Romanian Stabilization in the 1920s and the Missing Gold Reserves
Despite ending the First World War as one of the victors and, as a consequence, having doubled its territory and population and reaching its political goal, i.e. the union of the territories with the majority of the Romanian population in the form of a national state, Greater Romania was, economically, severely affected by the war. According to certain estimates, the war has caused ROL 31 billion worth of damages (Romanian Leu). In addition, the war triggered the disruption of the economic activity, trade deficits in relations with foreign markets, financial chaos and inflation.
As with other belligerent European countries, inflation was triggered by the renounciation of the self-regulatory mechanisms of the gold standard monetary system (the convertibility of banknotes) as well as by the dramatic increase of paper money issue having pegged exchanged rate for the purpose of financing war expenses. In Romania, the convertibility of the leu in gold was de facto abolished immediately after the outbreak of the war and abolished de jure in July 1917. On the other hand, the volume of loans granted to the state by the National Bank during the war increased greatly, reaching 93.5% of the total.
Greater Romania was, economically, severely affected by the war. According to certain estimates, the war has caused ROL 31 billion worth of damages (Romanian Leu). In addition, the war triggered the disruption of the economic activity, trade deficits in relations with foreign markets, financial chaos and inflation.
Inflationary pressures had begun to emerge since the neutrality period (1914-1916) but intensified during the two years of war. The phenomenon was fueled by the repeated issues of non-convertible banknotes, of requisition bonds, of treasury bills and, later, of other means of payment, enforced by the Romanian authorities who retreated to Moldova during the course of the war. To these general reasons, specific for Romania, two other aggravating factors were added. The first was represented by the loss of the gold reserves - about. 105 tons of gold, estimated at 315 million lei – sent to Moscow when Romania joined the war (1916) and appropriated by the authorities of the new Soviet state, subsequent to the Bolshevik Revolution. The second aggravating factor was the massive issue of a currency also called “leu” by the authorities of the German occupation. This “war leu” was issued through a German-based bank established in Bucharest (the General Bank) and was used to pay for goods requisitioned or bought by the occupation army. Obviously, the “war leu” issued by the General Bank came in addition to the “common leu” issued by the National Bank, which was relocated in Iași, which boosted inflation.
This means that the responsibility for the inflationary boosts during 1916-1918 can be assigned to both the Romanian and German ruling authorities. The effect of inflation on the entire territory of the pre-war Romania – occupied, or not, by the enemy – was to be perceived in the increase in consumer goods prices over nine-fold compared to the pre-war period.
Inflation was then amplified by the problems of the integration of the new territories that were united with Romania after 1918.
Monetary unification (1920-1921)
Once the war was over, several types of currency denominations were used on the new territory of Romania: the leu issued by the National Bank, the “war leu” issued by the authorities of the German ruling, the Austrian-Hungarian Koruna, the Romanov Ruble and the Lwow Ruble. Under these circumstances, the first challenge for the Romanian authorities was the exchange of the foreign currencies (now belonging to Romania) issued by the ruling power during the war (“war leu”) or circulating on the former Austria-Hungarian and Russian territories (the Korunas and the Rubles) in lei issued by the National Bank. This operation was referred to as “monetary unification” in the Romanian economic history literature to suggest that the union of 1918 was not only political but also economic.
The inflationary phenomenon was fueled by the repeated issues of non-convertible banknotes, of requisition bonds, of treasury bills and, later, of other means of payment, enforced by the Romanian authorities who retreated to Moldova during the course of the war.
Although technically the monetary unification should not have raised particular issues, the operation gave rise to numerous political disputes and delays – mainly due to the speculative interests of certain circles close to the country’s leaders.
Thus, the unification took place only on the 1st of August 1920, which allowed the illegal entry of large quantities of depreciable Korunas and Rubles, which were exchanged at a higher rate than the buying one.
From a financial point of view, the monetary unification was endorsed by a ROL 5 billion loan granted by the Narional Bank of Romania. Thus, the monetary unification recorded an enormous cost (67.5% of the yearly state’s expenditure). This cost was backed up, financially, just like the war related costs, by a large inflationary issue of money, which led to the continuation and acceleration of inflation and thus the internal and external depreciation of the leu.
