The History of Debt

In current events we have recently seen the removal of US troops from Afghanistan. I made a whole video on this, you can check it out on the channel. But one of the main takeaways was that the new Taliban government is deciding right now whether to make debt illegal. Historically, issuing loans and charging interest is illegal under Sharia law. Over the last 20 years, the US has helped set up banks and has been issuing loans. The Taliban is deciding whether to shut it all down. People in the US are confused watching this, because we are so used to debt being a normal part of life. But people forget, there was a point in time in Western culture where debt was also illegal. So we are going to take a look at what happened and, specifically, what changed our minds. We are going to talk about the history of debt. WATCH NOW





I want to start with a basic description of debt. Debt is loaning money with interest. This takes a lot of different forms including credit cards, home loans, and government bonds. But they are all essentially the same thing. Debt is really based on the idea that we are all going to die. If you think of the timeline of someone’s life, there are different phases. You start out when you are born, then you go through mid-life where you are the most productive and be able to generate money, and then you grow old. When you get older you are more tired and you start losing physical ability. At some point you are going to want to retire and stop working altogether.

If you think about this timeline from a financial perspective, you will want to earn money during your mid-life, in order to have enough savings to support yourself in retirement when you are older. In a society without debt, this creates a number of problems.

  1. Money is locked in savings of the older generation
  2. Older generations cannot earn any money on savings
  3. Younger generations do not have funding to start businesses

When you introduce debt into a society it unlocks all that savings. It allows the younger generation to borrow funds from the older generation before they pass away. The older generation can say to the younger generation “You are full of energy. Here is a business loan to start a business and you can pay me interest. That way my savings is not just sitting in a bank account. I am actually putting it to work, and earning interest on my money.” What debt effectively does is double the cash in your society. Instead of the cash sitting in someone’s savings, you are actually putting it to work to grow businesses.

Debt sounds like a great thing. But there was a time in Western culture when debt was illegal. The period was called the Dark Ages. This was the period of time in Europe where they had castles and knights. There was a black plague that was a worldwide pandemic that killed so many people. People forget that Western society at this time used to be a Theocracy. We were governed by spiritual leaders. Specifically, the Pope in the Catholic church. No one got to vote. God chose the leader and you had to do what he said, or you would be killed. During this time, some horrible things were done in the name of religion. It is shocking to read the stories. There was this thing in Spain called the Spanish Inquisition. And nobody expects the Spanish Inquisition. They would just show up at your house. If they thought you were doing something wrong, they would take you away. But they would not just kill you. They would torture you, then burn you alive at the stake. So before you get self-righteous about the Taliban killing their own people, remember what we used to do when we were led by religious leaders.

The point of all of this, was during this time, the Catholic church made it illegal to issue debt and charge interest. This was thought as sinful, and if you were involved in lending money, you would go to hell, and the Spanish Inquisition would also kill you.

But there was an interesting thing that happened. There was a community that did not outlaw debt and it was the Jewish community. During the Dark Ages there were a number of Jewish communities that had migrated to Europe. And so you had the majority of people in Catholic communities where debt was illegal, but if you needed a loan, you could go meet with a moneylender in a Jewish community.

It is sad to talk about, but even back then, there was anti-Semitism about the Jewish community. Just to be clear, anti-Semitism and hatred towards any community is horrible. In this case, it came from this idea of moneylenders and whether debt was illegal or not. As you can imagine, sometimes people get frustrated making debt payments, and this fueled a lot of hate between the Catholics and the Jewish community. We see this anti-Semitism in a play by Shakespeare called The Merchant of Venice.

In the play, the bad guy of the story is a Venetian Jewish moneylender. He makes a loan to the hero of the play, and in a really cruel agreement, if the hero defaults on the loan, he has to pay with a pound of flesh. Of course, the hero defaults and all kinds of drama happens. And the play ends with the Jewish moneylender forgiving the debt and converting to Catholicism.

This is what was happening in our history. Debt was illegal because our spiritual leaders said you would go to hell. But the technology and the knowledge was there.

The moment in history when all this changed was called the Renaissance. During the Renaissance, local governments in Italy started making their own rules and some of them started allowing debt. One of the reasons for this was for trading with ships on the ocean. As you can imagine, sending out a ship to pick up goods on the other side of the world requires a lot of up-front cost. Debt allows you to get the money up front, which you can pay back with interest when you return with the goods. Debt fueled all these trading expeditions out of Italy.

How did they get around the laws of the church? How did they change people’s minds? A lot of it has to do with someone who is called “The Father of Accounting” and his name is Luca Pacioli. Luca Pacioli wrote the first textbook on accounting. Accounting is important, because Accounting is what makes debt possible. You have to be able to show someone your accounting books to make them confident in giving you a loan. But he was not just an accountant. Luca Pacioli was also a monk. He came from the Catholic church. So here was a leader in the financial industry, who was also a spiritual leader. And he was traveling around Italy saying that debt was okay. It was just a piece of technology that could be used to make the world a better place.

When you read Luca Pacioli’s writings, he writes as if accounting is spiritual. To him, showing someone your accounting books is about showing people your reputation and your trustworthiness. And debt is an extension of those ideas. Debt is about building business relationships with people and allowing them to trust you with their money. This was the moment in time that people started to acknowledge that debt and interest was legal. It was okay. This concept changed the course of history forever.

This is what people do not realize. This simple concept caused the Renaissance, because it effectively doubled the amount of money in society. The simple concept is that you could separate out the technology of debt and interest away from religion. You can take out a bank loan, and it does not mean you are going to hell. You can still be religious and let people put their money to work to earn interest.

Let us bring this back to today. This is also the moment that is happening in Afghanistan right now. I hope the Taliban realizes how important this is to people’s lives. We have seen this exact moment in history before during the Renaissance. If you embrace the concept that debt can be separate from religion, it will change your society forever for the better.

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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.

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