The Online Library of Liberty

A project of Liberty Fund, Inc.

• A History of Banking In Great Britain;
• Chapter I.: Banking In England.
• Section I.: A Record of Beginnings.
• Section II.: Foundation of the Bank of England.
• Section III.: An Era of National Development.
• Section IV.: State of the Irish Currency.
• Section V.: Failure of Currency Reform—inflation and Reaction.
• Section VI.: The Committee On Banking of 1840.
• Section VII.: On the Bank Acts of 1844 and 1845.
• Section VIII.: Commercial Crises.
• Section IX.: Monetary Panics.
• Section X.: General Conclusion.
• Chapter II.: Banking In Scotland.
• Chapter III.: The Theory and Mechanism of Banking.
• Chapter IV.: Definitions of Economic Terms.
• Chapter V.: The Theory of Value.
• Section I.
• Section II.
• Section III.
• Chapter VI.: The Theory of Credit.
• Section I.
• Section II.
• Banking In Russia.
• Chapter I.: The Early Stages of Money and Credit.
• Section I.: Prefatory.
• Section II.: Introduction of Paper Money.
• Section III.: Financial Reconstruction Under Alexander II. And the Founding of the State Bank.
• Chapter II.: Methods and Operations of the State Bank.
• Chapter III.: Banking Vicissitudes From 1862 to 1875.
• Chapter IV.: The Eastern War Period.
• Chapter V.: Private Banks.
• Chapter VI.: The Bourse.
• Chapter VII.: The Precious Metals.
• Chapter VIII.: Foreign Exchanges.
• Chapter IX.: The Debt and Finances of Russia.
• History of Savings-banks In the United States.
• I.
• II.
• III.
• IV.
• V.

CHAPTER I.

THE EARLY STAGES OF MONEY AND CREDIT.

SECTION I.

PREFATORY.

IN examining the credit system of Russia, the fact that first of all strikes us is that it has always been conducted, if not in accordance with invariable principles, yet at least after a uniform method and one which has conformed to the political policy of the Empire.

The State is the great dispenser of favors, the general manager of all affairs of its subjects. It exercises its control according to its own ideas, but with a very sincere desire to further all those interests of which it assumes the care; to profit by the experiences of other countries, while avoiding their mistakes, and to excel them if possible; but its success has been only such as a bureaucracy, more or less intelligent, is capable of attaining. That the intelligence of this bureaucracy has not always been equal to the mission it has undertaken; that its final aims have not remained constant, but have varied with the controlling powers and their advisers; that the highest interests of the State have often been construed in a sense adverse alike to the dictates of wisdom and the economic progress of the country; that the tutelage exercised by the State over commerce and industry has not always been to their advantage,—all of this will be made sufficiently manifest in the history of the Russian banking system which is to be here laid before the reader.

That system is to-day what it has been for more than a century. The issue and circulation of money are entirely in the hands of the State. There have been brief intervals when emancipation from that control has appeared possible, and even in the way of being accomplished; but they have yielded no result.

Before treating of note circulation as it now exists, it may be well to take a rapid glance at the monetary situation in the period when paper money was unknown.

Such information as is procurable upon this branch of the history is fragmentary, and must be culled from certain personal memoirs rather than from records of incontestable historical value. However, aside from the influence of local peculiarities, the history we are about to sketch is parallel to the experience of all countries.

Until the middle of the seventeenth century there was no copper money in Russia, except one small coin called a “poul.” There were in circulation some gold and silver pieces of foreign origin and some small silver coins of Russian mintage. The Government, which held a monopoly in more than one branch of commerce, sold its merchandise to foreigners for ducats or thalers, and had the receipts recoined at the local mints to its own great profit. About 1650, three new silver coins were introduced which, according to the statements of all the chronicles of the time, partook very largely of the character of counterfeit money, having the appearance but not the weight of coins of an intrinsic value greater than their own. Russian subjects were forbidden to pay out these coins in the purchase of imported goods, the Government fearing that such a course would result in raising the price of imports. Somewhat later, it was deemed advisable to debase even the copper coins, and the difference between their official and real value soon became so great that farmers refused to bring their products to market. A contemporaneous writer states that for 160 copecks the Czar bought enough copper to make coins officially valued at R. 100, thus giving them a fictitious value about sixty-five times as great as their real value.