In conclusion, the monetary unification in the years 1920-1921 was necessary for the economic integration of the Romanian historical provinces that were returned to Romania after the First World War. But this operation came at a high cost, and it undoubtedly favored the speculative groups, which were linked to the inner circle of the government and of the National Bank. Alongside with the difficulties of the economic recovery and the tense relations with international creditors, the setback of the monetary unification and the manner in which it was carried out and financed only perpetuated the inflation in the post-war Romania and delayed the actual stabilization until 1929.
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General characteristics of the 1920s
During 1923 and 1928, the industry grew rapidly as a result of massive investments funded mainly by foreign capital. Industrial production increased during 1923-1928 by 136.3%. Under these circumstances, the most spectacular development was recorded by the oil industry, placing Romania sixth among the world’s oil leading producers. On the other hand, in agriculture the production recovery and technical progress were slower. In 1921, there was an extensive agrarian reform that expropriated over 6 million hectares of land, of which nearly 4 million hectares were of farmland (66% of the landowners' property). Although approximately 2 million peasant families were granted land ownership, the reform did not extinguish semifeudal employment relations in agriculture (for example, the tithe was maintained) and did not alter the extensive and cereal nature of agriculture. Under these conditions, the agricultural production increased during 1923-1928 by only 102.5%.
Several types of currency denominations were used on the new territory of Romania: the leu issued by the National Bank, the “war leu” issued by the authorities of the German ruling, the Austrian-Hungarian Koruna, the Romanov Ruble and the Lwow Ruble.
During 1923-1928, the volume of Romania's foreign trade increased and the trade balance generally recorded a surplus, excepting the years with small agriculture production.
Even so, Romania entered the mid 1920s reflecting a difficult financial situation. In the first post-war years, the budget deficits were very high, and the public debt contracted home and abroad reached 19.2 billion lei in 1921. As a result, the National Bank's monetary issue – primarily used to finance budget deficits – increased from ROL 2,498 million in 1918 to over ROL 15 billion in 1922, which led to the continuation and intensification of the inflation and the depreciation of the ROL.
The state's financial situation improved to a certain extent in the 1922-1923 fiscal year, and all subsequent years up to 1927 ended with substantial budget surpluses. However, it has to be noted that these surpluses had been achieved primarily by eliminating some expenses from the budget which were necessary for the running of the state, and not by increasing its public revenues.
Romania, found among the winning countries at the end of the war, paid to the Allies a much higher sum than the one it received from its former enemies.
Although during 1923-1928 the public debt did not increase, the public debt service grew (from 228 million lei in 1921-1922 to 6 billion lei in 1928). The explanation lies in the fact that Romania received only a small part of the war reparations, established according the peace treaties, from the defeated countries (Germany, Austria, Bulgaria and Hungary), while the debts contracted during the war with the allied countries (France, England, USA) had reached exorbitant amounts by capitalizing interest rates. The result was that Romania, found among the winning countries at the end of the war, paid to the Allies a much higher sum than the one it received from its former enemies.
A characteristic of the evolution of the Romanian economy during this timeframe was the increase in the number of banks, which granted a large amount of loans to the industry. The banks acquired their lending resources not so much by collecting savings but by discounting a large part of the loans at the National Bank. Thus, a large part of the discount loans – which are specific for the central bank bank short term lending – was actually used by the banks to finance industrial investments, jeopardising the banks' liquidity. These credits would later appear as the central bank's fixed assets (“rotten” portfolios) and would be covered by means of external loans and taxes.
From the point of view of the economic policy, the 1923-1928s were characterized by the application of the policy called “by our own means”. This catchphrase expresses the economic policy of the National Liberal Party, which was in power for most of the inter-war period (1922-1926, 1927-1928) but controlled the political stage even when other forces came to power (for example, the People's Party, 1920-1921). This policy consisted of protectionism through custom duties and of the attempt to increase the share of Romanian capital at the expense of foreign capital in some of the more profitable or strategically important economic branches (“nostrification”, from nostru, meaning ours), but also of creating certain advantages for the Romanian employees compared to the foreign specialists, the substitution of imports (reflecting tendencies of economic autarchy), control and restriction of foreign economic relations, etc. The “by our own means” policy later failed both in terms of industrial development and monetary and financial stabilization. The main causes were the poor agricultural crops of several years, the hostility of external creditors and the internal opposition, but also the erroneous, rigid and primitive character of the policy itself. As a result, the National Liberal Party was forced to cede the power to the National Peasant Party, whose government began to apply a different economic policy since 1928 – known as “the open door” policy.
