«The Struggles for the Establishment of the National Bank of Moldavia In Light of the Theory of Political Entrepreneurship Tudor Gherasim Smirna 1 ...»
The Romanian Economic Journal
The Struggles for the
Establishment of the
National Bank of Moldavia In
Light of the Theory of
Tudor Gherasim Smirna 1
Mihai-Vladimir Topan 2
At the middle of the XIX century, the historical provinces of Moldavia and
Wallachia had simultaneous and coordinated plans to establish two national
banks, one for each province, as state-sanctioned, official, central banks. While the
plan for the Wallachian central bank was thwarted by the ouster of Prince Barbu Dimitrie Stirbey in 1851, the plan for the National Bank of Moldavia was finally realized by Prince Grigore Alexandru Ghica, in 1856, when the international developments weakened the grip that the Russian Empire had over Moldavia. The first Romanian National Bank was, however, a short-lived initiative. In this paper, we will look at the way it was established.
Keywords: Political Entrepreneurship, Central Banking JEL Classifications: E5, F54, G01, G28, N23 Introduction 1Tudor Gherasim Smirna, PhD student at the Economic and International Affairs Doctoral School of the Bucharest University of Economic Studies, e-mail:firstname.lastname@example.org 2Mihai-Vladimir Topan, Lecturer, PhD, Bucharest University of Economic Studies, e-mail:
email@example.com Year XVIII no. 56 June 2015 The Romanian Economic Journal We are going to look in this article at the National Bank of Moldavia as a specific case of banking with state privilege, carried by politically connected entrepreneurs in partnership with statesmen from the local and foreign governments. We will show that it is an early illustration of political entrepreneurship at international level.
We want to emphasize from the outset the distinction between the two separate categories of action: political and economic. Using the criterion of private property, we can say that the economic actions are free market actions, in which the entrepreneurs aim to fulfill the demands of their clients as expressed on a voluntary basis. On the other hand, political actions are directed toward the accumulation of profits from unwilling clients that are forced directly or indirectly by (legally sanctioned) systematic aggression to accept the redistribution of their income (Block & DiLorenzo 2000). In both categories, the entrepreneurial element can be described as the employment of resources in pursuit of novel directions that bear the promise of profits, either of the political or economic type (DiLorenzo 1988: 64;
Hülsmann 2003: 418). In the remainder of the paper whenever we refer to supply, demand, production, consumption, entrepreneurship, etc. without qualifications, we imply the economic, voluntary interpretation of these concepts. When we qualify it here with the term political, we refer to the systematically aggressive, involuntary notion of the concepts3.
The XIX Century Economy in Romanian Principalities We have to acknowledge here that by doing this, we use a categorical, theoretical distinction between economic and political means, and that by this we do not deny the historical concept of politics and things political as in matters that concern the polis, that can and usually does leave room for legitimate political actions. In other words, we agree that often we encounter uses of the term “political” that can encompass references to both actions that respect private property rights and actions that do not. For further conceptual clarifications and discussions, see Topan and Smirna (unpublished); McCaffrey and Salerno (2011) Year XVIII no. 56 June 2015 The Romanian Economic Journal The emerging capitalist market in the Romanian Principalities was developing as the industrial revolution was generating increased demand in the West for Romanian products and was sending its accumulated capital to look for new investments and profit opportunities abroad.
Parallel to this trend we see a great battle of state powers to either maintain or gain hegemony over the Romanian Principalities, with influence being transferred by means of war and diplomacy from the Ottoman Empire, to the Russian Empire, then to the Austrian Empire, before the unification and the accession to power of a local elite with French political support and then, with the enthroning of King Karl of Hohenzollern, also with a more significant Prussian support.
The battle for influence was of course not as schematic as described above and had specific local and international manifestations. A case in point is the struggle for the establishment of the National Bank of Romania, in 1856.4 Banking in the Principalities At the middle of the XIX century, the banking sector in the Principalities was in a state of natural backwardness when compared with the West. Namely, it was operating with commodity money, whereas the West was already operating with paper monetary substitutes. These substitutes, while not pernicious in themselves, gave the banks issuing them the very profitable opportunities that came
with fractional reserve banking and increased circulation on a much wider scale than with commodity money.
It is this political profitability that was pursued by the entrepreneurs and statesmen who wanted to establish the first National Banks in the Romanian Principalities.
The attempts at a privileged bank in one or both of the Principalities can be discovered back to the 1830’s right after the Treatise of Adrianople that gave the Principalities the perspective of a greater liberty form Ottoman hegemony.
The emergence of the capitalist economy led also to the development of the monetary and financial sector, where, after 1830, we see money changers acting as credit intermediaries and then commerce houses fulfilling the same role on a bigger and international scale. As the economy of the Principalities starts to grow, we see a secular transfer of wealth and properties and the clash of the entrenched classes of rich boyars and landowners with the new capitalists of financial, commercial, agricultural and industrial background.
Early proposals for privileged banks The early attempts at the establishment privileged banks are usually initiated by foreign investors that have the capital. They seek the support of the political decision makers, usually enrolling the support of the Prince and of the boyar elite.5 We note here that because the banking sector was not so developed with fractional reserve banking, it was not fragile and there was not a need for a central bank as a lender of last resort and a monopolist issuer of banknotes. See Hülsmann (1997) for a description of the central bank as the fulfillment of the progression of the fractional reserve principle.
