Developments in finance have often been more readily associated with commercial and industrial activities than pastoral or rural ones. True, the former drives considerable demand for financial services but so too do the latter. Yet, while urban finance advanced considerably in the 18th century, rural economies were not as transformed by the advent of paper money, banking, and other new institutions. Indeed, even into the 18th century, the Church in Prussia remained an important source of surplus capital in rural areas. In any case, the provision of credit to rural landowners there was changed by the establishment of new mortgage lending institutions, the landschaften.
Seven Years War
Rather than stimulate the rural economy by increasing the demand for rural products, from food to wool, wars in 18th century Europe tended to depress the nearby agrarian economy. Armies marching through the countryside would requisition supplies from farms and damage buildings and equipment. During the Seven Years’ War which lasted from 1756 to 1763, the estates of many Prussian aristocrats were damaged, particularly east of the Elbe River. Prussia may have been on the winning side but its economy was strained by the war. After the fighting ended, there were shortages of livestock and seed and peasants’ houses were also destroyed. To restore the productivity of farms would require some time and money.
Impeding improvement was the fact that there were no financial institutions serving rural needs in 18th century Prussia. Landowners had relied on private lenders in the past but this credit dried up after the war as the agrarian economy languished. Amidst the credit crunch, landowners’ cost of borrowing grew from 6% to 10% and commissions on loans which had traditionally been between 0.5% to 1% grew to 2% or more. Partly as a result, too many worthwhile investments went unfunded and the depressed agrarian economy lasted for years.
During this period, interest and principal payments were not being made on time. Mortgaged land was foreclosed on and there were many ruined landowners among Prussia’s nobility. More than four hundred estates were auctioned off in Silesia alone, one of the areas most fought over during the preceding war. However, even the new owners struggled with low prices for grain.
Landschaften
A new form of financial institution and accompanying instrument were devised to solve the credit scarcity. Diederich Ernst Bühring, a Berlin merchant, proposed using bonds issued by a new financial institution to fund loans to landowners. There had been earlier attempts at creating a mortgage bank. In 1767 though, Bühring presented his idea to Frederick the Great (King Frederick II) and his finance minister. The latter rejected the idea only for that minister’s replacement, Johann Heinrich Casimir von Carmer, to make a similar proposal the following year.
The institutions devised were landschaften (singular: landschaft). These were non-profit cooperatives set up to offer mortgage credit for the rural economy. They were established in numerous provinces of Prussia, including in Silesia, Brandenburg, Pomerania, West Prussia, and East Prussia, all between 1770 and 1788. The Silesian Landschaft was the first of these, receiving royal assent on July 15, 1770; Silesia had been particularly devastated by the Seven Years’ War.
To obtain credit from the landschaften, borrowers needed to become members of them, but in most regions, membership in the local landschaft was compulsory anyway. The borrowers obtaining credit from the landschaften were typically large landowners. Small landowning peasants would be served by some landschaften and also by another kind of financial institution, rentenbanken, though in the latter case only after the mid-19th century.
Through the creation of a new bond security, called pfandbriefe, landschaften lent money to nobles against the value of their land. Valuation was conducted by an assessor who relied on either the most recent sale price or the estate’s net profit to determine the value. Loans were made in amounts up to half the valuation or up to twenty times the annual profit. If the last sale price was relied on in producing the valuation, then the loan amount could be less depending on how long ago the referenced sale occurred. These loans could not be called in early by the landschaft. Also, there was no amortization of the loans early on; borrowers’ regular payments just covered the interest.
However, if payments were missed, landschaften could foreclose on estates. Earlier mortgage laws had created an effective system for securing loans with land in Prussia. Though landschaften made minimal use of this ability very early on, when it was done, selling estates usually resulted in a full recovery on defaulted loans. In addition to an attorney that would handle these matters, landschaften were comprised of an elected board of directors. Only the chairman of this board, the generallandschaftsdirektor, besides the attorney, was a salaried manager.
Pfandbriefe
Landschaften sold bonds, called pfandbriefe (singular: pfandbrief), to investors. More precisely, when a loan was approved, the landschaft would issue a pfandbrief to the borrower. That borrower could then either sell the pfandbrief back to the landschaft, which would then sell it onward to investors, or the landowner-borrower could place the pfandbrief with an investor himself. The bonds generally yielded around 4% split into two semiannual payments; this cost of capital, plus 1% for administrative costs, was borne by the landowner-borrowers.
Pfandbriefe were jointly backed by all members of the landschaft issuing the bond, in addition to a particular landowner borrowing under the loan and the institution itself. Landschaften also maintained a reserve fund; in the case of the Silesian Landschaft, Frederick the Great himself put up 200,000 Prussian talers to create its reserve fund.
While each pfandbrief that was issued noted the estate which it financed, the fact that all of the bonds were cross guaranteed and collateralized by the estates in the entire region meant the identity of the exact estate mentioned on the bond mattered little. However, in the event of nonpayment, investors were first required to seek remedies through the courts against the borrower before making a claim against the relevant landschaft and its members. Still, joint liability gave members an incentive to be conservative in the organization’s lending, and because all borrowers were given the same loan terms, by extension, to be conservative in their own borrowing from the landschaften as well.
All this helped pfandbriefe come to be regarded as investments as safe as government bonds. The adoption of pfandbriefe was further supported by standardization; even to fund larger loans, the bonds were usually issued in denominations of between 20 and 1,000 talers. This divisibility enabled a large market for pfandbriefe to develop. The finance minister introducing the first landschaften, Johann Heinrich Casimir von Carmer, had intended for the bonds to circulate like money, a possibility that could not be realized by the old privately negotiated loans.
