1. Analyze how the debt could be possible without money
2. Describe how increased government borrowing has stimulated the monetary system and also created a reliance on greater government control over the financial industry and markets

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Ur and Lending Legislation

Another important city in the ancient Middle East was the city of Ur. Historians believe this was the home of an ancient Wall Street. Clay tablets discovered here reveal a city of entrepreneurs and lenders. Evidence of the first long-term bond, a five year loan, have been unearthed. This clay-tablet "contract" actually appears to have been traded and changed hands a number of times. Evidence of even longer term contracts have also been found. One with a term of almost 30 years may in fact be the first documented mortgage. For a financial contract to be trustworthy for this long a period, there must have been a stable and reliable legal system to establish property rights and enforce obligations.

The charging of interest and the exploitation of the time value of money were the real innovations. Evidence indicates that interest rates were very high, up to 20% per month, which made the lenders unpopular figures. Laws were put in place to cap the maximum amount of interest at 20%, but there was no regulation of the term a loan might have. The government at that time did not fully understand the close link between time and money. As a result, moneylenders started charging the full 20% for shorter and shorter periods of loan! Here, we see the earliest antecedents of loan sharking.

A legal system was needed to protect the rights of those borrowing and lending wealth. In fact, contracts and property legislation were more important than human rights during that ancient period.

Financial crises are not solely modern-day phenomena. The first documented financial catastrophe occurred in 1788 BCE. At the urging of badly indebted citizens, King Rim Sin, from the city of Larsa, not far from Uruk, declared all loans to be null and void. A financial collapse was the result, as most of the lenders were wiped out. In the short term there were both winners and losers. People in debt celebrated and those in lending panicked. Creditors tried to sue to secure the property pledged as security for the loans, but were unsuccessful. After this, lending virtually came to a halt for many years. Attempts to regulate interest rates did little good, as lenders would only lend on very short term, fearing that at any moment the government might once more decide to nullify the loans.

The Greeks and Investment Lending

Real sophistication in lending only came with the Greek civilization and was connected with sea trade. Lenders invested money to finance major Greek trade expeditions. There was certainly a large element of risk, but also a good return. If a ship made it back without being sunk by a storm or pillaged by marauding pirates, a lender could see a return of up to 25%. If the ship sank or returned empty, the lender would receive nothing. Here, we see a major new appreciation of both the time-value of money and the concept of risk vs. return.

Most individuals who found themselves in debt, though, were still either former slaves or other members of the working poor. And money lenders continued to be very unpopular, of course.

Thus, far back in the ancient world, the basics of modern debt economics emerged and took shape: interest rates, terms of loan, lenders as stakeholders. The use of lending and credit, like the use of money, was largely put on hold during the Christian Middle Ages, and only reemerged during the vast expansion of trade and capitalism in the Renaissance. Since then, debt has become an ever more important factor in the economic growth of a society.

Governments In Debt

The government's role in financial markets and society in general has increased rapidly since the middle of the 19th century. The need of those in power for more money than they could collect through taxes, typically to finance wars and more recently to pay for expanding social programs, has led most Western governments to take a much stronger role in the nation's finances and also to become the single largest borrowers, with most governments now monstrously in debt.

We've seen the power of debt in helping to fuel the expansion of an economy. However, the downside can be quite damaging, with governments needing to pay lenders in the bond markets higher interest rates in order to compensate for increased risk of default or inflation.

The insatiable appetite for more borrowing has led to the invention of new financial instruments, some of which have proven to be capable of having devastating effects on the lives of those who are tempted by them, as we have recently discovered. One of these innovations is securitization, in which an asset - for example one's house or one's car - stands security for one's debt. Default on the debt and the lender can instead take your security asset, leaving you without a vehicle - or actually on the street.

In the form of mortgages, people's secured debts have become products that can be traded and sold themselves. Mortgages can actually be bundled together and resold in the financial markets as a product known as a mortgage backed security. The interest payments on these securities are derived from each of the individual homeowners making their monthly mortgage payments. An investment fuelled entirely by people's debt interest.

A more recent invention is the so-called Bowie bond. Rock star David Bowie sold bonds using the value of his music copyright as the collateral security in case he had to default on payments. The interest payments were derived from the royalties Bowie earned on his copyrighted music. $55,000,000 worth of David Bowie bonds were put on the market and Prudential Securities bought them up in minutes.