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• 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 III.

BANKING VICISSITUDES FROM 1862 TO 1875.

IN 1862 the Bank was called upon to conduct the very serious undertaking of putting an end to the legal-tender power of bills of credit and re-establishing a metallic currency consisting of gold and silver. It should be noted at this point that the trebling of the circulation between 1854 and 1857 had not adversely affected the value of paper money. In April, 1857, the paper rouble was quoted at 403 centimes, even above the par value, which was 4 francs. But such a situation could not last. We have seen that on January 1, 1861, the Bank had in its possession a fund of R. 92,900,000, of which R. 8,500,000 was in State securities, against a note circulation of R. 713,000,000. The value of the rouble was bound to be affected by this state of affairs; and it is interesting to notice that the depreciation had been comparatively small, very small indeed, relative to what it has been at various times since (as, e. g., in 1866, 1879, and 1887), to which reference will be made later on. Evidently, the financial world had great confidence in the economic situation of Russia and in the sincerity of her desire for progress in every direction. And such a desire did exist; it was real and sincere, though somewhat naïve and inexperienced, as is shown by the history of the reform undertaken in 1862. The first conception of this reform undoubtedly originated in the fertile imagination of Eugene Ivanovitch Lamanski. As proof of this, the author may cite a pamphlet which appeared anonymously in 1860, and of which only fifty copies were then issued, and those without authority of the censors—that is to say, in manuscript. “The Causes of the Depreciation of Our Circulating Medium and the Means of Remedying It”—such is the title of this tract, the authorship of which there can be now no reason to conceal. After summing up the various steps taken between 1857 and 1859 to retire a large part of the floating debt, M. Lamanski treats of the reform of the Bank, as he understands it, and of the resumption of specie payments. He thus sets forth and sums up his conclusions upon the subject:

We come now to the conditions under which the return to specie payments was to be accomplished. In pursuance of a ukase of April 14 (26), 1862, a loan of £15,000,000 sterling was placed with the London house of Rothschild, the intention being that the proceeds should be used exclusively to build up the fund reserved for the redemption of bills of credit. On the 25th of the same month, a second ukase ordered that the proceeds of the loan should be devoted to the strengthening of the metallic reserve and to the gradual resumption of specie payments. It was provided in the first of those ukases that “the printing and issuing of the bills of credit shall be done by the State Bank and under its authority, and under no circumstances shall they be issued except in exchange for gold or silver.” The outstanding bills were to be redeemed at a gradually increasing valuation, and a notice issued by the Bank, on April 29th, contained the information that, on and after the first of May, the exchange value of the demi-impériale, gold (intrinsic value, R. 5.15), should be R. 5.70, and that of the silver rouble, 110½ copecks; and that, after August 1st, the values should be, respectively, R. 5.60 and 108½ copecks. Thereafter, the valuation was to be as follows:

When the redemption began, the Bank had in its coffers R. 79,000,000, and the circulation aggregated R. 722,000,000, of which the Bank held R. 15,000,000. At first, the demand for redemption was small, amounting to only R. 10,037,000 between May 1 and December 31, 1862. This latter date was just on the eve of the Polish insurrection. In April, 1863, the chief European powers intervened by diplomatic notes, and it was well known that Napoleon III. was eager to interfere by force of arms, provided England and Austria should offer him other than mere paper support. Then the metallic resources of the Bank melted like snow. From January to the end of July R. 45,000,000 of gold were withdrawn; and between the 1st and 3d of August the demands amounted to R. 4,405,000. A loan was impossible. The Bank, therefore, resolved to stop paying gold and to continue the redemption only with silver. At the same time, however, it was selling to the public drafts on foreign countries at the same rate at which it had undertaken to redeem its bills. In this way, the proceeds of the Rothschild loan were soon exhausted, though still at the Bank’s disposal abroad. On November 1 (13), 1863, the rouble was almost at par (397c.); but it was upon this date that the Bank was forced to suspend the redemption of its paper. It continued the sale of foreign drafts for a few days longer, but this did not prevent the rouble from losing eight per cent. of its value by November 19th; and when on this date the sale of drafts ceased in turn there was a further fall of four per cent., and the rouble was quoted at 350 centimes.

The experiment had failed; and its most obvious result may be summed up thus: On December 1, 1863, the note circulation amounted to R. 642,800,000, of which the Bank held R. 8,000,000 in addition to R. 68,000,000 of specie. Since May 1, 1862, therefore, the note circulation had decreased by R. 79,300,000 and the specie holdings of the Bank by R. 11,000,000. If we take account of the Rothschild loan of R. 96,000,000, the experiment had cost R. 107,000,000 of metal; and as only R. 45,400,000 of the redeemed bills had been destroyed (on June 11, 1863), the net result of the undertaking was an actual loss of R. 62,000,000, not counting the numerous and severe indirect losses attending the failure.