According to Meyerberg, the Czar put in circulation more than R. 20,000,000 of this money. This traffic, by which the Czar Alexis is said to have gained R. 20,000,000, produced numerous revolts, resulting in massacres and the execution of some citizens. Yet such is the force of actual facts that even a Czar Alexis could not keep his spurious copper roubles at par, and their price, which, up to March 1, 1659, had been 104 copecks at Moscow and 103 at Novgorod, gradually declined. On January 1, 1663, the quotation at Moscow was ten copper roubles for one of silver, and on June 15th it was fifteen at Moscow and twelve at Novgorod. That is to say, the fictitious rouble was valued at only 6⅔ per cent. of par in Moscow and 8⅓ per cent. in Novgorod. A general increase in prices resulted. Naturally the blame was laid upon speculators and forestallers, and many accused of these offences were convicted. Nevertheless, in 1662, the Government acknowledged the force of accomplished facts; but it consulted its own interests even in the readjustment. The copper coins were called in at 1 per cent. of their nominal value; but, inasmuch as their real value was 1.6 per cent., many citizens preferred to keep their copper and turn it into household utensils; so the poorest citizens, who were unable to bear the expense of this change, were the chief sufferers.

Less than a century later, copper was once more called upon to play the rôle of Providence for the imperial treasury. It is said that Peter the Great boasted of having carried on all his wars without contracting a debt. In order to do so, he had found it sufficient at first to debase all the gold and silver coinage, and afterward to issue large quantities of five-copeck copper pieces. These latter gradually drove out the other coins and remained practically the only form of money in Russia until the beginning of the reign of Catherine II.

At this period our sources of information become more abundant and more authentic. We need merely mention, however, that the official debasement of the currency was all the more disastrous because it had as an ally, or rather as a competitor, counterfeiting on private account. An official report of 1740 accuses Russia’s dishonest neighbors, Poles and others, of this treacherous rivalry against the State. No greater indulgence was shown to these malefactors than had been extended a century earlier to those who trafficked in roubles. It was decreed that every person coming from a foreign land and found in possession of copper copecks should be hanged at the frontier. But the culprit usually escaped if he had the good fortune to reach the Senate with an appeal from this grievous sentence. As early as 1730, the depreciation had become so great that the Government itself refused to accept its copecks in payment of taxes; and in 1731 it authorized the public to melt them for domestic uses. There was, nevertheless, some sense of the obligation resting upon the State to redeem at par the copecks it had issued. But the Czar’s advisers constantly protested against the burden which such a transaction would lay upon the Treasury; and, in 1744, they made an estimate of the loss, putting it at R. 4,000,000—an amount much beyond the then available resources of the Treasury. Nevertheless, it was imperative that something be done; and, on May 11, 1744, it was announced that, on and after August 1st, the public treasuries would refuse to accept five-copeck pieces except as the equivalent of four copecks, and that, after October 1, 1745, they would be taken for only three copecks; and a further reduction to two copecks was to become effective on August 28, 1746. No further change was made until 1754. Then it was resolved to issue copper money at the rate of R. 8 to the “pood” (about 36 pounds avoirdupois); and, with this end in view, dealers in copper were forbidden to retain more than one-fourth of their stock. This was almost a return to monetary honesty; for, from 1728 to 1740, the pood of copper had been coined into R. 40. In 1755, the last five-copeck pieces of the old mintage were called in at two copecks each. It had been feared that large quantities of counterfeit money would be brought forward for redemption; but an official report of April 8, 1757, shows that there were presented altogether only R. 3,250,000, or R. 205,723 less than the State itself had issued. Evidently, a large number of persons had concluded to pocket their loss and had melted down their copper money. As for counterfeiters, they found their occupation gone as soon as the coins ceased to have a value that made their manufacture profitable.

SECTION II.

INTRODUCTION OF PAPER MONEY.

