Regulating Credit Markets: A Brief Background

Prior to the advent of capitalism, debt regulation had a single, powerful instrument: cancellation. Debt jubilees were not unheard of in the ancient world because a population heavily mired under a debt burden would not be willing to fight wars and work on the land.

Given the fact that the rate of population growth was much slower than today in the pre-modern era, a large share of population in debt to creditors without any means to sustain their livelihood was not a politically sustainable option for the rulers. In the absence of strict border controls, political subjects could also use their exit option and migrate elsewhere. In light of these risks, high levels of private debt were viewed as a source of political instability. Thus, the rulers and religious edicts of the ancient world frequently issued debt cancellations and jubilees (Hudson 2018).

The cancelation of debts was eventually abandoned in the West under the Greek city states and the early Roman law. Under this new arrangement, debt needs to be repaid, otherwise, the borrower would face consequences, including financial and social ruin. This doctrine informs the subsequent legal codes in the modern capitalist states that punish the indebted party in case of unpaid loans (Hudson and Goodhart 2018).

Historically, the abandonment of the debt cancellations led to the concentration of economic power in the hands of the creditors, enabling them to wield greater political influence to advance their private interests. According to some historians, unresolved conflicts between debtors and creditors was a major factor that destabilized and contributed to the fall of the Roman Empire (Hudson 2023). Once debt cancellations and debt jubilees were less frequent, usury laws became the main instrument to regulate private debt—high interest rates charged on private loans were banned by most Abrahamic religions (Calder 2016). Yet, this did not stop individuals from getting into private debt contracts, albeit with a lot of exceptions (Kuran and Rubin 2018). Where usury laws were abolished or reformed, private debt as a form of political control re-emerged in the form of bonded/indentured labor and private debt turned into an instrument to repress political opposition.

England and the US are the two key historical cases to understand the evolution of how private debt is governed under modern capitalism. A major instrument in private debt regulation is interest rates. Historically, there has been a political struggle over this between the rulers, lenders and the borrowers (North and Weingast 1989). In England, laws have been historically in favor of creditors: in case of default, debtors were imprisoned and their remaining property would be transferred over to the creditors (Cohen 1982). Debtors could avoid this fate by fleeing the realm and living in a different country. During the medieval period, the imposition of these sanctions and punishments on consumer borrowers were practically ineffective since the vassals did not want to lose their serfs—and disrupt production. In that sense, there was no equivalent of debt jubilee or clemency edict issued by the ruler, yet, lack of law enforcement capacity allowed borrowers some practical relief. Later, as the number of imprisoned debtors began to emerge as a problem, reforms were introduced to discharge borrowers from imprisonment. US during the 19th century borrowed its early insolvency and bankruptcy law from England (Countryman 1976). In case of failure to repay a loan, the borrower could expect imprisonment. The enforcement of this law by the federal government failed on multiple occasions. Therefore, bankruptcy and insolvency laws were implemented at the subnational level in a decentralized fashion during much of the 19th century.

During the 20th century, and particularly under late neo-liberalism, cancellation of private debt became less and less common due to at least three reasons. First, advances in healthcare enabled faster population growth, creating a massive reserve army of unemployed individuals. Second, the mechanization of agriculture and advances in food production technologies reduced exclusive dependence on human labor for food production. Third, the military became increasingly professionalized where the rulers do not exclusively depend on the masses that fight in their name. Under these circumstances, debt cancellation is no longer an instrument to renew the social contract between the rulers and the ruled. Consequently, private debt is not cancelled, but governed under a variegated landscape. If ever happens, debt cancellations or renegotiations are reserved for corporations that are deemed critical and politically important rather than households and individuals since much government borrowing relies on large private creditors. Households are more likely to become a concern when the cost of mass default threatens the political survival of the rulers (Chwieroth and Walter 2019, 2022).

Resources:

Calder, R. (2016). God’s technicians: Religious jurists and the usury ban in Judaism, Christianity, and Islam. European Journal of Sociology/Archives Européennes de Sociologie, 57(2), 207-257.

Chwieroth, J. M., & Walter, A. (2019). The Wealth Effect. Cambridge University Press.

Chwieroth, J. M., & Walter, A. (2022). Neoliberalism and banking crisis bailouts: Distant enemies or warring neighbors?. Public Administration, 100(3), 600-615.

Cohen, J. (1982). The History of Imprisonment for Debt and its Relation to the Development of Discharge in Bankruptcy. The Journal of Legal History, 3(2), 153-171.

Countryman, V. (1976). A History of American Bankruptcy Law. Com. LJ, 81, 226.1.

Hudson, M. (2018). --and forgive them their debts: lending, foreclosure and redemption from Bronze Age finance to the Jubilee year. New Publisher

Hudson, M. (2023). The Collapse of Antiquity. Islet.

Hudson, M., & Goodhart, C. (2018). Could/should Jubilee debt cancellations be reintroduced today? If not, what alternative measures of debt relief and redistribution might be possible?. Economics, 12(1), 20180045.

Kuran, T., & Rubin, J. (2018). The financial power of the powerless: socio‐economic status and interest rates under partial rule of law. The Economic Journal, 128(609), 758-796.

North, D. C., & Weingast, B. R. (1989). Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England. The journal of economic history, 49(4), 803-832.