Helanya and I are buying a house. It’s actually not a house, it’s more a sort of tiny, small, little flatlet in the center of Stellenbosch. Did I mention it’s not huge? And, to be perfectly honest, the bank’s buying it for us.
Except if you’re desperately fortunate, or willing to rent for the remainder of your life (which seems to be a good option at this moment), debt is as certain as death and taxes. Debt is, of course, not a new phenomenon (consider Shakespeare’s Merchant of Venice), but it’s often perceived as something bad (consider Shylock), like some contagious disease that everyone wants to avoid but everyone ends up getting. The recent financial crisis, with the subprime mortgage crisis as its proximate cause, did not help.
But debt and credit markets may just be one of the most important institutions of development. Mohammad Yunus, founder of the Grameen Bank and winner of the 2006 Nobel Peace Prize, has shown how micro-loans to the poor can both be profitable and an instrument of development. Hernando de Soto argued in The Mystery of Capital that the difference between the West and the rest is that property rights are protected in rich countries. This allows everyone, even the poorest, to use their meager assets as collateral to borrow money and invest in themselves or other profitable opportunities. The poor in poor countries don’t have property rights and so cannot go the bank to ask for a loan. Of course, this implies well functioning credit markets that are able and willing to provide those loans. Van Zanden, Zuijderduijn and De Moor (2012), for example, argue that capital market institutions in Holland were fairly efficient in the fifteenth century; there were very low interest rates (in fact, no higher than they are today) and the owners of capital offered access to credit at low cost to men and women and to rich and poor households because the Dutch towns solved the “de Soto problem” by keeping records of all transactions and ensuring the transparency of the legal system. This widespread use of credit and debt during the fifteenth century would play a significant role in ensuring that Holland would emerge as the wealthiest country in the seventeenth centuries. Using probate inventories, Ogilvie, Küpker and Maegraith (2012) show that even in the poorest parts of rural, central Europe (parts of modern-day Germany), debt was an important tool to smooth consumption and invest in profitable ventures, also at relatively low interest rates – much different from the poor today.
Cape probate inventories also suggest that the market for credit in the eighteenth century Dutch Cape Colony was active. In the inventories I use, 40% of all household assets (of those households that report debt) are owed to someone else. Perhaps the early credit market of Cape settlers is a cause of their eighteenth century prosperity (Fourie and Van Zanden 2012). And to take this even further, perhaps South Africa’s well-developed financial market today (South Africa is first – yes, first! – on the World Bank Doing Business list in the category ‘ease of getting credit’) is a consequence of our earlier settler credit markets.
It’s not likely that such a link can be demonstrated. But there’s no doubt that such history effects the present and often repeats itself. Here’s the Cape governor’s report on the state of Louis Fourie’s finances, my great great great great great great great grandfather, in 1731: “Louis Fourie – owns property, yet not without debt” (Shell 2007). Santé, grandpa!