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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).
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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