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The unsuccessful revaluation of the leu in 1925
After the war, most countries tried to stop inflation by re-establishing the gold convertibility of their banknotes and, in general, by re-establishing the principles of the Gold Standard system. Within this framework, the Romanian authorities initially tried to return to the pre-war leu by deflation and therefore by revaluation. The idea of revaluating the leu by gradually reducing the currency supply was put forward in 1920, when it was envisaged that this process would be carried out concurrently with the monetary unification which was known to happen. The idea did not get applied until 1925.
One of the reasons for the postponement was the fact that, as previously shown, the administrative groups were interested in conducting monetary unification under the conditions of the inflationary growth of the monetary mass, not in reducing it. The government also considered that the 1920-1921s, when the monetary unification took place, was premature for the success of a revaluation operation.
From the point of view of the economic policy, the 1923-1928s were characterized by the application of the policy called “by our own means”.
The method used to accomplish deflation was the gradual repayment of the government debt to the National Bank and blocking the reimbursed cash, so that the amount of banknotes in circulation would finally reach the level deemed appropriate to the needs of the economy. Practically, the amount of banknotes in circulation at 31 December 1924 (ROL 21.1 billion) was divided into two formal components: a) the “state” issue – which corresponded to the state's debt to the bank; and b) the “own” issue – which corresponded to the cash requirement of the economy. The “state” issue was considered not to have backed by gold, so for the first time it was officially recognized that the National Bank's banknotes were, in fact, fiat money. The “own” issue had a 25% security in gold – “gold” representing both effective yellow metal and government securities (bonds, treasury bills, debt certificates, etc.) and currencies (cheques, the cash in the foreign currency accounts, and foreign currencies) in gold. Since, in the balance sheet of the National Bank as of 31 December 1924, the total value of the gold-denominated amounts was of ROL 1.2 billion, it shows that the “own” issue was of ROL 4.8 billion and the rest of ROL 16.3 billions was “state" issue. The deflationary process had to be very strong, given that the money supply was to decrease by 77.3%.
In order to withdraw the banknotes from the “state” issue, a “fund for the liquidation of the state issue” was set up. This fund would be supplied by redirecting some of the state’s revenues in the next 15 to 20 years. The liquidation fund – owned by the state and managed by the National Bank – had to serve for the gradual withdrawal of the banknote issue “for the state”, ie, in fact it represented the repayment of the state's debt to the bank. This way, at the end of the period, the amount of the banknotes considered to represent the “state” issue was to be completely withdrawn from circulation.
An adjacent measure was the limiting of the National Bank’s banknote issue to the level of ROL 21.1 billion, which there was on December 31, 1924. In other words, the central bank could not increase the amount of banknotes above this limit not even for economic or unrelated causes until the banknote convertibility wass restored.
The idea of revaluating the leu by gradually reducing the currency supply was put forward in 1920, when it was envisaged that this process would be carried out concurrently with the monetary unification which was known to happen. The idea did not get applied until 1925.
With the help of the state it was also planned to increase the back up in gold of the banknotes in circulation. Thus, the state granted the National Bank the right to include as guarantee for banknotes in circulation the following items: gold from the treasury (lingots, coins), gold deposited with the Bank of England, the Reichsbank in Berlin and in Moscow, the gold treasury bonds issued by the English government, bonds, exchange bills and compensation in gold. In this way, English gold treasury bonds gained an important share in the structure of international reserves (Figure no 1).
Fig. no. 1: International reserves and treasury bonds convertible in gold, 1920-1928
Source: Stoenescu V., (coord.), Blejan E. Costache B., Iarovici A., International Reserves of the National Bank of Romania 1920-1924, 12.2006, BNR, p. 5, http://www.bnro.ro/Studies-3215.aspx; accessed on 09.06.2017.
