How Loans Started

“To loan or not to loan”

The age-old question is whether to loan money or not to loan money.  And if you do, should you charge interest.  Philosophically, there are 3 schools of thought.  One says that if you lend someone money, don’t expect repayment.  The borrower needs the money badly, and if someone loans money, they should do so for no reason other than benevolence, and they should never "expect" repayment. The borrower may promise repayment, but if they fall on hard times and cannot repay the loan, the lender should accept that fact.  The thinking being that the lender should never have lent out the money if they couldn’t afford to lose it in the first place.  It’s the same mentality as taking your money to the casinos of Las Vegas. 

The 2^nd philosophy is that if money is lent out, then it must be repaid.  But no interest should be collected.  Most people feel bad about having to borrow money in the first place. There's no need to make them feel worse by hounding them for interest.  It’s like lending a rake to your neighbor.  When he’s finished, he’ll return it.  You don’t charge him interest.

And of course, the 3^rd philosophy, and the one we have come to embrace is the aspect of the commercial, business or personal loan tied directly to repayment plus interest.  This is what banks and loan companies generally subscribe to. 

But when did all the money lending start.

The First Money

Money, both in the paper and coin form, is not the original way humans bought things.  If fact, money as we know it today is rather a recent concept.  In the past, civilizations would trade cattle or grain.  And that was all well and good if you want cattle or grain in exchange.  But what happened when the person who has what you need did not want what you have.  There had to be some form of currency that could be traded in those circumstances.  Something of real value, a currency that everyone could agree on. 

African tribes traded bright metal objects call Manillas, Canadian natives traded beads and beaver pelts, while other civilizations have traded animal teeth, ivory, and feathers, to name a few. As long as the people think that these things have value, then everything is fine.

Tally sticks were introduced by King Henry the First around 1000 AD.  They were basically sticks of polished wood with notches cut out of them to indicate the denomination.  The stick was then split down the middle, with the king keeping half of the stick to prevent against counterfeiting. 

The king accepted these sticks as payment for taxes, so the people had confidence that these sticks had value, and therefore traded them for other goods and services.  This practice continued for over 700 years.

The First Banks

The earliest banks were not the kind of banks that we know, but rather temples that were used to store grain and other commodities for trade, way back in Mesopotamia about 5000 years ago.  The fundamental banking principles used there and in Babylon, the birth place of banking, have remained relatively the same until this present day.

Early Lenders

Judah was captured by the Babylonians about 650 B.C..  The Jewish people were taken to Babylonia and held there for 70 years.  While there, a man named Jacob Egibi became one of the first known men to set up a business for loaning out money for profit.  Thus started the concept of private banking.  At the end of the captivity period, the Jewish people were sent back to Judah, but because of the lucrative business some had developed, some, like Jacob Egibi did not want to return.

This practice of loaning out money, which evolved into Loan sharking with interest rates of 30%-50%, continued right up until the time of Christ.  When the Christian era became well established, right up until about 500 years ago, charging interest was banned.

In fact, kings such as Alfred the Great, King of England; 849-901 A.D. and James 1, King of England; 1566-1625 A.D. had edicts that forbade taking interest, and men would be banished from England if they were found taking a “usury fee”.

Let the Money Flow

Banks started to appear in Britain from the mid-seventeenth century.  They were started by goldsmiths who not only made items with gold, but also began to look after valuables and lend money.  Gold was a heavy commodity to carry around, so people would store their gold with the goldsmiths, and in return they would receive a receipt indicating the value of gold stored.  These were called bank notes, and because they were easier to carry, they began to get traded like money, and loaned out like money.

Big Business Today

During the early part of the twentieth century, the practice of opening bank accounts for saving and to receive wages became very popular. This was followed by many of the smaller banks disappearing with large banks being established with many branches.

In the last 30 years, incredible advances in technology have allowed us to save money and get loans by telephone and through the internet.  The business of loans is now a well regulated business with many companies, besides bank, offering their services.

About The Author

Diane French is a successful freelance writer providing helpful tips and advice for consumers on mortgages, personal loans and equity loans.  Her many years of mortgage industry experience have helped others understand the business.

This article from "articles for free" is reprinted with permission.

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