As long as interest rates remain high, it will take a long time for inflation to fall to single figures

In the early periods of ancient Sumer, barley was the primary medium of exchange for many products and goods. Mesopotamia, the cradle of many of the world’s ‘firsts’, was also a region of great agricultural wealth; consequently, cereals were used for many years as a medium of exchange and as the fundamental standard in payment and repayment transactions. Indeed, even before 3000 BC, certain metal ingots were also used as a medium of exchange within this vast civilisation.

Two primary standards of value existed: grain and silver. Silver was generally the standard of value in town and city economies, whilst grain served as the standard in villages. The values of these commodities were often highly volatile; consequently, the state frequently intervened in the market to stabilise these fluctuations and establish new regulations. Because no minted currency existed until the first millennium BC, people used metal ingots for payments alongside weight measurements.

Numerous texts dating from the Sumerians to the present day contain a wealth of information regarding property transactions and credit operations. Many financial practices and traditions in Early Sumer were based on the Babylonian Code of Hammurabi.

In Sumer, property ownership could be of a communal nature, based on individual or temple groups. Payments or loans were recorded in detail in the presence of the temple or other groups. Although rules governing the sale of houses and fields were introduced before 2800 BC, information regarding their application is more commonly found in texts dating from after this period. These rules were based on the interests and needs of the family owning the house and land. Uncultivated land was also transferred to families, but only on condition that the land was cultivated and crops were grown.

The Code of Hammurabi contained numerous rules and regulations governing the ownership and cultivation of land, the employment of agricultural labourers, land rent and lending practices. One such regulation concerned the rules governing the repayment of loans. Particularly in the case of agricultural loans, production and the harvest were given priority.

Priority was always given to the needs and interests of the producer as the borrower; no creditor could demand repayment of the loan before harvest time. More importantly, in the event of a decline in production due to natural disasters such as drought or flooding, the interest on the debt was automatically waived.

Land could be leased in exchange for a specific crop, or for a period of three years. In such cases, depending on the agreement, a specific portion of the annual harvest was paid to the landowner. The landowner could be an individual or a community representing a temple; in such instances, payments were made into a fund used to cover the temple’s expenses.

An interesting aspect of the Code of Hammurabi, which regulated debt, is that whilst loans for consumer goods were interest-free and penalties were imposed for late repayment, no sanctions were applied to those unable to pay these penalties.

As in many other laws, the Code of Hammurabi established and enforced a ‘maximum interest rate’ for interest-bearing loans. Regulations limiting interest rates were established around 2000 BC and remained in force for hundreds of years. These rates were higher for grain than for silver.

Approximately 1,200 years later, in the 6th century BC, the maximum interest rates applied to loans of silver and grain were equalised.

The law stipulated that all lending transactions, whether involving grain or silver, must be conducted in the presence of at least one witness. Loan contracts concluded without a witness were deemed invalid, and the borrower was not obliged to repay the loan if they so chose. Furthermore, if the agreed-upon interest rate exceeded the maximum limit, the contracts were again deemed invalid. In these agreements, the absence of a witness and the exceeding of the upper interest limit rendered the contracts null and void.

In these loan contracts, if the borrower was married (which was virtually a requirement), a provision mandating the consent of the borrower’s spouse was invariably included; this was because the laws protected the rights of spouses with clear provisions. Whether it was land or a dwelling, half of the property belonged to the spouses. For this reason, such a condition was applied in loan agreements.

Under the Code of Hammurabi, regardless of the security provided, if interest on an unpaid loan could not be repaid—and if there were insufficient assets or goods to cover the debt—the debtor was required to perform compulsory labour; however, the duration of such labour instead of debt repayment could not exceed three years. This period was subsequently extended. Numerous recorded contracts show that interest (and in some cases the principal as well) was repaid through labour by a slave or the debtor’s children, as stipulated.

Temples possessed vast wealth and were directly involved in financial affairs; they indebted farmers and merchants through interest-bearing loans. Temples did not charge interest on the grain- or silver-based loans they granted to poor farmers. Historical records show that temples granted loans at interest rates below the legal maximum – sometimes half, sometimes a third of the maximum rate.

For example, the Temple of Marduk in Babylon provided interest-free loans to slaves who had lost their freedom due to debt, enabling them to regain their freedom. The Sun God of the Sippon Temple was also regarded as the ‘chief banker’ of the era and the region. The temples also served as centres of justice whilst, at the same time, acting as pawnbrokers in return for interest.

In the early periods, banking operations—centred on lending, deposits and payments—which were in the hands of the temples, later passed into the hands of companies or partnerships during the Assyrian and Neo-Babylonian periods. Initially, the owners of these companies were royal families with temple origins or prominent members of the temple community.

Money transfers also began to be carried out during this period. To make a transfer to another person, a document was drawn up in the name of the intended recipient at the relevant temple department, enabling the transfer to be made. In this regard, either the equivalent amount of the requested transfer (silver or grain) was deposited immediately, or a

debt instrument was drawn up to be paid within a specified term.

At the same time, deposits were accepted to be withdrawn after a specified period; in other words, a system of term deposits was in operation.