Did this failure arise solely from the Polish insurrection, the public fear of renewed hostilities, and the impossibility of replenishing the metallic reserve by the method outlined in the imperial ukase and M. Lamanski’s pamphlet? Such was the official explanation; but the impartial student cannot accept it. One needed simply to be on the ground in order to witness the extreme eagerness with which paper money was presented to the Bank for redemption. The true explanation is that the circulation had been increased almost threefold within less than ten years, and that this increase was not demanded by any commercial or industrial need, but simply by the necessities of the Treasury. Then, again, the Russian Government had made the mistake of issuing in the form of a floating debt what was simply a substitute for note circulation, a proceeding that had been of considerable service to it at times, but which had now become a great burden. Thus, there had been issued in denominations of R. 100 nearly R. 100,000,000 of so-called “metallic bills” drawing interest at four per cent. Exchequer bills had also been issued, of R. 50 each, bearing interest at 4.32 per cent.—that is to say, 18 copecks per month—and redeemable in eight years. These, in view of their small denominations, were simply bills of credit, except that they bore interest. In ordinary times, the capitalist kept them in his safe and the merchant took them readily because the Treasury would accept them in payment of certain taxes. But the moment specie grew scarce these bills circulated just like bank notes, and the only concession made to the taker was that he had the benefit of the one or two months’ interest due upon them. Thus the public had ample opportunity to exhaust the metallic reserve of the Bank. Not to have thought of this before issuing the ukase of April, 1862, was one of the most serious mistakes made by the authorities, but it was by no means the only one. Thus the attempt to resume specie payments was a failure in 1863, and no other effort has been made since. It will be our duty hereafter to examine the causes which have made all further efforts in this direction impossible up to the present moment. But first we shall make some further examination of the past, for the history of the Bank of Russia cannot be written except in connection with the financial transactions of the Empire, so close is the connection between them.

It is not merely the ukase of April 14, 1862, decreeing a return to specie payments, that makes that year memorable in the annals of the Russian Bank. The same year signalizes another very important reform. M. de Reutern had been only a few days at the head of the Finance Department when he published the first budget of the Empire. Up to that time nothing of the kind had been known in Russia, and the figures the Author was able to quote in the earlier part of this work, bearing upon the expenses of the years 1823 to 1827, were taken from the memoirs of Count Cancrine. Without casting any reflection upon the memory of M. Reutern (obit 1890), we may say that his first budget did not furnish a full account of the situation; it did not even include all of the national receipts and expenditures. In fact, it was several years before the budget became what it ought to be. A central auditing office for the accounts of the Empire had, it is true, long been in existence, but in a condition calling loudly for reform. This reform was accomplished by Tartarinow* (obit 1871); and since his time the annual publications of that institution are of real value and very helpful to all students of Russian finance. The same may be said of the reports of the Finance Ministers, accompanying the provisory budget at the first of January of each year. But at the time of which we speak there was no publication of this kind, and no information was to be had regarding the state of Russian finance except from the annual report of the Commission of Credit Institutions, and there is no reason now to conceal the fact that that information was very meager in its details. It is hardly more instructive to-day; but then it has been a long time since anybody has thought of paying any attention to the tiresome document crammed with figures with which that Commission annually honors the official files. The very precise and accurate reports of which we have just spoken render it altogether superfluous now. But, at the time of which we write, it was the only document giving any information concerning the management of Russian finances, and it could have been made of great value.

The Author has a very distinct recollection of the eagerness with which he pored over the first report of that Commission which fell under his eyes, now thirty-three years ago. It was the “Address of the Finance Minister to the Commission of Credit Institutions, presenting the report of those institutions for the fiscal year 1861.” I studied it with the greater ardor because it was part of my duty at that time to write the Russian chapter for the “Annuaire des Finances Publiques,” published at Paris by M. J. E. Horn. The more we sought to sound the depths of that document the more signal was our failure. All we could be certain of was that the chapters did not agree with one another and that the report was not true to its title, because it did not show even the whole of the public debt. Russia had a press censorship even at that time; but as the administration seemed desirous of illuminating those places that were in need of light, we made known our difficulties in an article sent to the “Journal de St. Petersburg,” of which we were financial correspondent. The Commission condescended to reply in a note which we have preserved, and a translation of which we here present. There can certainly be no indiscretion in publishing it at this late day; and no one will accuse me of egotism, for clearly it caused the Commission no pangs to snub an intermeddler who had dared to call in question the value of an official report read by a minister. But the reader may possibly conclude that as early as 1862 the Commission of Credit Institutions had outlived its usefulness, if, indeed, it ever had any. Here is the official document:

As we have said, the reports of the Commission and the Commission itself have now merely an archæological value. The State Bank is the only institution that interests us at this time, and it has learned to put its reports in a form which is not only intelligible but has almost the precision of a mercantile balance-sheet. This it has succeeded in doing in spite of the complicated network, interweaving its own operations with those of the State and detracting greatly from the simplicity of its accounts. But, in 1862, the Commission might have made its reports of great value if it had not, as its note shows, considered it beneath its dignity to satisfy the curiosity of the public and its desire to know the truth about Russian finance.