NOTE circulation in Russia dates from a rescript issued on December 29, 1768, by the Empress Catherine II. The decree provided for the establishment of two banks of issue, one at St. Petersburg and the other at Moscow, having a right, or rather being commanded, to issue “assignats.” As a matter of fact, the assignats were issued by the State, the banks merely putting them in circulation and redeeming them. This redemption was to be made on demand; all State departments were commanded to accept the assignats at par; and of every payment of R. 500 made to the State at least R. 25 was required to be in these bills. Prompt redemption was assured, because each bank was required to keep on hand an amount of silver equal to its outstanding bills, and each bank redeemed only its own issues. The avowed objects of these issues were, (1) the creation of a more convenient form of money than the silver and copper then in use; and (2) an increase of the circulating medium. The assignats were not made a legal tender, and anyone who chose to do so might refuse to accept them in payments. The new undertaking developed slowly. In 1770, the provincial officers having money to forward to St. Petersburg were requested to send it in the form of these notes, and in 1771 each of the banks began to accept the other’s bills. In 1781-2, branch banks, each having from R. 100,000 to R. 300,000 in assignats, were opened in the cities of Novgorod, Pskov, Tver, Nezheen, Kiev, Koursk, Kharkov, Tambov, Orel, Toola, Kazan, Archangel, Kherson, Riga, and Revel. Yet in 1786, eighteen years after the ukase of Catherine, the total issues were only about R. 40,000,000; and it has been estimated that there were at this time in the country R. 110,000,000 to R. 120,000,000 in Russian silver and copper money, and some R. 10,000,000 of foreign coin, the total circulation certainly not exceeding R. 180,000,000. This, however, must be taken as merely an approximation.

The year 1786 marks the first departure from the prudent system of note issues previously adhered to. By a manifesto of June 28th of that year, the two banks of issue were consolidated with the loan bank of the Empire. At the same time, a new issue of R. 60,000,000 was decreed, R. 22,000,000 of which were to be employed in loans to the nobility, and R. 11,000,000 in loans to cities. The total amount of assignats, this manifesto declared, should never exceed R. 100,000,000; but their redemption could no longer be demanded of the banks, because the circulation was not entirely covered by a metallic reserve, but was secured in part by mortgage loans. A new form was given to the assignats, and very soon, in addition to those of R. 100 and of R. 50, others were issued of the denominations of R. 10 and R. 5. Soon the necessities of the State, arising out of the wars in Europe and the East, impelled it to overstep the maximum limit fixed by the manifesto of 1786. As early as 1790, there was a new issue of R. 11,000,000, and twenty years later (in 1810), the circulation had reached the formidable volume of R. 577,000,000. Aside from the R. 33,000,000 reserved for mortgage loans, all of this money had been devoted to the needs of the national treasury.

Though there was no law giving to the assignats a legal-tender quality, yet in 1793, when the amount in circulation was only R. 124,000,000, there was a variance between their value and that of metallic money amounting to forty-five per cent. It resulted from this lack of legal-tender power that specie, while it had entirely disappeared from the interior of the country, formed in the frontier provinces, Baltic and Polish, practically the only circulating medium. At St. Petersburg, all prices were quoted in assignat roubles, while at Riga business was transacted upon the basis of the Reichsthaler, assignats being in use merely as a supplementary form of currency. In order to check the variance between the value of paper and metallic money, and to prevent the further disappearance of silver from circulation, a ukase was issued toward the end of 1791, forbidding under severe penalties the exportation of any Russian money. On February 22, 1808, the Governor-General of Little Russia was commanded to take such measures as would prevent the Jews from sending silver money out of the country, and in 1809 the order was extended to include even copper. But naturally these measures neither brought silver into circulation again nor put an end to the premium upon it. From 1786 to 1807, the value of that metal, measured in paper, had varied between 102 and 164; in 1808 it rose to 201½, in 1810 to 401, and finally in 1812 it reached 423, so that an assignat rouble was worth only 23½ copecks in silver.

