How did a Sumerian grain loan become the idea of interest?

A loan is a simple deal: someone hands you something now, and you hand back more later. The extra is called interest. If you borrow 100 and repay 105, the interest is 5, and the interest rate is that 5 divided by the 100 you borrowed, so 5 percent. The sum you borrowed is called the principal, and the whole idea is much older than money as we know it.

The oldest records of credit are Sumerian documents from about 3000 BC, which show people systematically lending grain and metals. Historians think credit even came thousands of years before coins. One guess about where interest came from is farming itself. If you lent someone a handful of seeds or a pair of animals, they could multiply, so the lender asked for a share of that growth. Around 2400 BC the first written evidence of compound interest appears, at a rate of roughly 20 percent a year. In Mesopotamia, as in several neighbouring civilisations, interest was legal, and the state often fixed how much could be charged.

Why does interest exist at all? Economists give a few answers, and they fit together. Lending carries a risk of default, meaning the borrower may not repay, and interest pays for that risk. Lending also means waiting: in the sixteenth century the scholar Martín de Azpilcueta noted that people prefer to get something now rather than later, so interest compensates the lender for giving up the chance to spend the money today. And a third explanation points at scarcity: there is only so much money available to lend, so borrowers pay a price to use it.

It works in the other direction too. When you put savings in a bank, you are the lender and the bank is the borrower, so it pays you interest. The same word covers both ends of the deal.