These practices, which came into use in the pioneering regions of civilisation hundreds of years before the Common Era, remain at the forefront of the agenda for virtually everyone in the economy today—even in our age of ‘modern technology’—albeit on different bases and for different purposes. Of course, whilst they are no longer based solely on units such as ‘silver or grain’ as in those days, they are implemented through systems underpinned by thousands of units that affect every detail of life. In other words; for some, it is the lira, dollar, euro, riyal or yen; for others, Bitcoin, Ethereum, Dogecoin or Cardano; for others still, gold, silver or platinum; some use shares or bonds, whilst others use oil, wheat, coffee beans, salt, cocoa beans and thousands more; of course, the most universal of these is interest – and, as the practices of those times demonstrated, the ‘most modern’ unit of all.

However, even hundreds of years before our time, in the Code of Hammurabi—which is counted amongst life’s significant contradictions and holds an important place in the history of justice—a ‘maximum interest rate’ was established and enforced, even in the practice of interest, which was considered ‘new’ at the time. To put it more plainly, in order to prevent negative consequences such as hardship and injustice in people’s lives, effective rules capping high interest rates were enshrined in the famous Code of Hammurabi and widely enforced; consequently, ‘severe problems arising from the effects of high interest rates’ did not feature in history; to put it another way, ‘compliance with the rules developed for implementation’ was also ensured by the systemic rules of the time; thus, ‘victims’ such as ‘those harmed by high interest rates’ did not feature in ancient history.

By contrast, in today’s era of high interest rates, it is evident that we frequently encounter news reports of individuals or small-scale businesses suffering significant losses—even due to reasons such as ‘high transaction fees’ or ‘losses caused by high interest rates’—when transferring money held in a term deposit or investment account to another account via bank transfer, EFT or FAST. Furthermore, if your money is held in a high-interest daily or monthly deposit account and you transfer it when needed, that transfer results in a significant daily loss of principal and interest.

Whilst all this highlights the potential losses that high interest rates directly inflict on individuals, they naturally have negative effects on the country’s overall economy as well. Foremost among these is the slowdown – and at times even the halt – in investment; this is because the rising cost of high-interest loans makes it difficult for companies to make new investments, expand capacity and launch new projects. This, in turn, creates serious problems and declines in production across many sectors in the country, particularly in industry.As production, consumption and investment decline, economic growth slows; in the long term, this leads to a recession (economic contraction). The halt in investment and the need for companies to cut costs not only prevent the creation of new jobs but also lead to redundancies and, consequently, higher unemployment.

Such developments naturally reduce the taxes levied on companies’ sales and the taxes paid by individuals when shopping. Furthermore, the government’s borrowing costs rise and, as we have seen recently, the proportion of the budget allocated to interest payments reaches enormous proportions, thereby reducing the resources available for public investment and social spending. Furthermore, imbalances between interest and non-interest expenditure within the Central Bank or the public budget may escalate to unsustainable levels.

Whilst all this is taking place, alongside real sector companies operating on debt – particularly those with foreign currency or variable-rate debt – SMEs, which are considered the backbone of the production economy, are also crushed under high financing costs, facing bankruptcy and composition proceedings, thereby dealing another heavy blow to production.

High interest rates also make it more attractive to hold money in interest-bearing accounts, government bonds or short-term financial instruments (carry trade) rather than channelling it into the real economy and production; and, of course, as the resources that should be directed towards production remain idle here, this hinders economic growth. This economic contraction, driven by high interest payments, also paves the way for significant financial losses at the Central Bank or in public finances.

In short, decisive steps to reduce high interest rates – which have long served as the basis for such severe blows to the country’s economy – simply cannot be taken.

Fatih Karahan, Governor of the Central Bank of the Republic of Turkey (TCMB), stated at the Inflation Report meeting on 13 August that keeping interest rates steady whilst inflation and expectations were improving would, in fact, amount to monetary tightening.

Karahan also indicated that they would maintain the current level of monetary tightening by adjusting the policy rate in line with the fall in inflation, making a statement that seemed to signal that “the real interest rate would be preserved and the nominal interest rate adjusted in line with the decline in inflation”. Following this, annual inflation fell from 31.5 per cent to 29.7 per cent in September.

As we know, the CBRT’s Monetary Policy Committee (MPC) cut the one-week repo auction rate—the policy rate—from 37 per cent to 36 per cent on 22 October. However, according to Karahan’s statement, following this development, it would have been theoretically possible to cut the policy rate by approximately 2 percentage points to 35 per cent in order to safeguard the real interest rate.

The Central Bank, however, limited the cut to 100 basis points, meaning that the real interest rate rose by more than half a percentage point. Consequently, although it appears that interest rates have been cut, the reduction effectively resulted in a rise in the real interest rate.

According to many economists and economic analysts, whilst the conditions were in place to bring down high interest rates, it would not be wrong to assume that developments causing turmoil in the economy lay behind the decision to limit the expected rate cut to just one percentage point.

However, in this situation, the high interest rate that should have been reduced has, in fact, been ‘effectively increased’ by this measure, which indicates that the already slowing economic growth will decelerate further. As we highlighted above, since the interest rate—which has been reduced on paper—has in fact been raised in real terms, and as the cost of borrowing has risen further, this implies that economic growth will slow down even more.

Furthermore, with interest rates remaining high, they will continue to curb production and, consequently, growth. Consequently, unless structural reforms are introduced to support monetary policy – including measures to curb high interest rates – and, more importantly, as long as the CBRT’s interest rates, which are running above even ‘official inflation’, remain at those levels, it appears that bringing annual inflation down to single figures will take longer than Treasury and Finance Minister Mehmet Şimşek has frequently suggested.