Russia, Austria-Hungary, Portugal, the Latin Monetary Union, Germany and Switzerland

The Bank of Russia

Paper currency was first issued in Russia in 1768. It was offered greater convenience than the copper money, which it represented in the form of paper. These notes, which were called assignats, were seen in Russia as a certificate for copper.  A decree issued on January 10, 1774 set 20,000,000 rubles as the limit for the issue of paper money. This limit was raised to 100,000,000 rubles on June 26, 1786 for funding the country’s war with Turkey.

On July 1 1839, the government set the value of paper rubles at three-and-a-half to a ruble of silver to reduce the volume of paper currency. It also decreed the introduction of bills of credit, a new form of paper. The new bills were to replace the assignats on June 1 1843, and these paper credits were secured against a metallic reserve of 70,464,245 rubles deposited in the citadel of St. Petersburg in December 1844. The new bills did not fall below the par value before the Crimean War. Meanwhile, more paper credits were issued before the alliance with Austria to suppress the insurrection in Hungary.

The Bank of Russia was established in 1860 to help the country deal with the problem of debased monetary standard. The reserves of several other Russian banks were transferred to its vaults for this purpose. This helped in the consolidation of credit circulation, similar to the manner in which this was done by the Bank of England and by the banks of New York under America’s National Banking System. Under this system, smaller banks entrust their reserves with a bigger bank, which may or may not be a reserve bank or a national bank.

The Bank of Russia’s initial capital was 15,000,000 roubles. The government held the entire ownership and management of the bank, while private depositors were assured of the safety of their funds. In 1863, the bank witnessed a massive loss of coins during that year’s bank run. The bank took various measures to stop the drain of coins and the government ultimately issued a decree to stop the convertibility of bank notes in November that year. In 1862, the bank was given treasury funds free of interest to buy lands for the peasants.

Moscow and St Petersburg were the main beneficiaries of the expansion of credits, while the provinces faced a lack of capital and currency due to the presence of one big bank.

In 1876, the ruble was valued at 330 francs. The threat of war with Turkey and the issuance of new paper money led to a significant depreciation in 1877, dropping the ruble to as low as 234 francs, a decline of over 41%.

More paper money was issued by the government to provide resources for the war with Turkey in 1877 and 1878. The government issued more notes in 1879. This was followed by a famine and a decline in exports. The government responded by issuing a decree to reduce the debt to the bank to 400,000,000 rubles. Some of the paper money accumulated with the bank was ordered to be destroyed. The statutes of the bank were renewed in 1894, and the new statutes, promulgated on June 24, 1894, declared that the bank’s objective was "to facilitate, by means of credit for short terms, the movement of commerce and to promote the success of national industry and agricultural production." The maximum loan for a retail merchant was set at 600 roubles. It was set at 500,000 roubles for an industrial enterprise. The government also took active measures to help peasants and develop the country’s resources and productive power. Private enterprises in other European countries undertook these measures.

The accounts of the Bank of Russia were prepared, like the Bank of England, through the separation of the issue from the banking department. The bank had 107 branches towards the end of 1895.

Austria-Hungary

Vienna Banco del Giro, the first major banking institution in Austria, was established in Vienna in 1703 as a solution to the problem of debased currency. The bank had an initial capital of 7,000,000 florins and took deposits from individuals.

The Austrian Empire was at a critical stage of its history in 1761 as the influence of Frederick the Great was increasing in Germany. The empire began issuing bills ranging from 20 florins to 100 florins to help small capitalists with investment opportunities. It issued notes again in 1769 and 1771 to expand commerce in the empire. The paper currency was made legal tender after the excessive issue of notes caused panic among the people in 1797. This resulted in the gradual disappearance of coins, which were at a premium of 13% in December 1799. The problem became more severe after Napoleon took several of Austria’s Italian provinces, where bill owners began converting their issues to coins.

By 1806, the paper was circulating at half its nominal value in silver. To restore the funds, silver vessels, jewellery, and even the decorations of the churches were transferred to the treasury. Public finances were restored after the peace treaty, which followed Napoleon’s victory at the Battle of Wagram in 1809 and his marriage with Archduchess Maria Louisa, daughter of the Austrian Emperor. In 1811, existing notes were reduced to one-fifth of their value. The government promised that it would limit the issue of new notes, but the new notes began depreciating from the day of their issue.

To remedy the public distrust and business paralysis, the National Bank of Austria was founded in 1816 with an initial capital of 110,000,000 florins. The bank had a monopoly on discounts and the issue of notes. The war contribution by France, following its defeat, was used to retire some part of the paper money in circulation and increase its value. In 1840, the bank had to deal with a bank run by taking a coin loan from Vienna’s private banks. The bank’s charter, which was due to expire in 1842, was renewed until December 31, 1866. The Hungarian Revolution of 1848 caused a massive bank run, which reduced its coin reserve to 70,240,000 florins. The bank suspended payments in coins after a government decree issued on June 20, 1848, which made bank notes a legal tender. More notes were issued in the following months, while gold and silver began to disappear from circulation. In the middle of 1849, the bank notes were depreciated to about half their nominal value. The bank declared that it cannot give out more loans and began adjusting and consolidating its existing debt. On April 29, 1859, the bank stopped redeeming its notes during the country’s war with Italy, for which the government sought funds from the bank. This demand was met by issuing more notes.