In his work “Das Russische Papier-geld,”* M. Goldmann notes that while this depreciation of paper money resulted in a general increase in prices, the increase was not in all cases proportional to the depreciation. Thus, in 1808, the value of a “last” (about two tons) of rye at Riga was R. 160 and in 1812 it was R. 240; for the same years a “pood” (36 lbs.) of butter was quoted at R. 16 and R. 20 respectively, and a “loof” (2 bushels) of wheat flour at R. 10½ and R. 12; during the interval, however, the rouble had depreciated from fifty per cent. of its nominal value to twenty-five per cent. This variance, however, may have arisen from other causes affecting the value of the articles. Complaints were numerous both on the part of the consumer, who objected to the higher prices, and on the part of the producer, who found the purchasing power of his income less than before. The State also had its grievance, for having determined that the taxes should serve as security for its issues, it was bound to receive the assignats at par; thus the deficit increased in proportion to the amount of new issues, which were intended to stop the increase of deficiencies, but which resulted always in enlarging them. Accordingly, in 1812, the Government resolved to put an end to this “tax-foundation”; in a word, the State refused to recognize its assignats as a legal tender to the Treasury. But, in view of the general situation in Europe, the moment was not favorable for returning to the owners of assignats the whole or any part of the loss which an over-issue had brought upon them.

The lesson had been a severe one. Whatever it could do by decrees and ukases toward helping itself and the people, the State freely did. To begin with, an imperial decree of June 20, 1810, provided that for the future the silver rouble should become once more the only legal money—5 livres 6 zoltonik (about 4½ pounds) of silver, 83⅓ per cent. fine, being valued at R. 100. Subsidiary silver coins of a less degree of fineness were likewise to be a legal tender, and regulations were also made with reference to copper money. At the same time there was appointed an imperial Committee of the Public Debt, its duty being to reduce the circulation and prevent all new issues. To this end, the committee received a “special fund,” consisting of lands and forests, which it was to sell within five years. It began by the issue of a loan of R. 100,000,000 in five series of R. 20,000,000 each, the first being put out on July 15, 1810. This first series was issued in two forms—one falling due in seven years and the other running indefinitely. Subscriptions for the loan payable in 1817 were accepted on the basis of two assignat roubles for one of silver, and the interest was 6 per cent.; for the other, on the basis of 1½ to 1, the interest being 4½ per cent.; in both cases repayment was to be made in silver. The assignats paid in on these subscriptions were to be publicly burned. The promise of repayment at a fixed date resulted in a prompt sale of the new securities, and in May and June, 1812, on the eve of Napoleon’s arrival at Moscow, they were quoted at a premium of 42 per cent.

Thus the remedial scheme was apparently a brilliant success. But the money brought into the treasury by these new creditors was taken out through the doors of the various credit and deposit institutions maintained by the same treasury; so that the State was gaining nothing, but was simply converting a comparatively inexpensive debt into another much more burdensome. Only R. 5,000,000 of assignats were burned, and the four remaining series of obligations were never issued. The State having constituted itself the sole dispenser of credit, could not, of course, demand credit of the public. Once having absorbed in the form of deposits all the available savings of the country, it could not call them a second time to its aid. The attempt to do so was simply a bookkeeping operation; the money was taken out over one treasury counter and paid in over another. We shall meet this same phenomenon again and again in the course of the century; the lesson such operations have to teach has not yet been thoroughly learned.

The system outlined in the ukase of 1810 was promptly abandoned, and there was no further attempt to establish the silver rouble as the only legal form of money. Yet some change was imperatively demanded. It was decreed, therefore, that the Committee of the Public Debt should be intrusted, not merely with the redemption of the assignats, which function had now become a sinecure, but also with the management of all the public debts; that it should pay them with the aid of its “special fund,” and should use the surplus in the redemption of assignats. Its operations were to be superintended by a council partially composed of merchants and having a Grand Duke at its head.

On April 9, 1812, it was decreed by a ukase, amending that of 1810, that taxes might be paid in assignats at the rate prevailing when payment was due; that all contracts with the State or between individuals might be settled upon the same terms, and that all payments stipulated to be made in silver or any other form of money might, at the option of the debtor, be made in assignats at the current rate. This was a legal-tender act with no circumlocution.

It is needless to say that the years 1812-15, those of the French invasion and of the two great wars that carried the Russian armies to the gates of Paris, were not years in which the circulation of assignats could be reduced. On the contrary, it is estimated that in 1817 their volume had increased to R. 800,000,000; after that time, however, there was no further increase. In view of the depreciation which had already occurred (the rouble was worth about twenty-five per cent.), the legal-tender decree did not prevent metallic money from coming into circulation once more. Its position was established, because the value of the assignat was purely fictitious. It remained at twenty-five per cent. until 1820, after which it rose gradually and reached twenty-eight in 1840; thus its value was practically stable. Everyone had become resigned to the depreciation, and business adjusted itself accordingly. The burden of the loss of R. 600,000,000 out of R. 800,000,000 issued had, to a large extent, ceased to be felt with the passing of the generation that had been its victim.

