Part 3
Chapter 14
Petr Vorel
Introduction
For the late medieval and early modern society, the issue of debt loans and maximum interest rates was of great importance for both religious and economic reasons (Kindleberger 1985, pp. 41–2). Since ancient times, the society discussed the question of the maximum interest rate especially in relation to usury. Nonetheless, the interest rate level was generally a regulated element of the economic system and interest-bearing loans were either completely banned or allowed within certain boundaries.
Central Europe also reflected the contradiction between the Christian doctrine which, until the Middle Ages, refused any interest on borrowed money as undesirable usury, and the economic reality that could not do without interest-bearing loans. In this regard, the development of the British Isles significantly differed from continental Europe. Even as late as 1521, in England, there was confirmed a strict ban on lending money at interest (Bacon 2002, pp. 89–91; Blanchard 1996, pp. 57–73). This would not have been possible on the continent at the time, as credit from large banking houses was commonly used to finance policies of imperial and papal power already in the 15th century.
Major part of Europe of the Late Middle Ages already generally accepted the concept of interest (North 1991) but each state used its political instruments to regulate the maximum interest rate. Demanding an interest rate above the legal limit was severely punished as the forbidden usury but only as long as both parties to the transaction were Christians. In fact, an important part of the credit system of that time was represented by Jewish merchants and bankers whose business activities were not restricted by the standard statutory interest rate but followed different rules.
Specifics of the economic system of medieval Bohemia
In the second half of the 14th century, the Kingdom of Bohemia was one of the most advanced financial centres in Europe of that time. During the reign of Emperor Charles IV of Luxembourg (1356–1378), the first permanent imperial court in the history of the Holy Roman Empire was established in Prague and Bohemia was a major European exporter of silver. Thanks to these circumstances, Bohemia developed an advanced credit system.
The extraordinary economic and cultural development of this region was disrupted by the deep internal crisis of the Holy Roman Empire at the beginning of the 15th century that resulted in religious wars in Bohemia. These also fundamentally disrupted the development of the domestic economy and severed its connection to international market networks. However, accepting interest at the statutory maximum interest rate remained part of the economic system even in times of crisis. Nonetheless, the most prominent recent publications dealing with the historical evolution of interest rates do not pay attention to this part of Europe (Homer & Sylla 2005, pp. 96–108; Geisst 2013, pp. 58–75). As the situation in Bohemia in the corresponding period represents a certain anomaly in terms of wider European development, I have taken the liberty of summarizing the basic information in this study which may serve well as comparative material.
At the end of the 15th century, during the restoration of the country’s economic system in the time of the post-war boom, a prominent Czech lawyer, Professor Viktorin Kornel of Všehrdy (Dean of the Faculty of Arts at Charles University and later an official of the Land Court) created a factual overview of legal regulations. The elaboration was based on the situation of several generations earlier which he reconstructed by studying archival sources. At the same time, he explained how to apply the former legal procedures in view of the recent political instability when the judicial system was not functioning and proper property records were not kept (Jireček 1874, p. 8).
It is clear from this source that in Bohemia at the end of the 15th century, interest was perceived as a normal, long-term accepted and stable part of the country’s economic practice with clearly defined rules. For example, for duration of the obligation, if the creditor did not request the payment of interest for a continuous period of ‘jural years’ (3 years and 18 weeks), the debt was annulled. However, this did not apply during the time when the judicial institutions that could be used to demand the payment of interest did not work. If the creditor applied for a court-mandated freezing and subsequent seizure of part of the debtor’s land property, he could claim not only the ‘principal amount’ (property at the book value of ‘one third higher’, i.e. 1.5 times the owed amount), but also the unpaid interest. Already at the end of the 15th century, there was a separate register of the so-called ‘interest books’ at the Land Boards office. These books recorded significant receivables and regular interest payments, and the official entry in the ‘interest books’ had the same legal power as the land property records in the Land Books (Jireček 1874, pp. 28, 206, 361–2).
The standard interest rate in Bohemia at that time was 10% (Jireček 1874, p. 324). The country’s economy adapted to this relatively high interest rate. However, it mainly relied on the development of the internal market and the rapid formation of a dense network of towns and townships controlled by nobility. Until the end of the 15th century, the still-continuing religiously motivated economic blockade of the ‘heretical’ Bohemia prevented any significant involvement in international trade. On the political level, this situation was exacerbated by the non-confrontational but unambiguous constitutional exclusion of the Bohemian lands from the newly consolidated Roman-German Empire. At the time of the establishment of the Imperial Diet structured by estates’ principles (1495), the Bohemian lands were no longer part of this Empire (Vorel 2017a, pp. 184–6).