Banking in Portugal

In Portugal, the privileged classes managed to avoid paying taxes, while the country’s involvement in wars due to its alliance with England led to severe financial strain. In response to this crisis in 1797, the government resorted to the troubling measure of issuing paper money to stabilize the economy. During the French invasion in 1807, 22,500,000 worth of paper cruzades were in circulation. These circumstances led to the establishment of the Bank of Lisbon in 1822. The bank was forced to suspend payments in 1828. By 1847, when France, England and Spain were facing a severe economic crisis, the Government owed the bank vast sums of money without any security. The Bank refused to take back its notes presented to it by its clients and the Government forced paper money for three months. The premium on gold increased to 37.5%.

The Bank of Portugal was formed in 1846 after the merger of the Bank of Lisbon with the Companhia de Confiança Nacional, another financial institution almost ruined by the Government. The bank’s capital was 10,000 contos and it received the exclusive privilege of issuing bank notes in the kingdom for 30 years. The bank took the assets, liabilities and a large share of paper money of the two old banks and soon began giving out huge sums as loans to the government. The government established a fund and gave up its revenues as guarantee for its loans. It took another loan of 4000 contos in return for payments from the company holding the Soap and Tobacco monopoly.

In a decree issued in 1850, the government reduced the bank’s capital to 8000 contos and restricted its privilege of issuing notes to the district of Lisbon. In 1852, the government began deflecting the fund’s money to public works and also began taking the monthly instalments that the bank received from the tobacco monopoly.

As a result of the decree of 1850, six new banks of issue were established between 1856 and 1864. In 1883, the Bank of Portugal urged the government to remove the tax on gold coinage. It argued that the protection of metallic currency adversely impacted the exchange rate. The monetary reforms were implemented by the government, and around this time, it also withdrew old copper coins, which were taken by the Bank.

On January 31, 1887, Senhor Marianno de Carvalho consolidated the eight Portuguese banks that were issuing bank notes.

A law passed on June 29, 1887 offered the Bank of Portugal a monopoly of issuing bank notes throughout Portugal with the condition that should the bank refuse the offer, it would also have to forgo its exclusive right of issuing notes in Lisbon. After extensive discussions, the Bank of Portugal and the northern banks reached an agreement in June 1891. This required the northern banks to stop issuing new bank notes and withdraw the existing ones. The Bank of Portugal was also required to advance the banks a sum of 2000 contos without interest.

In 1890, the revolution in Brazil made the monetary situation in Portugal very critical as the latter had a lot of capital invested in Brazil. The remittances and returns from Brazil were sent to Portugal through financial institutions in London. A severe crisis broke out after the country’s commercial relations with Brazil ended. The country soon went into bankruptcy and was not able to repay two-thirds of the interest on its debt. Many Portuguese banks suspended payments and the exchange value of Pence per Milreis was down by about 21%.

The Latin Monetary Union

France, Switzerland, Belgium and Italy formed a monetary union in 1865. This Monetary Convention of 23 December 1865, also called the Latin Monetary Union, was based on the convenience and simplicity of the French monetary system and its decimal basis.

Germany

The Bank of Prussia was established on June 17, 1765, under the name of Royal Bank of Loans and Current Accounts at Berlin, with a capital of 1,000,000 thalers. Initially, it functioned solely as a state institution and most of the bank’s deposits during its early history composed of those made by the government. It remained a state entity until 1846, when the demand for capital for railways and expanding commercial relations prompted a shift towards private funding. The money lent to the state increased steadily and this amount reached 1,897,800 thalers by December 1867. Despite the shareholders’ rights, the government continued to have a firm grip on the direction and management of the bank. The Bank of Prussia, along with various other German banks, engaged in the practice of providing loans secured not only by bullion and securities but also by merchandise. The reserve of the Bank, valued at approximately 1 point 9 billion marks in 1875, comprised various assets including gold and silver coins, bullion, public securities, bills of Prussian private banks, and securities payable on sight. Until 1869, drafts were also part of this reserve. It had 167 branches in 1875.

The banknotes in Germany and the US were not legal tenders. There were different kinds of coins and banknotes in different German states, which led to higher and multiple exchange rates. The gold standard was first formally recommended during a commercial convention held in Berlin from October 20 to October 23, 1868, in which 119 German cities participated. The Act of December 4, 1871, established a uniform coinage and introduced a new unit called the mark, valued at one-third of a Prussian thaler. The new coinage laws ended the career of the old Bank of Hamburg, which existed for over 250 years. The Royal Bank of Prussia was ordered to cease operations on December 31, 1875. Its rights and privileges were transferred to a new institution called the Bank of the Empire or Reichsbank.

