I keep reading about Hammurabi and others cancelling citizens' debts, and how this was a regular feature of Mesopotamian politics for thousands of years, but I'm having trouble understanding how the credit system could continue functioning despite that. It doesn't sound like the state was making creditors whole (or even that it had the resources to do so) - were these cancellations actually infrequent enough (or the interest rates high enough) that it was still in creditors' financial interest to continue lending money despite the risk of having the king declare a jubilee of some sort and wipe out everybody's debts?
Hello, I have done research on Roman Laws while in law school. Rome had a history of debt cancelation that has precedents rooting in from the Babylonian roots and the arguments are somewhat similar but not as common in that period as lending became more sophisticated. So, I have done research on why the debt cancelation started and how it was handled in the period. Also, you are asking about a giant period of time, there were a lot of differences in different administrations and their views on debts. For example, sometimes interest was banned, other times it wasn't. But here is a general overview.
There there are two things to think of here: (1) the reason for the loans and (2) the cancellation process.
If the loans were interest bearing, they had rates of about 20% for silver or 33% for barley. The rates on barley were problematic at the time because they were consumptive loans and so the person who took out the loan, needed the barley for his family to survive. However, these loans were not typically expected to be paid off. In fact, some historians argue that they are given with the purpose of never being paid off. (Steinkeller) This is because in the period, the societal bottleneck was on labor. There were periods in the agricultural period in which there was not enough farm labor to actually cultivate the maximum number of crops in these early civilizations since everything was done manually with very limited tools. (van Driel). As a result, the wealthier class that possessed land and capital would need workers in order to grow their wealth. The most efficient way to do this was to give them debts and to pay them back they would trade in their physical labor.
This is debated though by some historians as most of the loans are actually by and from the wealthier class of the Mesopotamian societies. This suggests that the high interest is in response to the chance of nonpayment. So, even if the loans are cancelled randomly once every 7.5 years (Hammurabi did 4 cancelations in 30 years), there would still be over 700% return on that principal in theory in between cancelations depending on repayment schedules. In fact, the loans were often given with 1 year terms with the interest payment being set from the start - so no matter when you paid back the loan there would be the same interest. So, in a 7 year period, by just lending $100 each term and saving the rest (I.e. not reinvesting), one person could have $231 of gain after the final $100 loan was forgiven.
What is the point of cancelation?
While the majority of the loans were the latter, there are still a number of loans which were likely the former and just given for work. In Mesopotamia, the loans did not stop at the individual. They applied to every person within the family. So, by your brother (or even cousin) going into debt, you could be forced onto the fields in the result of non-payment. These did not stop at death either and were passed onto children.
So, with this crippling generational debt, one way that a ruler can gain popularity is to cancel debt and the people who are now freed from the servitude will be in their favor forever. This could lead to some unfortunate events binding a family to servitude for generations with no possible way of paying off of the debt. A society of debt slaves might put the entire state at risk of being ripped apart.A better way to think about this though is that this was not a popularity movement, but rather more like the reason that we have bankruptcy laws today. The debt was a contageon on the local economy, and trapped many people who had nothing to do with the debt. These debts were never to be paid off, they just created discontent, but it was easier to forgive all debt because most of it that lasted over a year was predatory.
So, like today, once someone is in debt, you cannot give them new debt. But if this leached out to the entire family as well, the economy might stall and become less efficient. A fresh start in that case might be better off for all involved, just like it often is in today's bankruptcies.
These cancellations were also not always complete cancelations. In many cases, they would be limited to non-commercial loans or only in the case of crop failure as a result to war or a poor harvest. As a result, later reforms did not "cancel debt" automatically but implemented rules where a person can only be a servant for some number of years and then the debt would be canceled.
Sources:
Kilborn, The 5000-Year Circle of Debt Clemency: From Sumer and Babylon to America and Europe
Garfinkle, Shepherds, Merchants, and Credit: Some Observations on Lending Practices in Ur III Mesopotamia
Van Driel, Capital Formation and Investment In Mesopotamia
Steinkeller, Security for debts in Near Eastern Laws
I'd just like to add an addendum to the existing discussion – I answered an earlier query about debt cancellation in this period by questioning how common the policy really was, and under what circumstances it was considered. You might like to review that response in addition to the direct answers to your question: