Hammurabi is one of the most famous historical leaders of all time. He was the 6th ruler of Babylon and ruler of the city-state of Mesopotamia. He wrote the Code of Hammurabi, which governed many facets of society. The rules typically involve how to treat property and contracts. The code is most famous for its axiom of an “eye for an eye” and a “tooth for a tooth.” This is at the heart of the code often. The code provides rules about punishments for those who do not live up to their side of a contract. Repayment of damages, banishment and even death are common among these punishments.
Those who have closely studied commerce’s history have discovered that credit, debit, and contracts came before formal currency. The first commodities to be treated similarly to money were grain and cattle. This makes sense since food is a prime concern of a developing society. Add the fact that money only gains prominence if it is universally accepted, and you gain insight into why trade and currency have developed the way they have.
Derivatives in the Code of Hammurabi
The 48th law in the Code of Hammurabi is where you find one of the oldest examples of modern derivatives. The wording of the law is the following:
“If any one owe 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 something like this:
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.
According to historians, this means that these 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.
More generally 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. Much of the Hammurabi Code seems to aim itself at such regulation. The prices on the contract were typically calculated in silver or in grain. Either way, it is interesting to note how some of these financial instruments are older than currency itself.