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Economic, political, legal and other consequences of debts and loans
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Economical and political consequences of the limiting of the statutory maximum interest rate in Central Europe from 10% to 6% since 1543
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 Sc 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 Vsehrdy (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 (Jirecek 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 (Jirecek 1874, pp. 28, 206, 361-2).
The standard interest rate in Bohemia at that time was 10% (Jirecek 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 interestbearing 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.