What Kept Pre-Modern Credit Networks Afloat?

Despite having become a cliché, the past is not always a foreign country. When Craig Muldrew wrote in his book, Economy of Obligation, “Increasing consumption and investment in the expansion of production meant that household debt loads grew to levels at which financial failure was an increasingly common experience” (pp. 16-17), he could have been writing about the modern economy. But he was not. He was describing sixteenth-century England. Pre-modern Europe was an economy built on credit. Fiat money did not exist, the supply of specie was insufficient to meet the daily needs of consumers and the trade of merchants, and money was difficult and dangerous to transport and expensive to exchange. As a result everyone, from the poorest to the richest, were implicated in extensive networks of credit.

Without banks, credit agencies, or much in the way of government involvement, we might simply assume that these credit networks functioned on the back of reputation. If credit were so important to survival, then no one would want to get a reputation for being a bad payer and risk being cut off from the credit supply. And indeed both the normative literature, such as sermons and moralizing poems, and the court records of the time emphasize the importance of a good reputation.

But the historical sources also include two pieces of evidence inconvenient to the story of an omnipresent concern with reputation. First, court records demonstrate that a lot of people lied, cheated, committed fraud, and did not keep their promises. Yet we will see these same defendants reappearing in court involved in later transactions.

Second, breach apparently had a different meaning in this period. Late payment, sometimes years late, seems to have been common. And creditors might wait years before pursuing the debtor in court.

These facts do not indicate that reputation was insignificant. Even if failure to pay on time was so ordinary that it did not ruin one’s reputation, refusing to acknowledge debts due did. The creditors of pre-modern Europe were more afraid of secrecy and dishonesty than they were of late or insufficient repayment. And no one wanted to have a reputation for being a fraudster or a liar.

Nonetheless, the evidence of slow payment creates a timing problem in the reputation story. If a shopkeeper extended shop credit to a consumer, who also ran similar tabs with other shopkeepers, and the consumer repeatedly failed to pay on time, and indeed might never fully pay off the tab, then why would anyone continue to extend credit to such a debtor? And yet, they did, routinely. Reputation alone did not tell creditors much about the likelihood of default on a present loan if they permitted default to be such a chronologically remote eventuality.

The complexity of the credit networks in which individuals were embedded raises another problem with reputation. In a society in which everyone used credit, and in which people who had money lent it out—there being limited avenues for investment—my debtor’s credit was only as good as the credit of my debtor’s debtors’ debtors. Knowing the reputation just of my debtor would be of limited use because if one person in the network could not pay his or her debts, it could cause cascading defaults down the line. This helps to explain the tremendous fear with which pre-modern individuals viewed bankruptcy. It also helps explain the importance of a debtor’s community. Debtors needed relatives and friends who would not only vouch for them but would also provide sureties or come to their rescue when payment was due.

Finally, reputation was an easily manipulated source of information. As the novelist and economic writer Daniel Defoe explained in the early eighteenth century, it was possible to ruin someone’s reputation falsely without saying a word. One need merely refuse to answer when asked about the person’s character. Similarly, medieval and early modern lawsuits against purveyors of false accusations demonstrate how concerned people were about the effects of negative gossip.

The evidence thus suggests that to understand how these credit networks functioned we should not look simply at debtors’ desire to maintain a reputation for paying their debts. Other factors were also at play. For instance, one significant driver of lending behavior seems to have been a concern with reciprocity. In these pre-modern communities, today’s creditor could be tomorrow’s debtor. Consequently, it was wise to cultivate a reputation for being generous when one was able to be. This might explain why creditors continued to extend loans to debtors they knew might not be able to pay. The creditors were essentially making an investment in the future goodwill of others in the network.

A second important factor was optimism. Repayment might have been slow, but most people took their duty to repay seriously. Some medieval shop account books indicate that eventual repayment reached over 90 percent, and debtors would confess to widows about unrecorded loans owed to their deceased husbands. (By contrast, estate records also show many loans written off as unpayable). The credit networks stayed afloat as long as everyone in them believed that all debtors would eventually pay off their loans. As the early modern European economy became more complex, and markets more far-flung, this optimism became harder to maintain. At this point, states stepped in to regulate bankruptcy by statute and creditors may have turned more quickly to the courts to resolve their payment disputes.

Last, although creditors inquired about debtors’ reputations, they generally did not rely on reputation alone. They also demanded pledges, sureties, and penalty bonds to protect their investments. They filed lawsuits to coerce settlement and made free use of debtors’ prisons to pressure debtors’ families and friends to pay their debts. These credit networks were simply not built on the faith that debtors wanted to maintain a good reputation.

Credit decisions were both complex and commonplace in pre-modern Europe. They involved small sums and large. The wealthy made loans to the poor, and the poor made loans to the wealthy. Individuals might owe money to dozens of others and be owed money by dozens more. Reputation helped grease this system, but it could not manage it alone.

The preceding post comes to us from Emily Kadens, Professor of Law at Northwestern Law School.  The post is based on her article, which is entitled “Pre-Modern Credit Networks and the Limits of Reputation” and available here.

1 Comment

  1. Stephen Schell

    Wonderful read. It sure supplemented my understanding of why debt, bankruptcy, debtor’s prison, and personal reputation were in the forefront of novels and biographies I have read. It is also a good addition to The Ascent of Money by Ferguson. steve- teacher ret.

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