As to the Government, it had in 1817 made a new attempt to raise its assignats to par. In accordance with a manifesto of April 16, 1817, and of imperial decrees of May 10, 1817, and June 16, 1818, the State was to buy up assignats until they had advanced to par, and to this end the Committee of the Public Debt was to receive R. 20,000,000 annually from the Treasury. It was instructed to invite deposits at six per cent., and to use them all for this purpose. In order, further, to hasten the retirement of the paper money, a manifesto of August 16, 1820, ordered that a foreign loan be placed with Baring & Hope for R. 40,000,000, and that this money also should be used exclusively in the purchase of assignats. By these means the paper circulation was reduced from R. 800,000,000 to R. 595,000,000. But the order for liquidation did not last. M. Cancrine, who became Finance Minister in 1823, considered it his first duty to put an end to what he called the “imprudent system” of transforming such a mass of assignats into an interest-bearing debt. From the memoirs of this statesman, who was at the head of Russian finances for a quarter of a century, we learn that he prided himself on having saved to the Russian treasury in this manner R. 18,000,000 per year. The depreciation continued from that time, and the State thought no more of redeeming the assignats at par. Nevertheless, the general peace of Europe was of great advantage to the economic situation; military expenses were less, and Cancrine says in his memoirs that he reduced the annual public disbursements from R. 114,614,147 silver to R. 100,829,053 silver. In 1830, it was deemed safe to revoke the order forbidding the export of the precious metals. They had begun to return to the country, and Cancrine says that the value of assignats rose to 350 after having been for some time at 400 and 380. These fluctuations resulted in the inconveniences and losses to which we have previously referred, for the common people and small tradesmen fell a prey to speculators, who exploited the situation for their own profit. Communication throughout the vast Empire was so imperfect that local speculation in the medium of exchange became an easy matter. Debts would be contracted in one kind of money and paid in another kind, which had been artificially depressed in the meantime for this purpose, or vice versâ. Each province had its own discount, which varied sometimes by ten or twenty per cent. from that of the capital. Decrees were, indeed, issued forbidding all speculation of this kind, but it is needless to say that they were ineffectual, and M. Cancrine himself was at last compelled to admit the necessity of retiring the assignats.

The retirement was accomplished by a series of steps taken between 1839 and 1843. A manifesto of July 1, 1839, amending that of 1810, provided that for the future silver money should be the only legal tender; that all taxes should be estimated and paid in that money, as well as all private debts. At the same time, the ratio between the silver and assignat rouble was fixed once for all at 1 to 3½, and all persons were forbidden to deal with them at any other ratio or to give to silver a higher value under the guise of a fictitious rate of interest; meanwhile, all debtors were at liberty to make payment in either form of money at the official ratio. Finally, the State treasuries were to exchange R. 100 for any individual on demand. In 1841, a further step was taken by the creation of a new form of note, such as it exists to-day, known as the “Credit-Rouble” or silver-rouble. The last of this series of manifestoes was that of June 1, 1843, decreeing the retirement of all outstanding assignats, amounting to R. 595,777,310, in exchange for the new form of bill, at the rate fixed in 1839, 1 to 3½, the exchange to be completed by January 1, 1848.

As we have just said, the credit-rouble, first issued in 1843, is still the legal tender of Russia. Its chief virtue was that it drove out of circulation a form of money which had become entirely discredited, and the exchange value of which was only 282/7 per cent. of its nominal value. Besides, the new bill was to be exchangeable on demand for specie (silver), and in this respect it was to be on a par with the circulating mediums of other countries.

Has this result been attained? Could it have been? It should be borne in mind that these reforms in Russia’s monetary system were being carried forward at the time when the subject of note circulation was being thoroughly investigated in England, and when the Act of Sir Robert Peel was just giving to the Bank of England its final form, such as it has retained to the present moment. Count Cancrine was thoroughly advised of that investigation and its results. Let us see how he turned them to the profit of Russia.

