Hammurabi’s Solution to Student Debt
Almost 4,000 years after its creation, the so-called “Hammurabi Code” was discovered in 1901 by archaeologists in the Khuzestan Province of Iraq. Inscribed upon a nearly 8 foot stone slab, was a code of law believed to have been instituted in Babylon, a kingdom within ancient Mesopotamia. The Babylonian king Hammurabi, who issued these laws, claimed to have received them from Shamash, a Mesopotamian god of justice, morality, truth and the sun. Western historians who have studied this particular text have been intrigued by a clause which declares that any debt owed by citizens to the state, or to the landed elite, could be nullified at any time. According to historical records, these cancellations were implemented four times during Hammurabi’s reign. However, debt cancellations pre-dated Hammurabi’s reign and were in fact commonplace within Mesopotamian society. Documentation of debt cancellation can be traced back as far as 2400 BC, more than 600 years before Hammurabi. Between 2400 B.C and 1400 BC historians have evidence of 30 such cancellations.
During the period following the last cancellation in 1400 B.C, there is evidence of vast inequality, the emergence of an oppressive landed gentry, pervasive enslavement, mass exodus to northern provinces, and social struggles between the peasants and the elite. However, many historians dismiss any connection between these events and the abolishment of debt cancellations. They view them instead as a direct result of a struggle with the Hittites, who sacked parts of Mesopotamia including Babylon. In fact, they see debt cancellation as a form of oppression, rather than a useful tool for public policy. They claim that at the time, debt clemency was a mechanism for rulers to accomplish two goals. Firstly, it allowed them to further perpetuate and maintain the established social order, in essence by constraining social mobility rather than promoting it. Historians argue that rulers like Hammurabi understood that it was imperative to ensure that debt did not grow faster than the economy. Hammurabi and other leaders had a keen understanding of the threat posed by compounding interest, causing debt to grow faster than the economy. This would ultimately result in the ubiquitous foreclosure of properties with potentially destabilizing effects for the kingdom. It would mean the leader would have a population unable to sustain itself and to serve in the military. Secondly, it allowed the rulers to appease the peasants and quell any social revolt. A debt crisis might give rise to a hegemonic oligarchy with the power to challenge the throne. Fundamentally these historians claim the intention behind debt clemency was to support the regime and achieve stability within the financial system, rather than equality.
Despite these critiques, there are some modern economists who believe debt cancellation may be a useful tool with potential modern-day applications. In the years leading up to the 2008 financial crisis, US consumer debt reached almost 14 trillion US dollars and it is again on the rise. This increasing amount of consumer debt leads to delinquency and constrains spending longer term as consumers need to allocate more income to debt service, hampering economic growth. To mitigate against this risk caused by excessive levels of household debt, governments lower interest rates to reduce the carrying cost and encourage spending. However, some economists argue that lower interest rates simply encourage more borrowing, thereby exacerbating the problem. They suggest debt cancellation may be a better tool. It will not only stimulate spending more directly, but in certain instances, it is also principally justified. They cite predatory lending practices by many financial institutions in the years leading up to the financial collapse in 2008. This entailed aggressively marketing mortgages, coupled with inadequate or fraudulent due diligence regarding the potential debtors’ ability to repay the loan. They argue that it is principally unjust to hold debtors accountable, while the responsibility lies with creditors. Recently student loans have become the focal point of the debt cancellation debate. In the USA, student debt has become a pervasive issue as students are graduating with more and more debt each year. This graphic from the New York Federal illustrates this dangerous trend.
This steady climb of the student debt balance has caused great concern amongst economists and legislators. Even more concerning has been the student loan delinquency rate. According to the New York Federal Reserve, student loans have a delinquency rate of 10%, by far the highest among the five major consumer loan categories.:
This issue has become one of the topics debated in the campaigns for the upcoming presidential election. Presidential candidate Bernie Sanders has tabled the notion of debt cancellation as a mechanism to quell the negative effects of student loans on the economy. His platform calls for complete cancellation of all outstanding federal education loans. Similarly, candidate Elizabeth Warren has proposed a plan conditional on income. Under her plan individuals with an outstanding federal student loan whose income does not exceed $ 100,000 will have up to $ 50,000 worth of student debt forgiven. Individuals whose income does not exceed $ 130,000 will have $ 40,000 forgiven, and so on. Since according to the New York Federal Reserve the average amount of student debt held by individuals graduating university in 2016 was just shy of $ 38,000 USD, her plan would result in most of the student debt to be forgiven.
Recently education secretary Betsy DeVos cancelled $ 10.8 million worth of student loan debt. However, in this instance cancellation is merely a way of compensating students who received government aid for ultimately fraudulent universities who had lost their accreditation.
While Hammurabi might have approved, these policies have not gone unchallenged. Critics have identified four major problems with debt clemency in the modern-day. Firstly, critics claim that clemency is merely a way for politicians to sidestep the root causes behind increasing levels of student debt. They argue politicians should be more focused on making education more affordable rather than spending large amounts of money to mitigate against steep increases in tuition costs. Secondly, they claim that the cancellation of government-backed student loans benefits a broadly privileged group of people. In the vast majority of instances, the individuals benefiting from this clemency have received a college degree in the process and as a result, are far more competitive in the labour market than people without college degrees. Leslie Tayne, an expert in student loans, writes “Those who are pursuing higher education are already generally better off financially, therefore, forgiving student loan debt could be considered already helping a privileged group rather than spending government funding to help those in poverty.” Thirdly, experts have criticized the cost to taxpayers of student debt cancellation. Senator Warren estimates that her plan will cost up to $ 1.2 trillion over ten years. Critics argue that asking taxpayers, most of whom have their own debt, to pay this bill is unjustifiable. Lastly, critics have always been concerned with the precedent that debt cancellation sets. Consumers need to understand that borrowing comes with the obligation to repay the loan, with interest. Critics fear that this fundamental tenet may be undermined when the government eliminates outstanding debt.
Debt cancellation in Mesopotamia remains an intriguing element of ancient law whose relevance in the modern-day cannot be ignored. During the period preceding the enlightenment, the political and financial establishment largely buried historical examples of debt cancellations in obscurity in favour of a narrative that debt payments are unilaterally obligatory. However, with the recent prominence of the student loan crisis, debt cancellation has re-emerged as a potential solution. Lawmakers have been wrestling with the implications as well as the price tag. Perhaps it is time to reconsider an ancient policy tool, first made prominent by Hammurabi. Below is a list of questions to be considered. If you would like to contribute to the conversation, please comment with your thoughts and ideas.
Do you agree with the historical perspective that debt cancellation is a means for oppression?
Does the concept of debt cancellation have applications in the modern-day? What are the merits of the policies proposed by Senator Warren and Senator Sanders concerning student debt? Are there other potential applications beyond student debt?
The Hammurabi code provided for the cancellation of debt owed to the state as well as the landed elite. Should debt cancellation be limited to sovereign debt? If it were to be applied to commercial lenders, how could the stability of the financial system be assured?
Please also post your feedback on this article and suggest ideas for other topics you would like to see discussed in this format.