It is true that, at the time we are now considering, publicity as to the Bank’s transactions had not been attended with flattering success; and the failure that crowned the work of 1862 almost seemed to justify the secretive policy of the Public Debt Commission. Rarely has there been a more disastrous failure or keener disappointment than was involved in the closing of the Bank’s wickets on November 3, 1863. It was followed not only by a steady depreciation of the rouble, but by a permanent Treasury deficit, so that several loans became necessary between 1863 and 1866. In 1864, a loan was floated in Holland of 70,000,000 florins, or £6,000,000 sterling; and in 1864 and 1866 domestic loans of R. 100,000,000 each, on lottery and premium bonds. Meanwhile, exchequer bills were increased by R. 99,000,000, issued in thirty-three series of R. 3,000,000 each. The credit of the Empire did not improve, and the reader can get some idea of the opinion foreignes had of the situation by glancing over these few lines from an article which appeared in the “Berliner Reform” of September 24, 1865: “Anyone who examines the situation in this country (Russia) must be forcibly struck with its financial and economic condition. That condition is immeasurably sad, not to say hopeless. Paper money is depreciated by one-fifth, despite its legal-tender value; gold and silver have disappeared; there is practically no credit; discount rates are high; there is an annual deficit; trade is nearly at a standstill, and capital is exhausted almost to the last penny; prices are immoderately high; the nobility is ruined, the capital city and trade centers are in visible decay.”

Meanwhile, the State Bank had ceased to be the sole credit institution of the vast Empire. In 1865, a group of capitalists had obtained permission to establish at St. Petersburg the joint-stock “Bank of Commerce” (such is its title still), with a capital of R. 5,000,000 in shares of R. 250 each. The people were so unaccustomed to rashness of this kind that the State was compelled to encourage the enterprise by taking shares for R. 1,000,000, agreeing not to sell them for ten years. But very soon the public became more courageous, and in a few years St. Petersburg and other cities had a large number of these share banks. In fact, that class of banks became so numerous that, in 1873, the State considered it to be its duty to check the movement; it refused to charter any more banks for the capital, the result being simply that, in order to get around this obstacle, banks were set up in the little towns nearby, such as Viborg and Cronstadt, with branches in St. Petersburg.

But, two other palliatives had been found for the State Bank’s inability to satisfy the needs of credit. One of these had been, if not exactly created, at least actively promoted by the State. M. de Reutern had hardly been installed in his office before he had a law enacted for the establishment of communal banks. Any commune furnishing a capital of R. 10,000 could found a bank, with ample powers in all directions, except as to the issue of notes. The great partiality that Russia has always had for the Mir (municipal autonomy), and the hostility in certain quarters to enterprises in which shareholders pocket all the profits, made this ukase very popular. It was useless to point out the fact that a commune or city is, of all corporate bodies, the one least fitted for banking affairs, that its responsibility is illusory, and fraud inevitable; in spite of conservative protest and warning, these banks sprang up on all sides. A fair sample of them was that at Skopine. To the bank in that little city of the province of Riasan, deposits flowed in from all parts of the Empire, the inducement being a promise of interest at the rate of six or seven per cent. The Mayor (Golova), M. Rykow, had become an extremely popular man. He devoted a liberal share of the bank’s profits to public improvements and works of charity. His annual reports and his appeals to the public were perfect gems of puffery. Rykow knew how to realize upon his merits, and his breast was soon covered with decorations. When at last the Government awoke to the danger and amended the law so that a communal bank could not accept deposits exceeding ten times its capital and reserve fund, the bank of Skopine went right ahead with its business and its public appeals, declaring ingeniously that a law could have no retroactive effect and that the new restriction affected only such banks as should be thereafter established. One day, however, about 1875, the bubble burst; Skopine could not pay its deposits, then amounting to about R. 7,000,000. There were disgraceful revelations as to the way in which the money had been spent, and Rykow was condemned to Siberian exile. Government agents were appointed to investigate the business of communal banks, and since then their transactions have been merely local. Further on will be found their balance-sheet for 1893.