We can thus see the National Bank as an artificial Western import, a form without essence. The financial sector was indeed suffering from fixed exchange rates between the different types of commodity money and from other administrative sources of uncertainty that increased the Year XVIII no. 56 June 2015 The Romanian Economic Journal Thus we see in 1832 a request for a national bank from the National Assembly to Consul Kiselyov, the Russian overseer of the Principalities during the Organic Statutes period. The justification for its establishment is the dearth of capital, the high level of interest and the ruin that it brings to the landowners. (Romaşcanu 1932: 34-35) In 1834, again, an “amortization bank” is proposed, and another initiative asks for a “Banque de Moldavie a Galatz”, without paper money issuing rights. Another proposal is dated to 1883-1834 and regards the establishment of a mortgage bank, for the development of agriculture and industry, with a capital of 200,000 ducats from abroad (Slăvescu 1941: 5-8).
We then see again proposals in 1838, from Comis Leonte Radu in Moldavia and in Wallachia from the representatives of the Bell & Anderson Company in Bucharest.
In 1847, Hospodar (Prince) Gheorghe Bibescu in Wallachia and a group of big landowners in Moldavia, ask for the intermediation of the German businessman Reineke to source German capital for a credit institution that could offer lower interest than the officially sanctioned rate. It is interesting to note here that the signatories of the letter addressed to the German businessman argue that they would have already founded themselves such a credit institution with their own means, but special difficulties were of such a nature as to oppose to the liquidity of their landed wealth. Thus they were willing to let the German investors take the initiative in this regard6 (Slăvescu 1941: 10
In 1848, the revolutionary groups include in their requirements a national bank. Nicolae Bălcescu publishes in 1851 the project for a national bank in his Question économique des Principautés danubiennes from 1851 (Romaşcanu 1932: 37-41).
The Nulandt proposals Beginning with 1850, we see the attempt by German businessmen Nulandt and Oeschlager to establish privileged banks in Wallachia and Moldavia. This attempt is the first in a series that will eventually culminate in 1857 with the establishment of the National Bank of Moldavia. The businessmen, with the help of the investor Sinna from Vienna and, more importantly, the Prussian Consul Meuserbach, started negotiations both with Prince Barbu Ştirbey of Wallachia and with Prince Grigore Alexandru Ghica of Moldavia.
They wanted to open a bank of discount and issue, not destined to deal in mortgages and insurance. The proposed capital was 3 million conventional florins and, the charter was given for 21 years and the bank was to be put under the jurisdiction of the Prussian consul (Romaşcanu 1932: 42).
The negotiations were stopped by a dissatisfied Prince Ştirbei in Wallachia and, while Prince Ghyka agreed with the terms, he was defeated in 1851 by the opposition of the bankers of Iaşi, in their majority under Russian jurisdiction, and by the refusal of St.
Petersburg (Slăvescu 1941: 13).
In 1852, another attempt by the same businessmen is cloaked as a charter given to boyar Petru Mavrogheni, minister of public works, for
a national bank and the request is advanced to the Russian authorities.
The proposed statute of the bank is similar to the previous proposals (Romaşcanu 1932: 51).
The argumentation for the profitability of the bank is remarkable here, given that the prime objective was to keep the interest rate at a very low level. The source of profitability is the issuance of paper substitutes that can be multiplied above the value of the commodity money in the vaults. Thus, by doubling the “capital” available for investments, the initial creditors would be rewarded by an interest of 16% and even 20% (Romaşcanu 1932: 51). This is a clear example of the rationale for fractional reserve banking: money creation ex nihilo and credit expansion at lowered interest rates, to increase the profitability of the bankers and their stockholders.
The governing body (the Divan) adopted the proposal in its unanimity but it was, again, faced with resistance from the Russian authorities.
The reply letter of Russian statesman Séniavine to representative Khaltchinsky, from 26 June 1852 is significant, because it analyses the proposal and dismantles the points where the Prussians would have gained privileges. In this letter we can see more clearly how the international powers were struggling to secure by political means the control over the present and future wealth of the Principalities.
The letter argues, among other things, that the possibility of the initial capital funds being brought from abroad disagrees with the well understood interests of the country. The Russian authorities ask for the weight of foreign capital to be less than a third of the total capital.
Moreover, such an international initiative must be submitted and harmonized with the international policies and agreements of the Porte.
Year XVIII no. 56 June 2015 The Romanian Economic Journal The Moldavian government must be aware of the implication of placing the bank under foreign jurisdiction, attracting the meddling of foreign powers in case of a disputed bankruptcy.
Besides this political concerns, the letter objects to the many and conflicting objectives of the bank, i.e., to credit both the industry and agriculture, and the government. Also, it warns that the circulation of low denomination paper money substitutes could bring about the replacement on the internal market of commodity money with “assignats” of dubious quality (Slăvescu 1941: 54-57).
We can see that the Russian Empire, as long as it had the Principalities under their protection and de facto rule, were keeping at bay the intrusion of other states. The Moldavian prince is however not abated by the Russian resistance and continues with the preliminary arrangements for the establishment of the bank. However, the advent of the Crimean War and the occupation of Moldavia by the Russian Army thwart his plans. They are renewed only with the defeat of the Russian Empire and the signing of the Treaty of Paris in 1856 that gave the Principalities more liberty from the Russian and Ottoman Empire.
Intervention of Austrian interests The new power arrangement that was being still negotiated between Austria-Hungary, England, France, Prussia, the Ottoman Empire and Russia has its consequences for the National Bank of Moldavia.
Frederick Ludwig Nulandt renews his proposal for the establishment of the National Bank of Moldavia, but now Prince Ghica has to choose between him and his Prussian backing and the competing proposal of the Viennese banker Weichersheim, representing Austrian and English interests.
Year XVIII no. 56 June 2015 The Romanian Economic Journal It is important to mention here a series of articles published in Viennese journals by a Professor von Stein, whose arguments are a clear statement of the main thesis of the article. Namely, that it is in the interest of the Austrian Empire to seize the opportunity of conquering the Principalities, not by army but by political means. He was bringing forth a lebensraum type of argument. The Danubian countries are a necessity for the development of the Austrian Empire.