These circumstances also contributed to deepening the economic isolation of the Kingdom of Bohemia. However, this isolation was paradoxically accompanied by significant economic prosperity. The explanation for this phenomenon is rather complex. It is related to the development of large nobility-administrated manors, weak ruling power, the political system of the so-called Estates Monarchy, and the specific role of Bohemia as the Europe’s main silver producing region, up to the advent of mass import of this precious metal into Europe from America in the 1540s (Vorel 2013, pp. 41–62; Vorel 2019a, pp. 52–7).
Another characteristic of the Czech lands was the different structure of land tenure. Except for minor remnants, there was practically no system of feudal hierarchy in relation to the sovereign or among the nobility themselves. Most of the territory consisted of allodial (‘free’) properties registered in the Land Books, or ‘enrolment’ properties (mostly medieval royal or ecclesiastical estates). Property rights to the land held by the nobility were thus not restricted by the ruler or the ecclesiastical hierarchy as was the case with hereditary fiefdoms and other forms of legal subordination in Western Europe.
During several decades at the turn of the 15th and 16th centuries, major magnates systematically purchased smaller nobility estates for which they paid not in cash but in issued interest-bearing bonds. For some time, this was beneficial for both parties: a large territorial domain made it possible to introduce new forms of enterprise by the central administration and to increase profit. The former owner of the small estate regularly received high interest payments from his properties and did not have to worry about its management.
Most of the large dominions created in this way were based on an interest-bearing loan. Under the standard conditions, the first half of the annual interest was paid in spring on the name day of St George (5%) and the second half in autumn on the name day of St Gall (5%). This also corresponded to the usual six-month notice period. This system appeared stable as the bonds were collateralised by credible guarantors but, generally, also by the value of the debtor’s land properties. Each nobleman could put up a guarantee for his debts only up to the value of his land properties. Any violation of this rule was considered a serious crime. For this reason, the financial chambers of great magnates served as regional financial houses where a large part of the rural nobility deposited their interest-bearing assets.
Debt of the Royal Chamber
The model described above worked even at a high interest rate, as the country had not been at war for a long time and there was effectively no strong ruling court that would unproductively tap funds from the economy in the form of taxes or forced loans. This significantly changed after 1526 when the Austrian Archduke Ferdinand of Habsburg was elected the King of Bohemia. Czech estates rejected Ferdinand’s claims for recognition of the hereditary ruling rights through his wife (sister of the previous King Louis). They insisted on an election because it included the acceptance of an election waiver by the candidate for the throne. This undertaking also included the acceptance of all financial liabilities of the previous rulers in relation to the domestic estates which were secured by pledges of former medieval royal property, property of secularized ecclesiastical institutions, and by the continuous income sources of the ruler including mint revenues and other assets. Although the Lands of the Bohemian Crown were the economically strongest region in the newly established Bohemian-Austro-Hungarian personal union and they were also in a politically safe zone (the Hungarian and Austrian lands were under an imminent threat of invasion by the Ottoman Empire), they yielded only irregular income from ad-hoc tax levies which were, however, subject to the approval of the Land Diet.
From the very beginning of his reign in Bohemia, King Ferdinand tried to change this situation which was disadvantageous for him. Yet the King managed to find one effective tool to force the domestic nobility to pay his expenses. Most of the medieval royal and ecclesiastical properties were held by great magnates but legally, they represented long-term pledges that the king could theoretically redeem. In view of the long-term inflationary development, the difference between the nominal amount of the pledges (determined in the 15th century) and the real value of the dominions at the beginning of the second third of the 16th century was considerable. Therefore, the king enforced money loans in high amounts, especially from great magnates that did not bear interests and were never expected to be repaid by the King. He only continuously ‘credited’ the loan amount to the original pledge amount up to the real market price of the relevant dominion. Naturally, the King also took into account the real political situation, and he therefore used such economic instruments individually with regard to the position of the specific noblemen within the aristocratic opposition or in the newly emerging power structures at the court.
