These paragraphs from the CCC do a good job of clarifying what is meant–and what is not meant by religious liberty.
**2108 **The right to religious liberty is neither a moral license to adhere to error, nor a supposed right to error,37 but rather a natural right of the human person to civil liberty, i.e., immunity, within just limits, from external constraint in religious matters by political authorities. This natural right ought to be acknowledged in the juridical order of society in such a way that it constitutes a civil right.38
**2109 **The right to religious liberty can of itself be neither unlimited nor limited only by a “public order” conceived in a positivist or naturalist manner.39 The “due limits” which are inherent in it must be determined for each social situation by political prudence, according to the requirements of the common good, and ratified by the civil authority in accordance with "legal principles which are in conformity with the objective moral order."40
37 Cf. Leo XIII, Libertas praestantissimum 18; Pius XII AAS 1953, 799.
38 Cf. DH 2.
39 Cf. Pius VI, Quod aliquantum (1791) 10; Pius IX, Quanta cura 3.
40 DH 7 # 3.
It also bears pointing out what is not allowed (which is what was condemned by Pius VI, and Pius XI above):
In their day, the government would make legal proclamations on religion (hopefully, that Catholicism was true). But, in their days, the governments began asserting that it didn’t matter what religion you partook of, they were all the same, and that man had a moral license to believe whatever he wanted. They also clung to the Liberal idea that the government could in no way and for no reason whatsoever hinder anyone’s actions as long as they did not infringe on the liberty of another–regardless of the common good. This rule would apply to the Church as well! It would take away the freedom the Church to govern her own people in matters of religious belief and pracitce!
Likewise, government was to be run on a purely naturalist or rationalist basis, without regard to God or Truth. Of course, this is completely wrong, and our current Holy Father, Pope Benedict XVI has spoken out against it many times (like
here).
On the other hand, the Second Vatican Council was not writing in response to radical Liberalism, but rather radical totalitarianism (such as was found in the Communist regimes.). They allowed absolutely no liberty to anyone with regards to religion, regardless of the common good. The religious liberty developed by the Second Vatican Council was not what the radical Liberals of the 18th and 19th centuries developed (that all religions were the same and that man had no obligation at all towards the true religion–in fact, no religion was true to them).
The Second Vatican Council fathers dealt with the idea that man’s coming to the true faith must be free from external constraints and coercion–since no man can come to Christ unless the Father draws him. It still affirmed that there is only one true faith that all men are bound to come to–but states cannot force the true faith on individuals. This is the constant teaching of the Church. This includes not forbidding religious practices–within due limits–those due limits have traditionally been understood under Thomist principles concerning the common good. Pope Bl. Gregory X, and the Council of Constance and Pope Martin V, all dealt with these issues, excommunicating people who molested the religious practices of Jews, in the Empire, and pagans in Poland, respectively.
Different historical situations and make-ups of societies have necessitated more or less restraints. St. Thomas, for example, argued for restraining those Catholics who became heretics, but not Jews and pagans who had yet to be enlightened with the true faith. This same sentiment was put forth by Pope Paul III concerning the Indians in the New World versus the heretics in the Old World who were causing massive social disorder and violence.
In practice, religious toleration and religious liberty reach the same result, just from two different approaches. People of false religions are morally obligated to the true faith, but they won’t be molested as long as the common good does not suffer.