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 IV.

THE EASTERN WAR PERIOD.

AT the period reached at the close of the last chapter, there appeared to have been a recovery in all respects from the disaster of 1863, when the revolution in Bosnia, the Servian war, and, finally, the Russian campaigns of 1877-8 in the East, once more brought to naught the whole splendid prospect. When the war was at an end the metallic reserve of the Bank (July 1, 1878) was only R. 130,300,000 gold and R. 17,500,000 silver. The circulation had been reduced to R. 726,900,000; but, in addition to this, there was an issue of R. 429,600,000 appearing under the misleading title of “bills issued on account of the branch banks.” In fact, the Treasury had used up that sum during the war, and, in addition to this, three large loans, known as “Oriental loans,” had been made, aggregating about R. 700,000,000. Professor Wagner had at this time very charitably urged Russia to part with the gold lying unused in the vaults—gold, as he said, being the proper money for States with an established credit. This advice of the learned German was not followed, but it was ten years before Russia’s metallic treasure had again reached the figure of 1875.

No new taxes had been levied to meet the expenses of the last Eastern war. There was a desire not to make the war unpopular, and it had been expected that the campaign would be short and decisive. All attempts of M. de Reutern to persuade the Imperial Council to sanction a levy of additional taxes had been fruitless. The only concession he had been able to get was a ukase issued in November, 1876, directing the payment of customs duties in gold. When that step was taken it amounted to an increase of only 12 to 15 per cent. in the paper cost of imports, but later, owing to fluctuations in the exchange rate, the increase rose to 40 or 60 per cent. It is true, however, that between 1877 and 1887 the specie thus secured was of great assistance to the State.

There was less opposition to an increase of taxation when the war was over. That unpopular duty devolved upon General Greig, who had succeeded M. de Reutern on the very day the treaty of Berlin was signed, July 1st (13th). As to the State Bank, it could obtain no help, nor could it do anything alone toward reducing the circulation to its volume on the eve of the war. It was not until January 1, 1881, that an imperial decree, issued at the instance of M. Abasa, who had succeeded M. Greig in August, 1880, prescribed a series of measures having that end in view. The R. 417,000,000 of bills of credit issued for the purposes of the war were to be retired within eight years, R. 17,000,000 immediately and the remainder at the rate of R. 50,000,000 per year, and the State was to supply the Bank with the funds necessary for this purpose. This arrangement was only partially carried out. Though there have been no other wars, and the only military operations called for have been those, relatively inexpensive, required in Central Asia between 1880 and 1886, still the international situation in Europe has necessitated heavy expenses, which M. de Bunge, who succeeded M. Abasa in 1881, found it difficult to meet. When he quitted the post at the close of 1886, the value of the rouble was 60⅔ copecks in gold. The provisions of the ukase of January 1, 1881, were modified by a second ukase of December 9, 1894. The latter states that of the R. 417,000,000 of paper money to be retired, R. 87,000,000 had been destroyed; R. 63,750,000 had been transferred from the account of temporary issues to that guaranteed by the fund available for redemption, which, meanwhile, had been increased by R. 40,000,000 of gold taken from the funds of the Bank proper—that is, from the proceeds of its commercial transactions; that R. 92,750,000 had been retained under the heading of provisional issues, and were offset by the amounts due the Bank from its customers, and that the remaining R. 173,500,000 had been covered by rentes delivered to the Bank, upon which it had not yet realized. The important fact is that only R. 87,000,000 had been destroyed. By this ukase, then, it was ordered that the R. 266,250,000 (R. 92,750,000 + R. 173,500,000) should remain permanently part of the circulation; we have just seen that R. 63,750,000 had previously been disposed of in the same way.