However, these gradual steps were not sufficient for King Ferdinand to solve the long-term internal indebtedness of the Royal Chamber that he partially ‘inherited’ from his predecessors on the Bohemian royal throne and partly exacerbated himself. Loans to the Royal Chamber also carried the standard 10% interest meaning that even servicing of the sovereign debt represented considerable costs, although the debt itself was not being repaid.
The prospects of any significant change were fundamentally limited by the financial costs of the war in the Balkans. The defence costs of the rest of the Lands of the Hungarian Crown and the hereditary Austrian lands in the Danube region also absorbed the vast majority of tax revenues from the Bohemian lands. Thus, using a tax instrument to reduce the internal debt was also not an option. At the beginning of the 1540s, the interest rate of 10% was already too high for Czech economy both in terms of the cost of servicing the sovereign debt (which amounted to approximately half a million threescore of Czech groschen) and also for the financial chambers of great magnates.
Interest rate in Central Europe in the early 1540s
The process of decreasing the maximum tolerated interest rate in Bohemia basically reflected the more general trend observed in Central European economy of the period. Especially in the context of the rapid process of reformation, most German states in the early 1540s were considering the introduction of a lower interest rate in the range of 5–7% (Brady 1996; Geisst 2013, pp. 74–5). By contrast, large South German banking houses maintained an interest rate of 10%, even in terms of financing the Habsburgs (Homer & Sylla 2005, pp. 115–16), as did the Florentine bankers who, at that time, also maintained their usual (10–12%) interest rate (Bruscoli 2009, p. 90). However, in the absence of knowledge of the exact terms of the loans and their collateral, a mere overview of the documented levels of interest rate in 16th-century Europe may seem quite chaotic (Homer & Sylla 2005, pp. 119–20). Nonetheless, the statutory maximum interest rate was legally binding. If someone was willing to lend money at a lower interest rate or interest-free, they were free to do so.
For King Ferdinand, the idea of forced reduction of the maximum interest rate in Bohemia from a ‘normal’ 10% to a lower level was certainly attractive as he was the country’s largest debtor. However, the first step he took in the early 1540s was aimed against Jewish financiers. They were expelled from the Kingdom of Bohemia by the royal decree of November 9, 1541 and this decree was (with a few exceptions) actually enforced. The formal pretext for the expulsion of the entire Jewish population from Bohemia was their alleged participation in starting the fire of Prague Castle in the same year. However, this did not make much sense because the anti-Jewish decree concerned the whole kingdom, not just Prague (Vorel 2005, pp. 147–8).
The Jewish population was granted only a very short period of time to organize their departure from Bohemia, during which they were also supposed to settle their property matters. For the monarch, such an intervention could only have a short-term economic benefit, as long as the expulsion of the Jewish financiers and their families was also accompanied by the amortization of their claims against the Royal Chamber. However, we do not have any specific data on the ‘unchristian’ interest rate at which it was possible to obtain a loan from the Jewish bankers in Prague at that time.
A certain comparison is provided by the situation in contemporary Rome where Pope Paul III indulged the Jewish business community during the same period but under very harsh economic conditions. The Jewish financiers paid much higher fees than Christian bankers to the papal treasury for legal protection and for the privilege of granting higher-interest loans. In 1543, the twenty ‘old’ Jewish banking houses that had been active in the city for a long time had their maximum interest rate reduced from 60% to 48%. For the next twenty ‘new’ Jewish families that extended the financial sector of the papal Rome, the maximum interest rate was set to a significantly lower level of only 30% (Simonsohn 1991, pp. 413–14; Vorel 2017b, pp. 39–44). The temporal link between the exodus of an influential and large group of Jewish financiers from Prague and other Bohemian towns and the growth of their numbers in Rome only a little later (but under less favourable conditions than those of the ‘old residents’) cannot be supported by material sources for the present but it is a logical assumption.
However, by expelling the Jewish financiers, King Ferdinand deprived himself of the possibility of obtaining flexible loans at a time when he needed them most. Such a situation occurred at the turn of 1541 and 1542 when King Ferdinand, in agreement with his brother Emperor Charles V, tried to organize a campaign of a large Christian army against the Ottoman Empire in the Balkans. The immediate impulse for this action was not only the destruction of the imperial and Spanish fleets off the coast of Algiers, but also the occupation of the capital of the Kingdom of Hungary (nowadays Budapest in Hungary) by the Ottoman army (1541).
