History of Credit

The idea of exchanging goods or services in return for a promise of future payment developed only after centuries of trade: money and credit were unknown in the earliest stages of human history. Nevertheless, as early as 1300 B.C., loans were made among the Babylonians and Assyrians on the security of mortgages and advance deposits. By 1000 B.C., the Babylonians had already devised a crude form of the bill of exchange, so a creditor merchant could direct the debtor merchant in a distant place to pay a third party to whom the first merchant was indebted. Installment sales of real estate were being made by the Egyptians in the time of the Pharaohs.

Traders in the Mediterranean area, including Phoenicia, Greece, Rome and Carthage, also used credit. The vast boundaries of the Roman Empire, at the beginning of the Christian era, encouraged widespread trading and a broader use of credit. In the disorganized period that marked the decline and fall of the Roman Empire, credit bills of exchange or promissory notes were widely used to reduce the dangers and difficulties of transferring money through unorganized trading areas.

During the Middle Ages, a period which spanned 1000 years from about 500 to 1500 A.D., credit bills were essential to the trading activities of the prosperous Italian city-states. Lending and borrowing, as well as buying and selling on credit, became widespread practices; the debtor-creditor relationship was found in all classes of society from peasants to nobles, even including the Pope and other high dignitaries of the Church. A common form of investment and credit, especially in Italy, was the "sea loan" whereby the capitalist advanced money to the merchant and thus shared the risk. If the voyage was a success, the creditor got the investment back plus a substantial bonus of 20 to 30 percent; if the ship was lost, the creditor could lose the entire sum.