The government also assigned the National Bank some of the gold obtained through the liquidation of the Austrian-Hungarian Bank and of the gold received by Romania as reparations of war. As a result, also considering the addition of the gold stemming from the domestic production, the gold stock which was to be found in the country increased considerably (Figure 2).
Fig. no. 2: The gold reserves, 1920-1928
Finally, the Statute of the National Bank was amended, meaning that the stock of gold was expected to be of at least 40% of the amount of issued banknotes; exceptionally, this stock could have been reduced to 33%. However, considering the fact that the international reserves included the gold from Moscow and Berlin and the English gold treasury bonds, it can be highlighted that at the beginning of the 20's, the international reserves of the National Bank recorded a decrease (figure no. 3).
Fig. no. 3: The gold reserves found ouside the country, 1920-1928
Source: Idem p. 6
However, a few years later, by recovering some of the gold deposited with foreign banks, through the recovery of the economic activity and by the acquisition of gold produced through mining in Romania, the National Bank managed to increase, to a certain extent, its international reserves (Figure no.4).
Fig. no. 4: International reserves, 1920-1928
Source: Idem p. 7
Throughout the period 1920-1928, the National Bank maintained its metal stock of gold in Moscow, although, as previously mentioned, this was confiscated by the Soviet authorities. As a result, the back-up in gold of the banknotes in circulation was largely unreal, which made it impossible to return to the convertibility of the leu. Consequently, the national currency devalued, which led to the rise in domestic prices and to the depreciation of the leu against the major currencies of the world at that time.
The “state” issue was considered not to have backed by gold, so for the first time it was officially recognized that the National Bank's banknotes were, in fact, fiat money.
Another measure introduced in the context of the revaluation project was the extension of the issue privilege granted to the National Bank for a period of 60 years (until 1960), as well as the increase of its capital from 30 million lei to 100 million lei in former currency. The state subscribed one third of the capital, i.e. 33.5 million lei, re-entering the board the shareholders of the issue bank.
This revaluation strategy of the leu was criticized by opposition representatives, who stressed the fact that the deflationary government policy would lead to lower prices and profits, especially those in the industrial branches. Thus, a well-known Romanian economist, Virgil Madgearu, representative of the National Peasant Party, pointed out that the “revaluation and deflationary plan” was built “hastedly” based on an fundamentally wrong economic concept and it would thus act as generator of unfavorable consequences for the national economy. The implementation of this plan had indeed led to the imbalance in the ratio between the domestic and the external value of the national currency, to the substantial increase in the gap between them and to the extinction, especially during the first part of 1928, of the international reserves of the National Bank. The “capital flaw”, which eventually caused the failure of this strategy, was the limiting at an arbitrarily determined level of the monetary issue “which could not have been surpassed in any way, not even for the purchase of foreign currency or gold by the National Bank”. According to V. Madgearu, the authorization of the central bank in July 1928 to exceed the issuance limit for the acquisition of foreign currency was a necessary but extremely late measure.
It must be pointed out, however, that during the period 1927-1928 a “real stabilization” of the leu was achieved. Initially, the main factor that acted in this regard was the important surplus of Romania's trade balance, which in 1927 amounted to over 4 billion lei. But, afterwards, the situation of foreign exchanges worsened, so that the leu's leverage was no longer the result of the functioning of the valuation market, but it was achieved through the intervention of the central bank, which sold large amounts of foreign currency. As a result, during the last years of the indicated period, the volume of international reserves has been greatly reduced (Figure no.5).
Fig. no. 5: International reserves (without the English Gold treasury bonds and the gold in Moskow), 1920-1928
The steadiness of the attempt to revalue the leu through deflation was, therefore, negative. However, the “actual stabilization” of the leu during 1927-1928 constituted the starting point for the monetary reform of the stabilization of the leu in 1929.
