Lending to Lemons: Landschaft Credit in Eighteenth-Century Prussia

This chapter describes the emergence of cooperative mortgage credit associations, called 'Landschaften' in 18th century Prussia, and thereby tells the history of mortgage-covered bonds. Landschaften facilitated the refinancing of loans for Prussian estates by issuing covered bonds (Pfandbriefe) that were jointly backed by their members. Landschaften were public institutions that did not have a profit motive and, except for reserve funds, did not hold their own capital. They relied on dual recourse, cooperative structure, joint liability, and local administration to overcome asymmetric information problems related to lending. Their emergence serves as an example of financial innovation in historical mortgage markets. Pfandbriefe exist to this day and are known for their security. Their longevity is attributable to some of their historical features.