From the end of 1541, King Ferdinand sought to convince the Christian rulers of Europe of the necessity of a joint campaign against the Ottoman Empire. The aim was not only to reconquer the capital of Hungary, but all the lands all the way to the south of the Balkan Peninsula. This resonated positively mainly at the Imperial Diet where significant support for the Hungarian campaign was offered to the Habsburgs by the Lutheran princes, associated in the so-called Schmalkaldic League. It was a clear political agreement: Protestant princes and cities in the Roman-German Empire will pay the soldiers to regain Hungary in exchange for a greater leniency of the Habsburgs in religious matters. At that time, an agreement between the Catholic Church and the Lutheran Reformation seemed to be a viable solution to the confessional schism. Therefore, Pope Paul III supported the Hungarian campaign with his own troops. He also announced the long-promised General Council of the Church. This was supposed to start in Trentino, South Tyrol, already in the autumn of 1542 when everybody would have returned from the supposed victorious campaign against the common confessional adversary.
The Imperial Assembly held at the end of 1541 even approved the financing of the common imperial army but it stipulated the following condition: King Ferdinand was supposed to provide, from his own resources, for another army of nearly the same size. However, King Ferdinand did not have the money to fulfil such task nor did have many options to borrow. To secure the basic needs and pay for the soldiers, he needed at least 100,000 Rhenish guilders in cash. He asked the Bohemian Land Diet for one half; he wanted to get the other half in Austrian countries.
Regarding the economic potential of the Kingdom of Bohemia, the amount of 50,000 guilders was not a major problem. However, the tax system was very cumbersome and it took a long time for the tax to be gradually collected in small amounts from individual taxpayers. Yet, for the purpose of the military campaign, it was necessary to collect the money in a short time and in cash which was not possible without fast lending operations. These could have been arranged by the Jewish financiers who had been expelled from the country by King Ferdinand a few months earlier.
Technical implementation of interest rate reduction in Bohemia
The entire campaign of the Christian troops to Buda ended in October 1542 in a great disaster and disgrace. The limited scope of this study does not allow me to examine the broader political significance of this unsuccessful military enterprise which has not yet been fully appreciated by European historiography and which I have attempted to interpret elsewhere (Vorel 2019b). However, the negotiations on securing financing for the military campaign in Hungary in 1542 in cash were the main impulse for the subsequent change in the maximum interest rate in Bohemia.
Technically, the change was made as follows:
In the undated royal proposition from the beginning of 1543, the monarch complained, among other things, about the high expenses he incurred with the campaign in 1542. He had to borrow money at a high interest rate that he was due to start repaying soon. Therefore, at the Land Diet that convened on April 30, 1543, he asked for further financial contributions. The Assembly refused to pay the King any money in cash but approved a new tax for the year 1543 in the amount of 1% of all property value. On this occasion on April 30, 1543, the Land Diet decided to reduce the maximum interest rate from 10% to 6%. The record indicates two reasons for this: by this reduction, the Assembly intended to prevent the usual practice whereby a nobleman preferred to sell his estate and to live unproductively on the income from interest yielded by the principal sum. This was assessed by the Assembly as an undesirable social phenomenon that caused other problems. As a second reason, the Assembly stated that the current interest rate in neighbouring countries was already considerably lower. Under the new standards, all loans taken were to be remunerated at only 6% starting from the earliest name day of St Gall (October 16, 1543). In his reply, the King very much welcomed the decree to reduce the maximum interest rate to 6% and stressed the importance of putting this resolution into practice (Sněmy české, 1877, pp. 557, 561, 565, 569).
For the majority of the politically active Czech nobility, which at that time consisted mainly of holders of larger estates, the reduction of the maximum interest rate seemed to be very advantageous because most of them were debtors rather than creditors. Like the monarch, they assumed that the economic cycle would continue reducing the costs of servicing their debts and making cheap credit more affordable. However, the consequences of this political decision were much more complex.
