Last Updated on October 21, 2023
Hammurabi’s code is among the most enduring legal documents in history. It dates back over four millennia to ancient Mesopotamia. It was crafted by Hammurabi, one of the most famous leaders of all time. He was the 6th ruler of Babylon and head of the city-state of Mesopotamia.
He wrote the Code of Hammurabi, which governed many facets of modern societal organization. The rules typically concern how to treat property and contracts. The code is best known for its hypothesis of an “eye for an eye” and a “tooth for a tooth.”
It includes rules about punishments for those who don’t live up to their side of a contract. Repayment of damages, banishment, and even death were common among them.
This set of laws is a testament to the earliest principles of justice and governance.
While it is often associated with matters related to crime and punishment, the code also had a profound impact on the evolution of financial practices and systems that are the foundation of our modern economic world.
Historical Context of Hammurabi’s Code
Hammurabi ascended the throne of Babylon in 1792 BC, a position he held for 43 years. Over time, he grew his kingdom by overtaking neighboring states.
The region was filled with city-states and territories with their own customs, traditions, and legal structures. He embarked on a mission to unite these laws under a single comprehensive legal framework (code) to promote order, justice, and fairness in his empire.
The code was made up of 282 laws. The laws encompassed not only criminal justice but also issues related to commerce, trade, property, and contractual obligations.
They were displayed in public for both literate and illiterate citizens to have access to them and acknowledge their rights and responsibilities, marking an end to arbitrary methods of rule.
The code reflected the socio-economic dynamics of that time. Mesopotamia was a land of thriving trade where merchants engaged in cross-border commerce. Therefore, there was a need for a code to address the complexities of trade and contracts.
Hammurabi Codes Related to Modern Finance
Here are some codes by Hammurabi that are related to modern finance and investment:
Derivatives in Law 48
The 48th law in the Code of Hammurabi is where you find one of the oldest examples of modern derivatives. The law states:
“If anyone owes a debt for a loan, and a storm prostrates the grain, or the harvest fail or the grain does not grow for lack of water; in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for the year.” [sic]
To translate this into the language of today, the Code of Hammurabi would read:
Farmers who have a mortgage on their land must make interest payments using grain. If the crop fails, the farmer has the choice not to make this interest payment. The one who would normally get the grain must waive the interest owed.
Historians say that the mortgages were set up much like modern “put options.” The farmers would not have had to worry about their crop production because of these rules. In the modern-day, a farmer would instead consider using futures to hedge themselves against a poor crop year.
The Code of Hammurabi allowed entering into contracts for future delivery. It required a witness to set the price and date therein. This gave the ancient Babylonians a way to regulate business cycles.
The prices on the contract were typically calculated in silver or grain. Either way, it is interesting to note how some of these financial instruments are older than the currency itself.
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Collateral and Loans in Laws 49, 50, and 51
These laws focus on the concept of collateralized loans and highlight the establishment of regulations that aim to ensure fairness and transparency.
Law 49 introduces the idea of using collateral for loans. The law dictates that if someone borrows money from a merchant and offers a field of corn or sesame as collateral, the field owner gains ownership of the crops during harvest. This illustrates the concept of modern secured loans and collateralized assets.
Law 50 further emphasizes the ownership of the crops grown on the field that have been used as collateral. Similar to law 49, it portrays modern lending practices where ownership rights and obligations are linked to the assets used as collateral.
Law 51 introduces a parallel to contemporary financial structures by allowing borrowers who lack the funds to repay in cash to compensate the lender with a part of the harvested crops based on established rates. This portrays the concept of debt restructuring or alternative repayment plans.
Read also: Corn Futures Overview – How to Start Trading Corn
Takeaway: Hammurabi’s Code Provided a Framework for Modern Finance
Hammurabi’s code is a cornerstone for many principles that have continued to shape modern finance. The laws within the code explore the early establishment of collateral, interest rates, and fair financial transactions.