Here we must take a momentary glance at the past for the purpose of noting that in spite of the delicate position of international relations, in spite of the fact that the Bank of Germany and the Seehandlung of Berlin were forbidden to loan on Russian securities or purchase them, in spite of the increase of military expenses and other public charges in all countries, a remarkable phenomenon had appeared in the markets of all European capitals; the price of silver had fallen everywhere, and this had produced a favorable effect upon the credit of the various governments. Refunding operations became fashionable, and M. de Bunge himself, about a year before quitting his place, had been on the point of concluding an extensive arrangement with certain German houses which would have resulted in reducing to four per cent. the interest upon a large part of the Russian public debt, and that, too, barely two years after it had been somewhat difficult to find a foreign market for a loan of R. 50,000,000 at six per cent. We may note in passing that that loan, so uncomplimentary to the credit of a great empire, was the last transaction managed by Baron Stieglitz, who retired from the management of the Bank in 1866. The refunding operation undertaken by M. de Bunge did not succeed, but no one can regret its failure who knows the burdensome, not to say humiliating conditions under which it was to have been made. His successor, M. Wyschnegradski, was a man of a totally different character. Though formerly a professor, like Bunge, he had for some years been in control of important enterprises, and had thus acquired, what had been entirely lacking in his predecessor, the art of managing men and conducting business affairs, boldness of decision and rapidity of execution. He had, in addition, the good fortune to be at the head of affairs during four years of very abundant crops and of an export of cereals such as had never been known before. He entered immediately upon the task of refunding the debt, and he was able to interest the French market in the undertaking, though it had up to that time avoided Russian securities almost entirely. He began with the pledge certificates of the Mutual Credit Foncier, which the State had finally guaranteed, and the interest on which had been reduced from 5 to 4½ per cent. at the same time that the premium of R. 20 secured upon their repayment had been withdrawn. Inasmuch as the Rothschilds had taken part in the issue of these securities, they were called upon to assist in this first conversion, and since then they have had a share in other refunding operations which M. Wyschnegradski carried on upon a large scale, and which his successor, M. de Witte, afterward took up and is still carrying forward. It is not merely loans issued directly by the State that form the subject of the refunding operations; besides the securities of the Mutual Credit Foncier, of which we have just spoken, railroad bonds also were included. During the past ten years, and especially between 1888 and 1894, the State has bought a large number of important railways, and has very materially reduced the burdens imposed upon it by the payment of subsidies and the guaranty of interest.

The subject of these refunding operations will be more fully treated in a subsequent chapter. What especially interests us just now with reference to them is their influence upon the condition of the Russian Bank. We have just seen what disposition was finally made of the circulation called into existence by the Eastern war of 1877-8. Notwithstanding the fact that only R. 87,000,000 of the R. 417,000,000 so issued had been paid, there came a time in 1889 when, as a result of the very great increase of exportation coincident with the fair of Nijni-Novgorod, the circulation was for the moment insufficient. M. Wyschnegradski had no hesitancy in authorizing the Bank to make a supplementary issue of R. 25,000,000; but he stipulated that the Treasury should deposit with the Bank a like sum in gold as a guaranty. A second issue of R. 25,000,000 was afterward approved upon the same terms; and it should be stated that these issues were in fact only temporary and were retired at the end of a few months. As a practical matter, the specie deposit carried from the Treasury to the Bank was of no avail. The holders of the “provisional” bills had not, any more than holders of ordinary bills, a right to demand their redemption in gold. The most important result of that temporary measure was that circumstances soon induced M. Wyschnegradski to repeat and extend it; when the famine of 1891 required exceptional sacrifices of the Treasury, the so-called temporary issue was several times doubled and even trebled, so that at times it reached R. 150,000,000; but the credit of Russia was not seriously impaired thereby. Thanks to the prompt recovery from the economic crisis of 1891, and to the boldness with which M. de Witte, the successor of M. Wyschnegradski, has continued the refunding operations; thanks also to the constant decrease of interest rates in the money markets of the world, the Russian rente stands to-day at a figure which, six years ago, the most optimistic hardly dared to hope for.