The German Empire was established in 1871 after the south German states joined the North German Confederation. Paper currency was used in most of the cities in the North German Confederation, and there were 33 banks of issue, which differed from each other in terms of obligations and limits of issues. Some German states were using the thaler system of coinage, while others used the gulden system. All German states followed the silver standard. A law passed in December 1871 laid out terms for the unity of coinage, while another law passed in July 1873 introduced the gold standard. Another law, passed in April 1874, ended the use of paper currency issued by different German states, and introduced imperial treasury notes. These notes were not a legal tender and the German states were authorised to distribute the notes and replace their local issues with the new notes.

In 1875, the Reichsbank was established as a central bank and kept under the direction and supervision of the imperial government.

The government also laid out a uniform set of regulations for all the banks of issue and also subjected these banks to imperial supervision. The Bank was mandated to carry out various financial operations for the imperial treasury, including receiving and making payments, all without any compensation. Additionally, it was responsible for managing the financial transactions of the Empire’s states free of cost. The right to issue notes was given to the Reichsbank and 32 other independent banks of issue that were incorporated into the new system.

The maximum amount of notes that can be issued without cash backing was set at 385,000,000 marks. For the notes issued beyond this limit, the banks should have cash in the form of gold Bullion, German coin, foreign gold, imperial-treasury notes and the notes of other banks. Notes issued beyond the set limit and not backed by cash was taxed at 5% per annum. These measures gave bank notes a solid basis of specie. From the beginning, the bank was expected to gradually become the only bank of issue in Germany. This purpose was indicated by a law of April 30, 1874, which required the discontinuation of the paper money issued by the various states before July 1, 1875. There were several other legal provisions that discouraged other banks from issuing notes. Fifteen of the thirty-two banks outside the Bank of Prussia chose to forgo their rights to issue currency due to new legal requirements. Instead, they transitioned to operating as private banks focused on discounting and deposit services. There were only six banks of circulation remaining at the beginning of 1896. 

In 1893, the bank increased its interest rates due to increased demand for money. By 1900, the Reichsbank had 240 bank branches in the German Empire.

Banking in Switzerland

Before 1834, there was no bank of issue in Switzerland. Before this time, there were numerous private banks, especially in Geneva and Basel, which served the country’s financial needs. The advent of railways in Switzerland made a single and large capital and free circulation of its credit representatives an acute necessity.

The establishment of the Cantonal Bank of Berne in 1834 was followed by the Bank of St Gall, the Bank of Zurich and the Eidgenössische Bank. Many more banks were founded in the following decades. All these Swiss banks were largely modelled on the Bank of France. Capital funding for these banks came entirely from shareholders or from a combination of shareholder contributions and financial support from the canton where the bank’s main office is located. These banks were engaged in the issue of bank notes, payments of cheques and drafts against bank credit, opening of accounts without interest, discounting of bills of exchange and other commercial papers, and collection of such papers for individuals or organisations. The Eidgenössische Bank, established in 1864 by a syndicate of French capitalists, played an important role in the general diffusion of bank notes throughout the country.

The bank, which had nine branches in the main Swiss cities, reached an agreement with the Banks of Basle, Zurich, and St. Gall, and later with The Cantonal Bank of Berne, the Bank of Commerce of Geneva and other smaller banks, to accept each other’s notes in order to avoid bank charges. This enabled the general circulation of paper money in Switzerland. During the Franco-German War of 1870, France extended the maturities for commercial paper, which prevented Switzerland from collecting its holdings of commercial bills from France. Switzerland, which relied on France for its supply of coins, faced a severe crisis as the banks’ clients rushed to the banks for redeeming their notes that could now be rendered worthless. To protect their metallic reserve, the banks reduced their loans and discount services, which impacted the commerce of the entire country.

The Federal Council responded by asking the banks of Switzerland to furnish statements of their accounts and proposed a reserve fund to meet the requirements of a guaranty and ensure the immediate exchange of paper against coin. The Council also proposed the exchange of bank notes free of charge. These proposals became a law on 18th September 1875. The Bank of Zurich took the initiative of supervising and directing a Central Bureau where all banks maintained an account. The bureau also facilitated the clearing of reciprocal credits. Through this bureau, bank notes received by one bank were sent to the issuing bank. The bank disbursing the money could cover itself through the Central Bureau, where all banks maintained a current credit account. The bank receiving notes from other banks could also demand payment in coins.

In 1881, another law was enacted to remedy issues related to the quantity and quality of banknotes and the insufficient guarantee of these paper issues. The law made each bank responsible for its own paper notes and brought these banks under the supervision of the Federal Council and under the control of the Department of Finance.

The law was not able to stop complaints against the banks and even the Bank Inspector highlighted the dangers of small metallic reserves of the banks on multiple occasions. Later, discussions focused on the need for a monopoly of issuing notes. At that time, private banks were given the monopoly of issuing notes in other European countries except Russia, where the Imperial Bank of Russia had the monopoly on issuing paper currency. Finally, Banque de la Confédération Suisse, or The Bank of the Federation, was established with the authority to issue banknotes of 50, 100, 500 and 1000 francs. Headquartered in Berne, the bank was exempted from all cantonal taxes and kept under the control of the Federal Government and supervision of the Federal Assembly.