Front Page Titles (by Subject) SECTION II.: INTRODUCTION OF PAPER MONEY. - A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.)
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SECTION II.: INTRODUCTION OF PAPER MONEY. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 2 A History of Banking in Great Britain, the Russian Empire, and Savings-Banks in the U.S.
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INTRODUCTION OF PAPER MONEY.
Beginning of Note Circulation—A Sound Issue of Assignats—An Unsound Issue of Assignats—The Volume Inflated for War Purposes—Ruinous Depreciation of Notes—Hoarding of Silver—A Ukase Against Exportation of Silver—Remedial Measure—Failure to Fund the Assignats—Assignats made a Legal Tender—Count Cancrine’s Financing—Origin of the “Credit-Rouble.”
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.
[* ] St. Petersburg, 1866.