The word testament in biblical usage comes from the Greek word diatheke. In Greek, diatheke means contract, advisory will, or covenant. It comes from a root word that can mean disposition or arrangement. In English, the word testament is most often used to describe the legal requirements of how earthly possessions should be dispensed after a person's death, as in "a last will and testament." However, it can also be used in the sense meaning evidence of a specified fact and is related to the English words testify and testimony.
In biblical usage, the King James Version uses testament almost every time the Greek word diatheke appears in the ancient texts. Thus, Jesus' words at the Last Supper include, "for this is my blood of the new testament, which is shed for many for the remission of sins" (Matthew 26:28, KJV). However, most other English translations replace that usage of testament with the word covenant. So in older translations, the word testament most often refers to a covenant, which is an intimate relationship and commitment between two parties.
God entered into covenant with Noah (Genesis 9:9–11), with Abraham (Genesis 15:18), with Abraham's descendants, the Israelites (Exodus 19:5), and with David (Psalm 89:3–4). God promised a new and better covenant in Jeremiah 31:31–34, one that included forgiveness of sins and would be "an everlasting covenant" (Jeremiah 32:40). When Jesus stated that the Passover cup would now represent His blood of the new covenant, He was referring to this promise from God in Jeremiah. In almost every instance where the King James Version uses the word testament, the word covenant is a more accurate rendering of the text.
One exception is Hebrews 9:16–17 where the author is actually referencing a last will and testament. The King James Version reads, "For where a testament is, there must also of necessity be the death of the testator. For a testament is of force after men are dead: otherwise it is of no strength at all while the testator liveth." Most other English translations use the word will in this passage rather than testament. But this is an example of where testament does not mean covenant. As always, reading passages in context is key to understanding meaning. Reading a passage in multiple translations can also help.
Finally, we have the division of the Bible into the Old Testament comprised of texts written before Jesus' birth and the New Testament comprised of texts written after Jesus' incarnation, death, resurrection, and ascension. While the name of these divisions is a holdover from the Greek diatheke and can be understood as when God was operating under the old covenant with the Israelites versus when God now operates under the new covenant through Jesus' sacrifice, it can also be understood under the more ancient meaning of a disposition or arrangement, also called a dispensation. A dispensation is a system of order, government, or organization of community that exists during a particular time. In Christian thinking, it would be the divinely ordained order that prevailed during a particular period of history. It's the different ways God has interacted with humanity throughout time. So one could understand the use of the word testament as the old dispensation and the new dispensation.
Interestingly, it not only makes sense to think of it as old and new covenants and old and new dispensations, but one can even consider it as old testimonies (or proofs of evidence) about God and new testimonies about God. Perhaps this multi-faceted meaning of the word testament is why most English translations, even ones that do not use the word testament within the text, still label these divisions of the Bible as Old and New Testaments.
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