In the first place, notwithstanding that he was a foreigner, a fault which Russia has never forgiven him, he set to work in a truly Russian manner, carefully retaining in the hands of the State entire control of the circulation and of credits. Not only did the State insist upon its exclusive right to issue paper money, in spite of the sad experiences of the recent past, but it claimed a monopoly also of banking operations properly so called; the discounting of paper and the receipt of deposits were confined to the State Bank, and Cancrine in his memoirs says it is a matter for congratulation that when the Bank was unable to use all of its deposits in loans to individuals, the State itself came forward time and again and borrowed from them to build fortifications, canals, and highways, and for naval and other public uses, thereby supplying the deficiencies of the public revenues.

One is constrained almost to admire the empiricism with which Count Cancrine handled a matter so delicate as the redemption of fiduciary money. In the system we are examining—if it be permissible to call it a system—a beginning had been made in 1839 by the creation of bills upon depositories always exchangeable for specie. These deposits having in a short time increased to several millions of roubles, with few demands for repayment, it was straightway determined that one-sixth of the issue would suffice to meet all demands; accordingly, when bills of credit were issued in 1841, it was decreed that one-sixth of the amount should always be covered by a metallic reserve, the total issue being further secured by all the resources of the State. Thus some R. 30,000,000 was thought to be sufficient to secure the circulation. This is the process by which that conclusion was reached. At the time we speak of and long afterward, it was held as a sort of doctrine in Europe that every bank of issue should keep on hand a metallic reserve representing a third of the circulation. To-day that theory merely causes a smile; but half a century ago it was accepted almost as a dogma. In view of the fact that the new bills during their earlier years had seldom been presented for redemption, Cancrine thought that half of the usual reserve would be sufficient for Russia, and thus he fixed it at one-sixth.

This exchangeability secured to the bills of credit (for such is the name by which they are still known) did not prevent the State from making their acceptance obligatory upon every citizen, that is, from clothing them with a legal-tender power. Thanks to this preventive measure, it has never been necessary to revoke the formula inscribed upon each bill, declaring that it is redeemable on demand. Half a century has gone by since the first issue of bills of credit, and they still bear this promise upon their face, but it is a dead letter. In any event, it could not have been difficult to foresee that the State would not long resist the temptation which the printing press held out to it. In fact, as early as 1849 a supplementary issue of R. 20,000,000 was ordered, and in 1853 another of R. 40,000,000, carrying the total circulation above R. 250,000,000. As a result of the Crimean war and the difficulty of placing loans abroad, a ukase of January 10, 1855, authorized the Treasury to meet all extraordinary expenses by temporary issues of bills of credit; at each new issue the Treasury was to deposit with the issuing office one-sixth of the sum in metal, and these temporary bills were to be retired within three years after the close of the war. It is unnecessary to say that they are in circulation yet. The authority for their issue was rescinded on April 5, 1857, one year after the treaty of peace. The circulation, which had amounted to R. 345,000,000 in September, 1854, to R. 356,000,000 at the end of that year, to R. 509,000,000 at the end of 1855, and to R. 689,000,000 at the end of 1856, had now reached a total of R. 725,000,000. Thus, fifteen years had sufficed to bring to naught the reformatory projects of Count Cancrine. He, however, was no longer Minister of Finance, and the final liquidation of the Crimean war expenses did not devolve upon him.

SECTION III.

FINANCIAL RECONSTRUCTION UNDER ALEXANDER II. AND THE FOUNDING OF THE STATE BANK.

THE reign of Alexander II. (1855-1881) was destined to be one of great reforms. It was not merely the emancipation of the serfs, the opening of the courts to the public, the establishment of the jury system and of judicial elections, the abolition of the monopoly in brandies, and the convocation of provincial legislatures (Zemstvo) that made memorable the earlier years of this brilliant reign. Sound ideas seem to have prevailed also in the domain of economics and finance.

