The Talmud in Gittin discusses an apparent innovation of the great Hillel, about a century before the destruction of the Second Temple. The shmita year carries with it not only the obligation of having the ground of the Land of Israel rest but also the requirement of shmitat ksafim - allowing all personal loans and debts to be automatically canceled. The Torah is very explicit about this requirement stating that one should not hold back from lending money to the needy in the sixth year in fear that it will not be repaid before the shmita year, when the debt will automatically be canceled.
Hillel, aware that in his time lenders were in fact withholding loans as the shmita year approached, constructed a legal mechanism - the pruzbul - to transfer the private loan into a loan made by the courts, which was not legally subject to the laws of the cancellation of debts on the shmita year. This legalism in assigning the loan to the court and removing it from the purview of shmitat ksafim had the desired effect and the flow of money and loans between lenders and borrowers remained unaffected by the impending shmita year.
However, at first glance, one must be puzzled by the institution of pruzbul. What empowered Hillel to construct a legalism that on the surface clearly contradicts the very reasoning of the Torah in establishing shmitat ksafim? This is a great topic of discussion in the Talmud and throughout all later rabbinic writings.
In the Talmud itself there are two opinions voiced on this matter. One is that during the entire Second Temple period the laws of shmita as outlined in the Torah were no longer applicable. All of the laws then were only of rabbinic effect - a remembrance of the shmita ordinances of the Torah - and the rabbis did not ordain shmitat ksafim at all. Thus Hillel's achievement was to create a positive remembrance of the Torah's ordinance by instituting the pruzbul so that the public would always recall that when the Torah ordinances would in the future be once again applicable.
Tosafot there comments that during the entire period of the Second Temple the Torah concept of shmita was not applicable because a majority of the Jewish people lived outside of the Land of Israel. Thus there was no yovel - no jubilee year - and hence no shmita either. According to Tosafot's opinion one can state that the Torah shmita was never observed properly in the Land of Israel by the Jewish nation. The First Temple Jews were exiled because of non-observance of shmita, and the Second Temple Jews only had a rabbinically ordained remembrance of shmita in their time.
The second opinion is that Hillel's ordinance was not a new thing but merely publicized an already existing "loophole" in Torah law which allowed private debt to be converted into debt to the courts. Hillel's act was merely one of publicizing this loophole to allow the free flow of credit to continue even in the year before the shmita. Thus even when the Torah shmita is reestablished, the use of the pruzbul will continue, since the legal loophole will then still be present.
Over the ages there has been much discussion of the pruzbul and its necessity. For a long period of time, Jews living in the Diaspora never used a pruzbul. The logic was that shmita after the destruction of the First Temple was only a rabbinic remembrance and the rabbis never instituted it to be followed outside the boundaries of the Land of Israel. Just as there is no shmita of land outside of the Land of Israel, there is no shmitat ksafim either.
However, there were great rabbis who dissented from this view and stated that shmitat ksafim still prevailed outside the Land of Israel and therefore a pruzbul was necessary to prevent the automatic cancellation of the loan. Rabbi Asher ben Yehiel (Rosh), when he became the rabbi in Toledo, Spain, at the beginning of the 14th century, attempted to introduce the pruzbul in his community. But he himself ruefully wrote of his inability to have the Jews of Toledo follow his ruling.
Over the generations, the institution of pruzbul has taken hold even in Diaspora communities. Many rabbis saw it as a matter of sanctity and remembrance, even if not of necessity, and therefore encouraged its general use. It became one of the methods of keeping the Land of Israel fresh in the minds of Jews living in exile. Hillel's foresight had many positive results.
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