The demand for pfandbriefe meant that, over time, it became easier for the bonds to be sold to investors by the borrowers themselves rather than the borrowers requiring the assistance of the landschaft to find an investor. The securities were bought by urban merchant bankers. Their standardized design allowed a secondary market to develop, one in which the bonds were traded after being issued. In time, they came to trade at a premium which meant that the actual yield to investors was less than the 4% interest paid by the borrower. When they were trading at a discount, the landowner-borrowers could repurchase pfandbriefe in the open market to retire their debts, in addition to simply paying in cash.
Land Speculation
Since landowners were jointly liable for the loans of their peers, they may as well take advantage of the loans offered by the landschaften themselves. There was substantial interest in the credit now on offer. Some 54 million taler were lent by the landschaften prior to the Napoleonic Wars. In East Prussia alone, the number of mortgaged estates grew from 133 in 1790 to 308 in 1798. Unfortunately, rather than use the money towards improvements that would enhance the productivity of an estate, many landowners bought more land to expand their holdings instead.
After the credit provided by the landschaften became available, estates changed ownership more often than they had in the past. Some changed hands five times within the span of five years. With more money at hand, buyers could pay more for land. Land values rose in the late 18th century. By 1790, the estimated value of all estates in Silesia had doubled compared to 1770. By the beginning of the 19th century, the value of estates in Brandenburg had quintupled in a half century.
New Wars and Financial Distress
The new system of mortgage finance would be tested by the return of foreign armies in Prussia. During the Napoleon Wars, French armies occupied, transited through, and were provisioned by the estates of landowners who had borrowed from the landschaften. Napoleon relied on lands in Prussia to supply the Grande Armée fighting in Russia starting from 1812. During this dislocation, yields on pfandbriefe rose as prices for existing pfandbriefe fell to about half of their face value.
Already by 1807, many landowners were in distressed financial condition, so much so that the Prussian government instituted a moratorium on debt repayments in May 1807 and these became reoccurring. In some regions they would be extended until 1832. The same sort of action had been resorted to during the Seven Years’ War. The action likely caused the number of loans in arrears to rise. The war and moratorium froze credit; in East Prussia, the volume of pfandbriefe outstanding stagnated after 1807.
The state was also in need of credit for its own purposes. To this end, Prussian state landholdings were included in the service areas of landschaften in Silesia and East Prussia. This allowed the state to request loans from the landschaften and issue pfandbriefe. The money borrowed was used to refinance war debts. This maneuver was only feasible because the market for pfandbriefe had recovered enough with the end of the war; prices for the bonds in the market had returned close to face value.
When the Napoleonic Wars came to an end, there were successive good harvests that were no longer disrupted by the movements of armies. The abundant harvests gave rise to an agricultural depression in the 1820s. It was worsened by protectionist laws in Britain which reduced Prussian exports of grain to that market. So, more loans turned bad and the market price of pfandbriefe fell again in the early 1820s.
Amidst the strain, foreclosures by landschaften became common. In East Prussia, the local landschaft made use of this when overdue interest on a loan grew to 5% of the loan’s principal amount. Whether initiated by the landschaft or others, there were 257 foreclosure sales in East Prussia between 1806 and 1829. In that province, a quarter of estates were foreclosed on during the rough years and another quarter were sold onward to buyers outside the family of the prior owner.
The period was a transformative one for the landed elite in Prussia as many estates were acquired by commoners. Also, landownership by nobles became more concentrated as others were driven out of the industry and economies of scale encouraged consolidation. As for mortgage financing in Prussia, another effect of the crisis was the adoption of amortizing loan structures by more landschaften. Indeed, despite the rural downturn, the mortgage institutions and their securities survived and new landschaften were formed afterwards both in Prussia and elsewhere in Germany.
Lesson
The landschaften were devised in response to a war that ruined many Prussian landowners. The new credit may have opened new possibilities for borrowers. However, it did not supply new resilience. That new rural credit was important to repairing the estates of Prussian landowners isn’t an incorrect judgement; indeed, if the money was put to productive uses, the resilience of a landowner’s financial position could have very well increased, despite the indebtedness. However, if the debt is not used like so, or the return on the investment is less than the cost of borrowing, such a benefit of borrowing is never realized. Unless new credit is put towards sufficiently productive ends, debt reduces the resilience of a debtor, even in the face of very familiar crises to which the borrower should be accustomed.
More from the Tontine Coffee-House
Read about a similar mortgage institution, Chile’s Caja de Crédito Hipotecario, and a post-war agrarian recession in the 1920s. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Bauer, Walter. Agricultural Credit in Germany. Farm Credit Administration, Washington, D. C., 1940.
2. Cherkīnskiǐ, M. The Landschaften and Their Mortgage Credit Operations in Germany (1770-1920). Rome, International Institute of Agriculture. Bureau of Economic and Social, 1922.
3. Colligan, Daniel C. The Origins of German Industrialization: The Transition to Capitalism in Prussian Agriculture. The City University of New York, 2025.
4. Wandschneider, Kirsten. “Landschaften as Credit Purveyors—The Example of East Prussia.” The Journal of Economic History, vol. 75, no. 3, Sept. 2015, pp. 791–818.
5. —. “Lending to Lemons: Landschaft Credit in Eighteenth‐Century Prussia.” Housing and Mortgage Markets in Historical Perspective, edited by Eugene N. White et al., University of Chicago Press, 2014, pp. 305–25.
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