The new regime went seriously to work to release the State from its position as the sole source of credit, and to emancipate commerce and industry from governmental tutelage exercised through a system of institutions entirely under control of the State. Moreover, the Government was no longer anxious to loan to landed proprietors now that the security they offered was about to disappear. The basis of landed credit had been the number of “souls,” of serfs, dwelling upon the estate mortgaged. The emancipation of these in 1861 was going to put an end to that security, and nothing would be left upon which the State could safely base a loan. The contemplated reforms began vigorously at this point, and the first step was to clear the ground of those institutions through which the State had acted as the chief lender, and also as the chief borrower, of the Empire. These institutions were of two classes; those acting under the supervision of the Minister of Finance and the Committee of Credit Establishments, and those in charge of the Imperial Board of Education.

In the first category were: (a) The Sinking Fund Commission, whose duties are indicated by its title; (b) the Imperial Loan Bank, which received deposits on interest and loaned them on country and city real estate for terms of ten, twenty-eight, and thirty-three years; (c) the Imperial Commercial Bank, which received deposits on interest, both for transfer and for safe-keeping, and loaned on securities, merchandise, and public funds; and (d) the bureau for the issue of bills, whose duties are indicated by its name. The Imperial Board of Education had under its charge: (a) the trust depositories (caisses de dépôts et de consignations) at St. Petersburg and Moscow, receiving deposits on interest and loaning them for long terms on real estate and public funds; (b) the widows’ banks; (c) lombards, loaning on personal property, jewels, etc.; (d) the savings-banks. Thus it appears that every transaction having any reference to borrowing or lending was under the control of some State institution, and for all those charitable and credit establishments the Treasury was responsible. It is needless to dwell at length upon the fatal defect of this system. As a matter of fact, the State was in a position of chronic insolvency, for deposits payable on demand or shortly after demand were secured only by long-term loans, not to speak of the very serious inroads which the needs of the State itself had made upon those deposits. The credit establishments having undertaken to pay interest to depositors at a fixed rate, and the war having increased the mass of bills of credit by nearly R. 500,000,000, this strange anomaly presented itself in 1857, that the State had in its coffers some R. 180,000,000 of deposits on interest for which it could find no employment.*

An imperial decree of July 20, 1857, reduced the interest rate from five to four per cent. On January 5, 1859, the various State institutions had outstanding loans aggregating more than R. 1,038,000,000, of which R. 37,900,000 were for less than a year, R. 31,400,000 for one to fifteen years, and R. 969,000,000 for more than fifteen years. The bank reserves aggregated R. 68,800,000, against which individual depositors had claims amounting to R. 725,100,000, while there was due to the national treasury R. 242,000,000, or R. 967,100,000 in all. Thus the reserves represented less than one-fourteenth of the claims against the banks, and even if the State had been willing to waive its demands there yet remained R. 725,000,000 of claims covered by a reserve of R. 68,800,000, or less than ten per cent., and part of it was in public funds. The practice of loaning on mortgage was stopped; the interest on deposits was reduced to two per cent.; and temporary deposits, payable on demand, were changed into deposits for a long term by the issue of four per cent. State bills (March, 1859). This change not proving acceptable to depositors, five per cent. bills were offered to them in September, 1859, payable in thirty-seven years and obtainable only in exchange for certificates of deposit. These measures and a long list of other conversions and new issues, together with a sterling three per cent. loan of £7,000,000, were partially responsible for the floating debt which weighed upon the State through the instrumentality of its various fiduciary establishments. By the close of 1859, this debt had been reduced by R. 638,555,023, and then stood at R. 328,550,000. At this point, the State may be said to have emerged from the worst of its difficulties, for about half of this last amount consisted of deposits belonging to corporations, municipalities, and public institutions, which were not likely to demand immediate payment. A year later (December 31, 1860), these deposits had been reduced to R. 191,900,000.

The liquidation of the past being thus nearly completed, the next step was the founding of the State Bank by the ukase of May 31, 1860, in its present form, barring such modifications as were made in 1894. The laws under which it was formed aimed to make it an essentially commercial establishment. It was forbidden to loan on mortgage security, and was to conform closely to the practice of the Bank of England; acting as cashier for the national treasury, but having no other connection with it. There was to be no secrecy about its operations, its balance-sheets were to be published weekly and delivered to all applicants. So great was the desire to make of the bank a credit establishment, modeled after the best European institutions, that it was given a capital stock of R. 15,000,000 and a reserve fund of R. 3,000,000, in spite of the fact that all its liabilities were guaranteed by the State. A résumé of the Bank’s regulations is here presented; which need be but brief, as the new regulations adopted in 1894 will be stated on subsequent pages.

