How A City Called Ur Gave Birth To The Bond Market
In the foundations of an upper middle class neighbourhood at the heart of the city, he found the remains of entire families. Buried alongside them were personal financial records, stored under the floors of their houses for safekeeping. Later, historians at Columbia University used Woolley’s excavation notes to match these excavated clay tablets to the homes where they were discovered. They uncovered something startling.
Ur had a financial district.
In fact, it was home to the world’s first financial district. The behaviour of its inhabitants tells us much about the role of finance – particularly bonds – in the ancient world.
In 1796 B.C.E. Dumuzi-gamil and another man borrowed 500 grams of silver from the businessman Shumi-abum. Dumuzi-gamil promised to return 297 grams on his share of 250 grams after five years, a 3.8% annual rate.
Here’s where things get interesting – Sumi-abum sold the loan to some merchants, who collected the debt in 1791. The Ur documents depict a liquid market for personal promissory notes, where selling loans was a common practice. Ur had a fully functioning bond market.
Although no records exist to measure the effect of this innovation on the region’s macro economy, it’s almost certain that the creative activities of its financiers facilitated economic growth and improved living standards for the city’s 40,000 inhabitants.
This was by no means the first bond to have been issued in the ancient world. In fact, the code of laws enshrined by Hammurabi, King of Babylon between 2084BC and 2081 BC included references to transferable credit agreements. But Ur’s active trade in buying and selling bonds is thought to be the genesis of the fixed-income market that dominates global finance today.
The bond market was a key driver of the growth in ancient Chinese empires, too. And we have already explored in a previous blog post how the ancient Greeks and Romans used the bond market to finance shipping and trade, pricing in credit risk during times of war. Renaissance Europe helped to formalise the modern bond market as we know it. Known as “prestiti”, bonds were issued by city-states to fund wars and shipping ventures, and were traded on the secondary market. Then, in the early 18th Century, England started issuing “war consol” bonds with an indefinite term to maturity. These transactions were used for a wide range of funding purposes, including the war against Napoleon. Later the bond market played a key role in financing the American Civil War, before the creation of modern securities exchanges in the 20th Century.
Clay tablets may have been replaced by screens and algorithms but the principles of the bond market remain the same. Individuals like Dumuzi-gamil and the mischievous Greek philosopher Thales who had a view on markets could use contracts to profit from others who lacked information or expertise. The same goes for bleeding-edge hedge funds, venture capitalists and proprietary trading desks.
The advent of financial technology worried kings and irritated philosophers in the ancient world. So too politicians, regulators and media commentators in the present day. In Mesopotamia, the legal limit on interest rates for loans of silver was 20%, but lenders got around these restrictions by charging the legal limit for shorter and shorter loans. Although mathematics was advanced during this period, the government failed to regulate financial innovation. The parallels to the contemporary world of financial innovation, with its recurring crises and increased regulatory scrutiny, are worth pondering.
Throughout human history, financial technologies have been invented and reinvented to solve big problems and advance the human condition. Despite the complexity of the market we work in, the fundamental principles of finance discovered millennia ago remain the same. Securities, however complex and hard to model, are simply contracts between two counterparties that exploit the time value of money.
Our economies are now globalised, interconnected and complex beyond the understanding of one financier. But we have developed regulations and procedures to safeguard the stability of the global financial system. Just as financiers have innovated with new instruments, so too policymakers and financial authorities have innovated with new regulations. This process started in ancient Mesopotamia. Who knows, perhaps one day our descendants will study the history of “Ancient London” with the same curiosity and wonderment?