British creditors after the Revolution trying to collect pre-war debts from their Virginia debtors found that many of them had gone to Kentucky. In the 1840s and 1850s, it was 'G.T.T.' -- 'Gone to Texas,'" says Mann.

"This experience is one reason why such states were strongholds of populism in the 19th and early 20th centuries. The United States enacted a permanent bankruptcy law only after the country had run out of places where debtors could escape their creditors."

A house of plastic cards?
America gave birth to the next historic milestone in consumer debt with the 1950 introduction of the credit card. Its economic impact, both good and bad, remains a hotly debated topic more than half a century later. Some predict dire consequences similar to the Athenian farmer scenario should this house of plastic cards ever topple.

"The biggest difference today is that credit is aggressively marketed to people whom the creditors know cannot afford it," says Mann. "That is why credit card companies write off the first six months of losses from their credit card solicitations, not as bad debts but as advertising expenses.

"Inability to repay is no longer the bar to credit that it once was."

Mann says that while there has never been a good time to be in debt, "the worst time was undoubtedly when debtors could be imprisoned, which was the case in both England and America until well into the 19th century."

"The two major improvements for debtors today is that we no longer permit imprisonment for debt and individual consumers have access to bankruptcy discharges, which 200 years ago were limited only to large commercial debtors," he says.

But there is a new downside to modern consumer debt.

"Computerized record keeping and the professionalization of debt collection have enabled creditors to be much more aggressive in pursuing their debtors."





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