Inasmuch as the present system plainly consists in intrusting to the State the largest possible share in the economic affairs of the people, the regulations of the Bank were revised on June 24, 1894, and made even more emphatic in the direction indicated. We shall merely cite such of these modifications as are peculiarly characteristic of the new methods. In the first place, in addition to commerce and manufactures, the agricultural classes also are to share the favor of the Bank. Chapter II of the law treating of commercial operations provides in Art. 77 that the Bank shall accept for discount “not only paper resting upon a commercial basis (a completed transaction, paper already in existence), but also paper drawn in view of commercial or industrial transactions yet to be entered into.” As an offset, however, to this privilege, it is stipulated in Art. 85 that “the Bank may at any time demand of its clients a detailed balance-sheet, a complete account of their affairs, and such extracts from their books and other information as may be needful to give it a full insight into all their transactions.” Art. 89, treating of manufacturing and agricultural loans, provides that the Bank “shall give credit and make loans upon such bills drawn to order as may be secured: (a) by a real-estate mortgage; (b) by a chattel mortgage upon agricultural or manufacturing tools and machinery; (c) by a guarantor; (d) by any other security which the Finance Minister may hold to be sufficient.” Art. 93 prescribes that when the loan is secured by new machinery the Bank shall pay the amount of the loan, not to the borrower, but to the seller of the machinery, and shall see that the purchase is delivered. Art. 97—Loans to any single enterprise shall not exceed R. 500,000, and those to a small tradesman shall not exceed R. 600. Art. 100 provides that loans and credits (upon one-name paper) intended to provide any undertaking with money for current needs, shall not exceed seventy-five per cent. of the sum necessary for the financing of the business. Art. 119 stipulates that when the value of any class of merchandise shall have decreased as the result of exceptional circumstances, the managers of the Bank may grant an extension to the debtor and may refrain from demanding even partial payment or additional security. Art. 124 states that in making advances upon paper bearing only one signature and secured by a pledge of personal property, the Bank, if it has full confidence in the borrower, may allow these concessions: (a) it may accept as collateral articles of merchandise not named in the official list set forth in Art. 109; (b) the pledge may remain in the hands of the borrower; (c) the amount of the loan may be as great as seventy-five per cent. of the estimated value of the guaranty. Art. 135 permits call loans to be made, either on collateral securities or on such paper as would be accepted for discount. The conditions of these loans are that the borrower shall repay them at any moment on demand, or else at a fixed time. Art. 138 provides that, at any time when its resources are sufficient, the Bank may extend its credit to provinces, districts, and communes, upon conditions to be approved by the Ministers of Finance and of the Interior. In accordance with Articles 165-8, the Bank may sell bills drawn to order, may buy and sell foreign bills of exchange, gold and silver, securities issued by the State or guaranteed by it, and securities not so guaranteed if they form part of the collateral of one who has defaulted in his obligations to the State; this latter transaction the Bank enters into only upon express instructions from the Minister of Finance. Articles 178 and 179 set forth the services which the Bank is required to render to the public treasury. There is no change in this respect from the original regulations, which have already been set before the reader; we shall not, therefore, repeat the provisions of those sections. Suffice it to say that in addition to all the duties pertaining to the circulation, to the issue of loans, and to the care of the funds of the State, the Bank is required to furnish such sums as the national pawn-offices may need; to assist in caring for the ransom of the serfs—that is to say, in administering the annuities owing by these peasants; and to liquidate the affairs of the former credit institutions of the State, in so far as this duty rests upon it under existing laws. When we have called attention to the fact that “the capital” of the Bank has been increased from R. 15,000,000 to R. 50,000,000 we shall have set forth the whole series of reforms to which that institution has been subjected. At this point, we may introduce the last balance-sheet issued by the Bank, that of August 16 (28), 1895:

Balance-Sheet of the Bank of Russia and of Its Nine Agencies and Ninety-eight Branches, August 16, 1895.

Besides deposits for safe-keeping:—

The Governor of the State Bank: ED. PLESKE.

It appears from this balance-sheet that, at the time it was issued, the circulation amounted to R. 1,121,300,000 (R. 75,000,000 being “temporary”) and the metallic reserve to R. 450,000,000 of gold, R. 75,000,000 of this also being a temporary reserve. If we subtract this R. 75,000,000 from both sides of the account we have left R. 1,046,300,000 of paper money secured by R. 375,000,000 of gold. Moreover, the Bank included under “cash,” on August 1 (13), R. 63,200,000 of gold and silver. Fifteen days later, that important sum no longer appears among the “cash,” but we find it a little further on under the heading “Gold belonging to the Bank,” which amounts to nearly R. 63,000,000. We cannot explain that change in the entry; but a comparison of the two totals will show that silver made up only about R. 250,000 in the first column, while it does not appear at all in the second. This shows that Russia has turned her face resolutely against bimetallism and that she accords to silver no higher position than that of a subsidiary coinage; a fact, moreover, which has been officially declared.