In 1860, the State Bank was founded to invigorate commercial undertakings and to consolidate the note circulation (Art. 1); and, to that end, it was provided (Art. 2), with the aforenamed capital of R. 15,000,000 and a reserve of R. 3,000,000, backed by all the resources of the State treasury. Its profits (Art. 3) were to be devoted to the payment of the five per cent. Bills of Credit and the amount loaned by the State to the former credit institutions, as well as to establish a reserve against possible losses. It was forbidden to use individual deposits for State purposes (Art. 9). Idle funds in the hands of State or provincial departments were to be kept on deposit with the Bank (Art. 12). The Bank was empowered to buy and sell State securities, but the total amount on hand should never exceed its capital stock.* The State was to be responsible, to the full extent of its resources, for all the undertakings of the Bank, and rentes were to be delivered to the latter to enable it to pay the amounts borrowed by the State from its depositors, the Bank being primarily liable for these (Art. 16). Commercial loans and discounts were not to be made for a longer term than nine months (Art. 23). No bills were to be discounted unless they represented a commercial transaction (Art. 27). It was made the duty of the courts to facilitate the sale of goods belonging to insolvent debtors of the Bank (Art. 39). The Bank was authorized to buy gold and silver at home or abroad (Art. 40). It could accept deposits for safe-keeping (Art. 48), or on accounts current (Art. 53), and deposits on interest (Art. 60). Every change in the conditions under which these deposits were received was to be published one month in advance (Art. 63). The Bank could loan on public funds, on the precious metals, and on merchandise (Art. 71); but these loans were not to exceed seventy-five or at most eighty-five per cent. of the value of the security as shown by bourse quotations (Art. 73). Upon certain classes of merchandise, the loans were not to exceed fifty or sixty per cent. of the value; and the term of the loan was to be not less than one nor more than six months (Art. 89). All the executive officers of the Bank were to be appointed by the State; but representatives of the nobility and of commerce were to be admitted to the directory, with a deliberative voice regarding certain transactions.

In order to emphasize the somewhat modernized character of the institution, there was placed at its head, not a public functionary, but an old banker, Baron Stieglitz, a business man whose fortune was such that it should have insured him the utmost independence of action, and who gave up his banking business to accept the position of Governor of the Bank of Russia. He devoted himself entirely to the work, but, unfortunately, it must be candidly said that he was not equal to the task. True, he was no bureaucratist, but still less was he a financier. He was an honest parvenu, humble and timid, very deeply impressed with the importance of his office and the honor conferred upon him, but not sufficiently imbued with a sense of the responsibilities of his new position; or perhaps it would be more accurate to say that he looked at his duty only from one point of view, that of the Government under which he held office. We may dismiss Baron Stieglitz with the remark that he quitted his position in the fall of 1866.

The Baron had as assistant, and afterward as successor, M. Eugene Lamanski, the ablest financier and banker in all Russia; a bureaucratist, indeed, but at the same time a man of education. He was very bold in his conceptions—to some of which we shall have occasion to allude later—but not consistent in their application. Was he the author of the new regulations of the Bank? We believe not; but he was bound to submit to them. The current was then setting in another direction, and M. Lamanski would have asked nothing better than to be allowed to float with it. His aspirations and convictions, founded upon a thorough understanding of the situation, and upon ideas which were entirely modern, had to yield to official exigencies, and he bravely undertook to make of the Bank an establishment modeled, as far as possible, upon European institutions of a like kind. We are about to see him at this work in his first semi-annual report of the business of the Bank. The extract from that report which we present shows that, from the beginning, the Bank was simply a branch of the national administration, and that its commercial business was of very small importance. The former credit establishments were closed, but the Bank had merely taken their place as part of the State machinery, and—the statement is true even at the present time—at thirty-five years from its beginning it has not materially altered its position or its methods.

The next chapter exhibits the condition of the Bank after the first six months of M. Lamanski’s management.

[* ] St. Petersburg, 1866.

[* ] Finance Minister Kniajevitch’s report of September, 1859.

[* ] This regulation has not been observed. At times the Bank has been in possession of public funds aggregating R. 200,000,000.