While lending at interest came under official scrutiny in medieval Europe, annuities did not. Though an annuity is usually thought of today primarily as a tool in retirement planning, in the Middle Ages, annuities were used to raise money for monasteries, property developers, merchants, artisans, landowners, cities, and countries. After receiving official sanction, life and perpetual annuities became the most widespread investment products available in medieval Europe.
The rente, French for an annuity, was based on the even older census contract dating back to Carolingian times, an era closer to the fall of Rome than to the Renaissance. Medieval annuities or rentes were often perpetual and heritable. As negotiable instruments, they could also be sold to another party, a factor which helped make rentes a favored medieval investment product.
Medieval annuities were typically paid out of the income of an estate. Since payment of the annuity was derived from the income of real estate, the income stream came to be associated with the rental income of a property, hence the name rente. In a sense, a rente was an obligation of, and an encumbrance on, the land rather than a person; it would not be discharged at death but would be paid by the future holder of the property, whether it was sold or inherited.
The medieval Church made use of the old census arrangement to encourage bequests of land to monasteries. The monastery receiving a donation would agree, in return, to pay an annuity to the donor for the rest of their life, and perhaps for the rest of their heirs’ lives, paid from the income of the very lands donated to the Church.
The annuity would be paid in kind, in produce from the land, and only later in money, particularly after the 12th century. Later, churches investing their endowments would become buyers, rather than issuers, of annuities. Whether used by churches or merchants, rentes could be quite large contracts in terms of the value involved, so they tend to be well documented and are therefore valuable to historians.
By the 14th century, most annuities made in north German cities were commercial and not related to a religious bequest. Sales of annuities were also used to finance either the purchase or construction of houses, rather like a mortgage. Records from Hamburg suggest this may have been the purpose of around 35% of annuities sold. Indeed, there was even a correlation in medieval Hamburg between the sale of annuities and the sale of bricks and roof tiles, perhaps suggesting that the creation of annuities was important to financing construction.
A merchant or artisan owning a workshop, warehouse, or market stall might himself sell an annuity secured by the property. The property could be repossessed if the annuity payments were not made. The amount raised by the sale of the annuity might go towards the purchase of the property itself and perhaps towards payment of the fee customarily required by an artisan to enter a guild. Annuities may also have been used to finance the purchase of partnerships in existing companies. The rente provided a form of financing in an era without banks. Once the person who had created the annuity had available funds, they could extinguish it by repaying the amount paid for the annuity by the investor.
Merchants and financiers would purchase rentes from landowners, providing them with capital in exchange for a perpetual income. It was a method of investing wealth gained in commerce. Whether as issuer or investor, the most active participants in annuity markets, at least in urban centers, were middle- or upper-class people like artisans, merchants, goldsmiths, city officials, and military officers – as well as rentiers, who made most of their income from investments, such as rentes. Though, in the countryside, even peasants might issue a rente to finance the purchase of land or other assets they required.
In the 13th century, cities and towns in Northern Europe issued rentes to investors. Cities in Spain did so as well though exactly when municipal annuities began to emerge there is uncertain; nonetheless, they were certainly in existence by the mid-14th century.
When their tax revenues were insufficient, cities would issue life or perpetual annuities to raise money. The implied interest rates on the former were much higher, sometimes twice as high, as the latter. In Hamburg, the standard interest rate on life annuities was 10% as compared to 6.66% for perpetual annuities. Though rates would have been lower for a public issuer than an individual one and these rates would nonetheless fall as the medieval period came to a close. Unlike perpetual annuities, life annuities might not typically be sold to a third person, though some were arranged to make payments over two or even three designated lives.
The first municipal rentes were issued by the city of Troyes by 1228. Many of these municipal life annuities were bought by financiers. Troyes continued issuing life annuities, thirty-two of them, in 1232. Further north, Arras issued £2,500 in life annuities at an average rate of 15.4%, covering one or two lives each. The annual payments on these annuities, issued between 1241 and 1244, comprised 75% of the city’s debt service payments.
Cities preferred the way rentes locked in funds and so converted their short-term debt, sometimes forcibly, into these longer-term annuities. Annuities were sold to finance wars, the acquisition of castles or political privileges, or loans to other cities. Higher levels of government in the Low Countries began issuing rentes in the 14th century and the national government in Spain in the 15th century. Only in the 20th century did the issuance of annuities cease to be used to finance public debts in Europe.
For much of medieval Europe, loans at interest were banned. In 1163, Pope Alexander III banned clergy from creating mortgages, a problem since many mortgage loans would have been extended by wealthy monasteries investing their endowments.
Further, in 1254, Pope Innocent IV relieved monks of their obligations to make interest payments on loan debts. In 1291, the Parlement de Paris cancelled usurious debts. In 1296, Pope Boniface VIII, under pressure from King Philip IV of France, decreed that the city of Bruges did not have to pay amounts owed to financiers beyond the principal amount owed. Anti-usury initiatives like these led to a shift towards rentes in lieu of loans.
Pope Innocent IV had expressly declared that rentes were not usurious, provided the income stream was based on real property. This led to broad acceptance by the Church, which had already been using annuities for its own purposes. This acceptance was endorsed again by popes in the 15th century, so that rentes’ good standing became indisputable. During the 15th century, the volume of annuity transactions in north German cities would have been about forty times larger than that of the 13th century, an increase that could not simply be explained by population growth or urbanization alone.
The fact that made the difference to theologians was that unlike a loan, an annuity could never be redeemed by a creditor so long as the seller of the annuity continued making payments. Though an obligor could extinguish a perpetual annuity early, the principal could not simply be called in by the investor, as a loan’s principal could. Also, the regular payments on an annuity were to come from real estate and not a personal obligation; thus, the annuity encumbers a ‘thing’, not a person, and clergy did not feel particularly inclined to paternalistically protect the dignity of ‘things’.
While restrictions on lending at interest did shape the contours of medieval finance, it did not kill off the concept of credit. The annuity was a workaround, one of many in medieval Europe. What made it unique was the breadth of its application; while bills of exchange and other medieval credit instruments may have been used by governments and merchants, annuities were issued even by the humble peasant or artisan. Widespread use of financial instruments did not die with the Dark Ages.
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1. Baum, Hans-Peter. “Annuities in Late Medieval Hanse Towns.” Business History Review, vol. 59, no. 1, 1985, pp. 24–48.
2. Briggs, Chris, and C. J. Zuijderduijn. Land and Credit: Mortgages in the Medieval and Early Modern European Countryside. Palgrave Macmillan, 2018.
3. Munro, John H. “The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability.” The International History Review, vol. 25, no. 3, Sept. 2003, pp. 505–562.
4. Munro, John H. “The Usury Doctrine and Urban Public Finances in Late-Medieval Flanders (1220-1550): Rentes (Annuities), Excise Taxes, and Income Transfers from the Poor to the Rich.” La Fiscalità Nell’Economia Europea, Secc. XIII – XVIII, 2008, pp. 973–1026.