Interest rates, regulations, and prohibitions. Finding a well-functioning loan system is not easy. Today’s loan market has evolved over time and is likely to continue changing. Explore credit in this economic-historical deep dive with a focus on 19th-century Gothenburg.
In the 1700s Sweden was a cash-free society – quite simply because cash was in short supply. Back then, money could actually run out. But there was an alternative: promissory notes, IOUs that stated how much money one person owed another.
At the beginning of the 1800s a number of countries in Europe were at war. France tried to force other countries to stop trading with Great Britain. When the French forced Denmark into this Continental System or Continental Blockade, the British bombarded Copenhagen. When Sweden was forced to join the system in 1809, many people were worried but in Gothenburg not a single shot was actually fired.
In the 1820s Gothenburg received an emergency loan from Stockholm. After the wars in Europe, Gothenburg had ended up in an economic crisis. Someone who wanted to borrow money for their daily activities, such as a shop owner, could go to the newly opened savings bank, Göteborgs Sparbank. It was even more common to borrow from the informal lending market.
In 1820 something totally new opened in Gothenburg: the country’s first savings bank. Its founder was Eduard Ludendorff, an immigrant from Poland. The idea was that Gothenburg residents would deposit their money and then the bank would lend it out. The borrowers would pay interest, some of which would go to the person who had deposited the money. The bank kept the difference.
Banks can be founded because the State wants to regulate lending, help the general public and develop the economy. But they can also be opened for purely business reasons: there is money to be made from lending money.
The banks were not the only source of loans. Many loans were made within the family. The person who needed to borrow money went to a relative or acquaintance. There were also more professional lenders. Today they would be called informal moneylenders. These were private individuals who had excess money from their companies, or had perhaps received an inheritance, which they used as loan capital.
The number of private loans increased during the 1800s from five million in 1820 to 100 million in 1900. Lending was so widespread that it led to the creation of a totally new professional group: the city broker (stadsmäklare). A city broker did not lend his own money but instead surrounded himself with a group of people who were willing to lend.
The informal moneylenders and city brokers were not governed by the central bank’s interest rate. They could therefore quickly adapt their own interest rates, loan periods and other factors according to the economic situation and world events. A good broker also knew the people who lived in Gothenburg. He knew who could be trusted.
Anyone who borrowed money and did not pay it back could be taken to court. Strict regulations prevented people from borrowing money unnecessarily and the penalties were severe. At the beginning of the 1800s a guilty person could end up in jail.