Ancient IOUs: The Origins of Debt Instruments

I'm Andy Temte and welcome to Money Lessons! Join me every Saturday morning for bite-sized lessons that are designed to improve financial literacy around the world. Today is December 6, 2025.

Over the past two months, we've traced the remarkable journey of equity ownership—from Roman publicani through the Dutch East India Company to smartphone investing. We discovered how stocks evolved from exclusive privileges for the wealthy into accessible tools for building wealth that anyone can use today.

But here's something that might surprise you: debt instruments are far older than equity securities. Thousands of years before anyone owned shares in a company, people were already lending and borrowing, creating promises to repay, and dealing with the consequences when those promises weren't kept.

Today, we're beginning a new series exploring the history of debt securities—the bonds, notes, and other IOUs that have financed everything from ancient empires to modern governments. This journey will help us understand the other half of securities markets and why bonds matter just as much as stocks for building wealth.

The First Written Promises

Picture Mesopotamia around 1750 BCE—the same time and place where we began our money series. Remember the Code of Hammurabi, which we discussed way back in our June episode on trust and confidence? That ancient legal code didn't just regulate commerce—it formalized debt relationships with remarkable precision.

Archaeologists have discovered thousands of clay tablets from this period recording loans. The terms were specific and binding. A typical loan might read: "Ten shekels of silver lent at 20 percent interest, due at harvest, with your barley field as collateral." Interest rates were regulated by law—33 percent for grain loans, 20 percent for silver. These weren't suggestions; they were legally enforced standards.

These were enforceable contracts backed by Babylonian law. The lender kept one tablet, the borrower kept another, and often a third was held by a temple as an independent record. Default carried serious consequences: losing your collateral, becoming a debt servant to work off what you owed, or in extreme cases, having family members labor to satisfy the debt.

Here's what makes these ancient debt instruments so significant: they represent humanity's first systematic attempt to separate consumption from payment. You could consume grain today and pay for it tomorrow.

Remember from our May episodes on trade how barter required both parties to have physical goods present at the same time? Debt instruments solved that timing problem. A merchant could acquire goods during the trading season but pay after selling them. A farmer could borrow seed grain in spring and repay after harvest. This time-shifting of resources was revolutionary and remains fundamental to how modern economies function.

The Roman Innovation

Fast forward to Rome around 200 BCE. Remember the Roman publicani we discussed when exploring the first shareholders? These companies collected taxes for the Roman government, but they also pioneered something else: systematic government borrowing.

The Roman Republic needed to finance military campaigns and public works, but tax collection was seasonal and unpredictable. The solution was elegant—Rome would borrow money from wealthy citizens and repay them with interest once tax revenues arrived.

Rome issued official debt certificates backed by the Senate's authority. These were tradable financial instruments that wealthy Romans could buy, sell, and hold as investments. If you needed cash before your certificate matured, you could sell it to another wealthy Roman at whatever price you could negotiate.

Notice the crucial difference from equity ownership. When you owned shares in a publicani company, you were an owner sharing in profits and losses. When you held Roman debt certificates, you were a creditor with a legal claim to repayment regardless of Rome's fortunes. This distinction between ownership and lending remains fundamental to understanding stocks versus bonds today.

Medieval Sovereign Debt and the Interest Problem

In medieval Europe, government borrowing had become essential for survival, but it faced a significant obstacle. Remember from our August episodes how medieval Europe struggled with the moral prohibition against interest? Sovereign debt provided an ingenious solution.

The Italian city-states pioneered sophisticated workarounds. Venice, facing constant wars with rival cities and the Ottoman Empire, created government bonds called prestiti. These paid regular returns to investors, but the payments were officially "voluntary donations" from the grateful city-state rather than forbidden interest. Everyone understood these were interest payments by another name, but the legal fiction satisfied religious authorities.

These Venetian bonds could be traded among investors, creating a secondary market where bonds changed hands based on Venice's perceived creditworthiness. When Venice won military victories, bond prices rose. When defeats threatened the city's ability to repay, prices fell. This market-based pricing of government debt was revolutionary—investors could collectively assess a government's financial health simply by observing trading prices.

The English government began experimenting with perpetual annuities in the 1690s to finance wars. These instruments paid regular interest with no fixed repayment date. By the 1750s, Britain had formalized this approach with consolidated bonds—known as Consols—that would never be repaid but would pay interest forever. Investors bought these bonds knowing they'd never get their principal back, but their children and grandchildren would keep receiving interest payments indefinitely.

Why Debt Came First

Here's the deeper question: Why did debt instruments develop over a millennium before even the earliest forms of equity ownership?

The answer lies in human psychology and economic organization. Lending is conceptually simple—I give you something today, you give it back later with a little extra. This mirrors natural reciprocity patterns that exist even in primitive societies.

Consider a Mesopotamian farmer in 1500 BCE. He could easily understand: "I borrow ten bushels of seed grain, I repay twelve bushels after harvest." Simple. Clear. Direct.

Now try explaining equity ownership to that same farmer: "You and I will jointly own this farm, split the work unequally, share profits based on a complex formula, and you can sell your ownership share to someone I've never met who will then have rights to my farm's profits." That requires legal sophistication that wouldn't exist for millennia.

Debt also aligned better with agricultural economies that dominated human civilization until recently. Farmers borrowed seed grain in spring and repaid after autumn harvest. This seasonal borrowing pattern was perfectly suited to simple debt instruments.

Finally, debt offered lenders something equity never could: seniority. When Rome faced financial trouble, it paid creditors before distributing any remaining funds to publicani shareholders. This creditor priority made debt instruments safer than equity, encouraging their earlier development.

The Foundation We're Building On

Understanding this history matters because it reveals something profound about financial systems. Debt instruments weren't created by financial wizards in modern suits—they emerged organically from humanity's basic need to separate consumption from payment, to finance projects too large for individuals, and to manage the seasonal rhythms of agricultural economies.

Every bond you might someday buy, every Treasury bill the government issues, every corporate debt instrument traded today descends directly from those Mesopotamian clay tablets. The fundamental promise remains unchanged: I will repay what I borrowed, with interest, on a specified date.

Over the coming weeks, we'll trace how these simple promises evolved into sophisticated markets that finance governments, corporations, and economic growth worldwide. We'll discover how bonds crashed economies and saved nations, how credit ratings became essential, and why understanding debt securities is just as crucial as understanding stocks for building long-term wealth.

Until next week...

Grace. Dignity. Compassion.