In view of the summary of the Bank’s new regulations which has just been placed before the reader, it would be useless to insist further upon the extent to which the affairs of the Bank and those of the State are intermingled, an intermingling more definite and pronounced than that existing under the regulations of 1860. It is more difficult than ever to understand why a capital stock should be thought necessary, or what place the capital of R. 50,000,000 provided by the new regulations can have in the economy of the Bank. But it is precisely because these intimate relations do exist that the value of the circulation cannot be predicated upon the relation it bears to the cash of the Bank. The State is responsible to-day, as it was thirty-five years ago, as it was also a century ago, for all the agreements of the Bank; and because this is so it becomes important to know that the metallic resources of the Treasury (including those of the Bank) amounted at the close of 1892 to R. 493,900,000; at the close of 1893 to R. 598,000,000, and at the close of 1894 to R. 598,600,000, in gold. On June 30 (July 12), 1895, the “Bulletin Russe de Statistique Financière” published a table showing that, on that date, the total metallic reserve amounted to R. 580,800,000, of which R. 4,666,000 were in silver and subsidiary coin, and the remainder in gold. Upon the strength of such a reserve, equal to more than half of the circulation, the Russian Government has deemed it safe not to insist upon a rigid enforcement of the legal-tender law, and it has given its sanction to the transaction of domestic business upon a gold basis. When it was first proposed, this measure aroused strong opposition. Though discussed at frequent intervals for some years, it was always vigorously resented as an attack upon the credit of the State, or rather upon the fiction that this credit was undisputed within the Empire and that foreigners alone evinced any doubts of Russia’s solvency by refusing to accept the paper rouble at its nominal value. M. de Witte (Finance Minister since 1893) was courageous enough to dissent from that Jesuitical position; but even he was desirous of stopping half-way and of granting the right to deal upon a gold basis only to certain classes of society; his view was like that held in some other countries, where certain classes are denied the privilege of dealing upon the Bourse or making time contracts, lest advantage be taken of their ignorance. It is very interesting to follow the Council of the State as it discusses the question, settles it in a very enlightened manner, refutes the apprehensions of the Finance Minister, and finally determines that its own deliberations upon the matter are of sufficient importance to be given to the public, an occurrence which is very rare in Russia. As this report teaches a valuable lesson and also furnishes one of those rare instances in which we are able to take the measure of the Council, it has seemed to us advisable to publish the document just as it appeared:

As a result of that legislative measure, the State Bank published on July 14 (26) and July 26 (August 7) the two following notices, laying down its regulations for the acceptance of specie deposits, and the price at which the yellow metal was to be bought and sold by it:

By-laws Governing the Issue by the State Bank of Certificates of Metallic Deposits.

1. In accordance with the provisions of section 148 of the statutes, the State Bank will accept on deposit the articles and securities specified in paragraph 3 of these by-laws, and will deliver against them Certificates of Deposit expressed in gold roubles and payable by the Bank in Russian gold coin.

2. The Certificates of Deposit will be issued by all of the agencies and branches of the Bank. The Minister of Finance will designate for each of the establishments of the Bank the particular securities of those named in paragraph 3 in exchange for which that establishment shall be authorized to deliver Certificates of Deposit.

3. The Certificates of Deposit are to be delivered against these metallic securities: (a) Russian and foreign gold coin, on the terms indicated in the table annexed to these by-laws; (b) gold bars of high standard duly stamped by the mint or an assay office, the zolotnik of fine gold being valued at R.3.63767, gold; (c) such foreign bank notes payable in gold as may be selected by the Minister of Finance; (d) drafts which have been delivered by the Department of Mines in exchange for gold deposits, these to be accepted at their face value; (e) coupons of Russian bonds payable in specie and of loans guaranteed by the Government, as well as such of said bonds as have been drawn for redemption, with the usual discount of interest; (f) those drafts on foreign countries which the State Bank is authorized by its regulations to purchase.

4. All the securities named in paragraph 3, above, are to be accepted at their value in gold roubles.

5. The Certificates of Deposit will be made payable only to bearer, and will be of the following denominations: 1 demi-impériale, 1 impériale, 3 demi-impériales, 5, 10, 50 and 100 impériales, the impériale being estimated at 2 zolotniks* 69.36 dolei of fine gold, and the demi-impériale at 1 zolotnik 34.68 dolei. These certificates are payable in Russian gold coin, the limit of toleration not to exceed that provided by section 21 of the monetary statute.

6. If the value of the security deposited, calculated according to the rules laid down above, cannot be exactly expressed in figures corresponding to the denominations of the certificates as set forth in paragraph 5, the surplus is to be paid in credit-roubles at the rate fixed for the purchase of Russian gold coin.

7. Certificates of Deposit of the various denominations enumerated in paragraph 5 are to be issued in series of 10,000 each, every certificate bearing the letter of its series and a number showing its place therein.

8. The Certificates of Deposit are to be issued in a form approved by the Minister of Finance.

9. The State Bank will set aside a special guaranty fund consisting of Russian gold coin, equal in amount to the certificates issued and to be reserved exclusively for their redemption. Foreign gold coin at a valuation calculated according to the table annexed may form part of the aforesaid fund.

10. Certificates of Deposit will be accepted on a par with Russian gold coin in all payments to be made in gold either to the Imperial Treasury or to the State Bank. Individuals may accept or refuse the certificates when offered in settlement of amounts stipulated to be paid in gold roubles.