Immediate consequences of the interest rate reduction in 1543
The resolution of the Land Diet of April 30, 1543 to reduce the interest rate from 10% to 6% was implemented immediately. However, on the nearest date when this change was to take effect (October 16, 1543), the existing credit system completely collapsed. Nobody wanted to lend money at the lower interest rate. The creditors terminated the credit agreements en masse and demanded the repayment of their assets in cash, as the future development with regard to credit market regulation was uncertain. The ad-hoc general disruption of the cycle of revolving credit contracts constituted an economic catastrophe, especially for great magnates. In most cases, they did not have the liquid funds necessary to repay their old loan contracts, and the failure to meet their financial obligations threatened to result in an official freezing and subsequent seizure of properties of a greater value than the amount of debt to be recovered. In the mid-1540s, several large territorial units thus disintegrated. The most affected person was John of Pernštejn, resident at the Pardubice Castle, the owner of the largest complex of land holdings in Bohemia at that time who, already in 1543, began to gradually sell off his estates to satisfy the creditors.
The collapse of the Bohemian credit market completely changed the sovereign’s opinion on the role of the Jewish financiers in the country’s economy. The anti-Jewish measures mentioned earlier were abolished in 1545.
The deep credit crisis came unexpectedly fast but did not last long. Its immediate consequences were overshadowed by the problems caused by the drawing of the Bohemian lands into the war between the Habsburgs and the imperial opposition in Germany in 1546–1547. King Ferdinand took advantage of a temporary victory in the Roman-German empire for his goals in Bohemia. Under the pretext of an alleged participation in the Estates Resistance, he carried out a politically and religiously discriminative punishment of the Czech estates that disproportionately impacted royal towns and members of the Unity of the Brethren (Vorel 2015, pp. 193–201). Thus, the year 1547 brought a one-time debt relief for the Royal Chamber: most of the sovereign debts were simply cancelled as a punishment to the creditors for real or alleged participation in the Estates Resistance. By confiscating the land property of the royal towns and that of a part of the aristocratic opposition, the king gained sufficient land for the restoration of his own estates subject to the Royal Chamber.
Long-term consequences of the interest rate reduction in 1543
The interest rate reduction in 1543 brought one long-term effect: significant growth in market prices of aristocratic land property. The official price of an aristocratic dominion was calculated based on two main items:
The first item was the so-called current income. This was determined as the expected revenue from business activities of the estate administration (fish farming, farmyard business, sheep, production, and sale of beer, etc.). The estimated value of the dominion included ten times the current income, which corresponds exactly to the ‘old’ interest rate of 10%.
The second part consisted of the so-called fixed income. This was the total value of the obligations of serfs to the nobility based on the possession of properties used by the serfs (rustic tenure). The holders of rustic properties were obliged to semi-annual payments of a specified relatively low amount either in cash or possibly in goods or by physical performance (statute labour). These rights held as assets by the nobility could easily be converted into the corresponding amount in money. The estimated value of the estate then included the annual income calculated in this way at a higher value (twenty times the annual income).
However, the reduction of the interest rate from 10% to 6% brought considerable chaos to this system which had been applied for long decades. After 1543, the model estate apprised the ‘old way’ yielded much more than its holder would have earned on interest if he had sold the estate and lent the money to someone. Therefore, the market price of the allodial aristocratic dominions rose sharply within a short time. Although neither the amount of the current income nor the fixed income changed, the income of the estate started to be included as a multiple of 15 (current income) and 30 (fixed income).
Conclusion
In Bohemia at the end of the Middle Ages, the interest rate was one of the items strictly regulated by the state. Due to the specific development in terms of land tenure, whose expansion at the turn of the 15th and 16th centuries was accompanied by frequent capitalization maintaining the constant interest rate of 10%, constituted a long-term stabilizing element that was made possible also by sufficient amount of quality currency on the internal market. A change occurred after 1526 when the demands of the ruling court on the tax and credit system increased significantly. The immediate impetus for the reduction of interest rates was given by the financial problems in need of flexibly securing a large amount of cash to raise an army to fight in Hungary in 1542. The interest rate in Bohemia was reduced to 6% by an unexpected ad-hoc decision of the Land Diet on April 30, 1543. The consequences of this decision became apparent as early as October 1543 when the credit system in Bohemia collapsed. This led to rapid disintegration of many large aristocratic estates whose holders, given the new conditions, were not able to meet all the obligations burdening their land tenures. In the long term, the consequences of this interest rate reduction were reflected in a rapid increase in the formal accounting value of land tenures. This process was not yet related to the consequences of the so-called ‘price revolution’ that started affecting Central Europe much later.
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