What We Learn About Sumerian Cattle Ranching Money

What is perhaps the most popular savings product in the world, has four legs, produces milk and, as every child knows, says “moos”?

In many rural areas, those who do not have much access to formal banking services use livestock to store their excess funds. Like a savings account, cows provide regular income, albeit in the form of milk (or manure for fuel) rather than interest payments. Although you may not be able to get your money out of a cow, you can still sell or eat it.

It’s not new. What is probably mankind’s oldest economic model was based on cows. A roughly 4,000-year-old Sumerian tablet discovered at Drehem in modern-day Iraq describes the growth of an idealized herd over 10 years. Like many models, it relies on unrealistic assumptions: no cow ever dies and every couple always has a calf.

Nevertheless, Sumerian accountants probably used this tablet to predict the value (in terms of money) of the milk and cheese produced by such a herd over 10 years. Archaeologists believe the Drehem tablet was probably an investment plan. The initial number of cows increases exponentially in the same way that adding interest to savings increases value over time.

Why should this matter to a modern investor? The one who doesn’t have the choice to eat or herd his cows, but to choose between stocks, bonds, cash or even just to spend his savings? Well, that helps illuminate the way central bankers see the world.

Central to their decisions is the economic theory of the “natural rate of interest” – the principle that, even in a cashless world, our savings should still yield a return. Indeed, it is perhaps the idea of ​​a herd of cattle whose number increases naturally that the Sumerians had the idea of ​​charging each other interest.

If a farmer lends his herd to a neighbor, not only will he expect to get back what he lent — the principal — but also the income generated by the assets, in this case the calves. The Sumerian word for interest is mash potatoeswhich also means “calves”.

The English word “capital” has a similar origin. In medieval Europe, cattle were an economic backbone and were counted by head of cattle. The Latin for head, capita, then gradually began to refer to wealth more generally and, eventually, the funds of money used by merchants.

Today, economists make a distinction between capital goods and financial capital. The real things – a company’s premises, software and equipment – are all capital goods. These are raw materials used to produce other raw materials — an oil rig gives you oil; a cow gives you milk. This physical capital can be loaned to a business, just like money.

Following the example of the 19th century Swedish economist Knut Wicksell – an iconoclast proponent of birth control who was imprisoned for blasphemy – central bankers believe that the natural rate of interest corresponds to the supply and demand of Investment Funds.

Wicksell knew that commercial banks—not central banks—created the vast majority of modern money, and he wanted to know where the limits of that process lay. His response was that when the interest rate on money – the cost of borrowing – matched the return on “real” assets, the natural rate of interest, there would be some kind of stability because the costs and benefits of creating new debt were equal. Otherwise, prices would spiral out of control, leading to hyperinflation or, if rates were too low, a deflationary spiral.

This theory is why central bankers often don’t believe they are actually setting interest rates. The long-term natural rate of interest should be independent of the short-term rates at which a central bank lends—changes in the money supply will not cause cows to breed faster or any other more productive investment. Thus, since central bankers are targeting a particular inflation rate, they will have to adjust their key rate.

What does this mean for monetary tightening? Central banks are now engaged in a program of withdrawing their pandemic support: the Bank of England raised interest rates at its February meeting, in the second consecutive hike in the key rate since only 1997.

But where will the rates end? Before the pandemic, central bankers argued that lower productivity growth – akin to cows reproducing more slowly – would mean rates would have to be lower for longer. The returns offered by investing in real assets were lower, so more had to be done to push cash-strapped investors.

It now seems clear that the pandemic has shaken something in the global economy: the emergency low interest rates enacted after the 2008 financial crisis seem, after years of doing little, to finally generate some stimulus. ‘inflation.

Yet nearly two years into the mass work-from-home experiment, it also seems hard to believe that the pandemic, on its own, will trigger more than marginal productivity improvements. Indeed, a economics article 2020 argues that the historical record shows that pandemics typically cause a 1.5 percentage point decline in – not a rise in – the natural rate of interest. According to the authors, this may be because there was less need for investment as the death toll meant fewer surviving workers for each unit of capital.

This would be an argument for inflation to fade quickly as short-term central bank interest rates rise: monetary policy will soon become disinflationary rather than stimulative. Interest rates will rise a little and then stop.

There is, however, another half to this mainstream theory of interest rates. The natural rate is not only determined by the degree of productivity of the investment, but also by the willingness to save of society, including governments and businesses. This time things may be different: Unlike historic pandemics, the government has been willing to spend to protect jobs.

The pressure to keep spending, for better or for worse, isn’t likely to fade anytime soon, whether it’s to cut carbon emissions, fix supply chains or simply keep voters happy. generous.

On the other hand, there may be nothing “natural” about the natural rate of interest. The mid-twentieth-century British economist John Maynard Keynes, for example, argued that this was a misleading idea, since “interest” was to be a purely financial phenomenon, not dependent on the yield of the capital but from the desire to hold money and, therefore, our uncertainty about the future.

Vaccines may have cleared many of the darkest clouds on the horizon – since central banks launched the latest iteration of extraordinary policies – but many investors would be forgiven for thinking there is still too much to worry about to give up the money just yet.

Gavin Jackson’s book Money In One Lesson was published by PanMacmillan on January 22. RRP: £18.99.