11. Certificates of Deposit will be redeemed by the agencies of the State Bank in St. Petersburg, Moscow, Warsaw, Riga, Odessa, Rostov-sur-Don, and by such others as may be specially authorized. Other agencies of the Bank will redeem the certificates whenever the cash on hand will allow them to do so.

12. All branches and agencies of the Bank are authorized to exchange Certificates of Deposit of one denomination for those of another.

13. Holders of the certificates may deposit them with any branch of the State Bank and demand that any other branch shall issue certificates to a like amount in exchange for them. No charge is to be made for these transfers, except the cost of the dispatch when they are made by telegraph.

The State Bank will accept gold coin in exchange for Certificates of Deposit on the following terms:

Remark.—Foreign coins of larger or smaller denominations than those named in the table are to be valued upon the same basis.

Rules Governing Accounts Current in Gold Roubles opened by the Bank against Deposits of Gold Coin.

1. The State Bank is prepared to open accounts current in gold roubles for individuals and private establishments against deposits of Russian gold coin. The branches of the State Bank which redeem Certificates of Deposit will also accept such certificates and carry the amount for which they are drawn in accounts current. Amounts deposited in gold coin to the credit of an account current must be repaid in gold coin.

2. A person or institution wishing to open with the Bank an account current in gold roubles must present on a prescribed form a fac-simile of his or its signature and of the signatures of the persons authorized to sign checks in the name of the depositor.

3. The State Bank and its branches and agencies may refuse to open an account current without assigning any reason for the refusal.

4. The deposits are to be entered as soon as received in a special bank-book delivered by the Bank to the depositor. Each deposit is to be attested by the signature of the officers of the Bank.

5. Each deposit in an account current must be accompanied by a special declaration.

6. The depositor may withdraw his deposit by means of checks signed by him or by his attorney in fact (§ 2); a check-book will be delivered to him by the Bank, together with the bank-book wherein his deposits are entered. Checks must be drawn in round figures, and they may be paid in demi-impériales of the new mintage.

7. The drawer of the check may write after the printed words “to bearer” the name of the person to whom he transfers the check.

8. Interest may be paid upon accounts current expressed in gold roubles, the rate being fixed by the Directors of the Bank with the approval of the Minister of Finance. No interest will be paid upon such of these accounts as are opened to the credit of those whose accounts in paper roubles do not bear interest.

9. If a drawer should lose a check the Bank will not be liable for a wrong payment unless it has prompt notice of the loss.

10. Accounts current in gold roubles may be closed at any time, in the discretion of the Bank, but the depositor shall have seven days’ notice of the intention. Whenever an account is closed the depositor must return to the Bank all unused checks in his possession.

Let us here take note of one further measure, destined, if not to increase the business of the Bank, at least to facilitate dealings abroad in Russian securities. We refer to the arrangement concluded between the Finance Minister of Russia and the Bank of France on April 11 and May 1, 1895, in virtue of which the Bank of France undertakes to accept at Paris or at its branches any negotiable evidences of the Russian debt deposited by holders who wish to have them registered. The Bank of France agrees to deliver registered bonds to such holders upon their payment of the stamp duties. It will also keep itself informed as to the drawings of bonds to be paid, and if any are drawn that are registered with the Bank it will inform the holder and make the collection for him. It pays the coupons as they fall due, and for these services it makes no charge against the bondholder, but looks to the Russian Government for all claims except those arising out of stamp duties. This arrangement went into operation on July 1, 1895.

A notice published on September 1 (13), 1895, by the Bank of Russia puts in force a new set of rules relative to the safe-keeping of funds and documents deposited with it by the public. It provides that thereafter the Bank and all its branches will charge upon deposits left for safe-keeping:

With reference to this publication, it should be stated that the custom is widely prevalent in Russia of depositing valuables not only with the banks, but also with the local treasuries. On January 1, 1895, those treasuries held thus on deposit R. 17,600,000 of securities payable in specie, and R. 228,600,000 payable in credit-roubles. The State Bank had R. 217,400,000 of the former and R. 1,941,700,000 of the latter. Taken all together, deposits of this kind aggregated R. 2,405,300,000 on January 1, 1895, against R. 1,967,900,000 on January 1, 1894, for the State Bank and the treasuries.

The reader is thoroughly informed now as to the duties and the methods of the Bank of Russia. It had been the Author’s intention to dismiss the subject at this point, but we have just had our attention called to the following notice published on August 24 (September 5), 1895. It brings out so strongly the “philanthropic” aims of the institution and its solicitude for the agricultural classes that we feel called upon to transcribe it:

[* ] The dolia equals 0.68578 grains; the zolotnik is 96 dolei, or 65.83488 grains.