Another new form of institution was to some extent a result of the great conflagration which, in the spring of 1862, had destroyed the greater part of the Tchoukine-Dvor of St. Petersburg, which may be called the little bazaar, as distinguished from the Gostinoi-Dvor, or great bazaar. The merchants affected by that disaster had need of credit, and the State Bank, the only banking institution then in existence, could not supply it, because its regulations required three signatures on all paper. In this juncture of affairs, M. Lamanski, then vice-president of the Bank, conceived the idea of founding, upon the model of the Société Général of Belguim, an association in which mutuality should be the controlling principle. It took him more than a year to find two men willing to subscribe an amount which should represent the maximum of their credit at the proposed bank, and to pay in ten per cent. of it. Evidently this was to be an association of very small importance; it was, in fact, so unassuming that its offices were established in one room of the State Bank, where M. Lamanski managed its affairs with the purest disinterestedness. Yet, five years later, that association controlled the fluctuations of the St. Petersburg Bourse, and indirectly, those of all Russia. Instead of confining itself to the discounting of its clients’ paper, it had begun to loan upon public funds, and as it was always able to rediscount its paper at the State Bank, thanks to the common management of the two institutions, this financial conspiracy had promptly led to an excess of speculation, resulting in 1869 in a serious crisis upon the Bourse, of which the independent bank, the only one then in existence, had to bear its part. Both institutions escaped from the crisis in safety, but there was a serious run upon both of them as a result of it—one upon the Bank in 1872, which imperiled its existence and which for nearly twenty years, or until 1890, kept its stock among the lowest of those quoted on the Bourse; and another upon the Mutual Association in 1875, which compelled it to levy an assessment upon its members, then numbering more than seven thousand. Many of the members retired from membership; nevertheless, the association survived the disaster it had brought upon itself, and returned the assessment to its members; but it never recovered the commanding position it had previously held. We shall see later on that the association is still in existence and that it has had a number of imitators in the provinces. But the enthusiasm for that form of association was exhausted after a short trial.

The attempt of the State Bank to resume specie payments having failed once (in 1863), no further effort in that direction had been made; but it must not be inferred that the Bank had altogether abandoned the idea of final resumption. Beginning with 1867, railroad charters, with or without a State guaranty of interest on the bonds, were granted with considerable frequency. At that time, a guaranty of interest was regarded as a purely formal matter, tending to further the enterprise, but not likely to become a burden on the public treasury, and the State was not niggardly in such patronage. Generally its guaranty covered only the bonds, which formed two-thirds of the nominal capital, and which were made payable in specie that they might meet with a readier sale abroad. As to the capital represented by stock, it usually served some other purpose than construction of the road or the purchase of materials. The fewer the calls upon the stock for aid in building the line, the more urgent the necessity for selling the bonds at whatever price they would bring, and a foreign market was found for them, especially in Germany. Finally, the Finance Minister took alarm at this state of things. Five per cent. bonds guaranteed by the State were as good as Russian rentes, and the sale of the latter was greatly impaired by the competition arising from the sale by the railroad companies of guaranteed bonds. For this reason it was determined that the State itself should issue the bonds and pay the proceeds to the companies; and, as the major part of the sums borrowed was to be used in Russia for construction and materials, the Government paid the companies in paper money at prevailing rates and used the specie for its own purposes. Part of it was used in making foreign purchases and in payment of interest on the public debt abroad, and part of it went to swell the metallic hoards in the vaults of the fortress of Peter and Paul in St. Petersburg. This is the explanation of the seven consolidated railroad loans, each of £15,000,000 sterling, made between 1868 and 1875; and it was by this means that the metallic reserve, which we found to be only R. 69,000,000 at the close of 1863, had reached R. 229,400,000 in 1875, of which R. 28,300,000 were in silver, the gold having amounted to R. 126,900,000 at the close of 1869, to R. 128,500,000 at the close of 1870, and to R. 175,600,000 at the close of 1872. The value of the paper rouble (the rate of exchange), which in 1866 had gone as low as 270 centimes, had advanced again to 370, notwithstanding the fact that the circulation during the whole of 1875 had been R. 797,300,000, or nearly three and a half times the metallic reserve. Confidence had returned. The budget no longer showed a deficit, and M. de Reutern, at the end of twelve years of power, was on the point of bringing exchange once more to par and resuming specie payments. The State Bank was already selling silver and gold at current rates. During the years 1873-5, when the first effects of silver depreciation following Germany’s adoption of the gold standard were felt, the Bank was even compelled to defend itself against attempts that were made to deliver silver to it at the value hitherto officially maintained.

[* ] Tartarinow had as successors in office several men of great ability, such for example, as Greig and Abasa, who afterward became Ministers of Finance.