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The 1929 monetary stabilization
Following the unsuccessful attempt to revaluate the leu, the Romanian authorities decided to adopt a more realistic strategy for the official recognition of the depreciation of the leu through a devaluation operation. This policy was inspired by the French model, which at the time dealt first with the devaluation of the Franc and then restored its gold convertibility (1931). This policy was to be supported by some measures to “strengthen” the situation of the leu, i.e. to stop the depreciation process and to maintain the value of the national currency at the low level which was reached in 1928. That is why the operation was officially called “monetary stabilization”.
Initially, it was envisaged that the depreciation and stabilization policy of the leu would be applied starting with 1 January 1928. Subsequently, it was postponed until June 1928, and then to September-October 1928, but the package of normative dispositions was adopted only on February 9th, 1929. The consequence was that stabilization had not been carried out by the liberal government any longer, although they were the ones who elaborated the reform project, but by the National-Peasant administration, which replaced the former in November 1928.
Virgil Madgearu, representative of the National Peasant Party, pointed out that the “revaluation and deflationary plan” was built “hastedly” based on an fundamentally wrong economic concept and it would thus act as generator of unfavorable consequences for the national economy.
The stabilization of 1929 was the most extensive and most resounding monetary reforms in Romania since the adoption of the currency system of the leu in 1867. Enforced by the difficult situation of the national currency, this reform should have been thehighwater mark of the economic-monetary policy of the post-war period, and at the same time to have constituted the basis for Romania's further economic development. In fact, the 1929 reform was compromised by the world crisis of 1929-1933, as it strongly affected the Romanian economy by drastically decreasing the prices of agricultural produce and of other goods exported by Romania, and thus by lowering export revenues, despite increasing the quantities of exported goods. The crisis hit the Romanian economy also in other ways, such as the increase in the annuity on foreign loans contracted in the past and the “fleeing” of the capital out of the region.
In order to create the financial support for the monetary stabilization, two laws were adopted in July 1928. The first law authorized the government to contract an external loan of up to $ 250 million, to be used exclusively for monetary stabilization operations and to cater for other needs of the state, including the restoration and development of railways. The second law granted authorization to the National Bank to conclude agreements with other central banks to open and use credits for the monetary stabilization in the form of advances or rebates. Also, the National Bank was authorized to buy unlimited foreign currencies convertible into gold.
Based on the recommendations of the Bank of France (Charles Rist - governor of the Bank of France - and Roger Auboin - Resident Technical Advisor), a program was designed to provide a series of measures of a general nature designed to ensure the conditions to be met by any country that wanted to stabilize its currency, as well as some specific measures for Romania. Among the general measures, the most important ones were the achievement of balanced budgets and the regaining of foreign confidence. Among the specific measures, it is worth mentioning the removal of fixed assets from the rebate portfolio of the National Bank (“ventilation of the rotten portfolios”), the repayment of the state debt to the central bank, the future prohibition on long-term loans granted to the state, the establishment of a gold reserve sufficient enough to restore the convertibility of the leu, creating a treasury fund that would help the Ministry of Finance not to require loans at the issuing bank, etc.
The stabilization of 1929 should have been the highwater mark of the economic-monetary policy of the post-war period, and at the same time to have constituted the basis for Romania's further economic development. In fact, the 1929 reform was compromised by the world crisis of 1929-1933.
The sine qua non condition for the achievement of the monetary stabilization program was considered to be regaining the trust of foreign agents. This was due to the fact that the leu could not be stabilized without an external loan and without the participation of the foreign central banks, a situation which could not be achieved unless foreigners had confidence in Romania.
The foreign central banks agreed to cooperate with the Romanian authorities to carry out the stabilization operation on two conditions: 1) regulating Romania's external debt; and 2) the application by the Romanian government of an “open door” policy towards foreign capital.
Thus, the Romanian government concluded a series of agreements to regulate Romania's external debt both towards the French state and to the private creditors in France, Belgium, Switzerland and England. Also, an agreement was reached with the German state regulating pending financial litigations, especially linked to the issue of the “war leu” circulated during the occupation. The Romanian literature in the field reflects the fact that it is generally considered that the provisions of these agreements were unfavorable to the Romanian side.
As far as the “open door” policy is concerned, it was applied during the years 1928-1931 by the National-Peasant government. This policy consisted of measures to attract foreign capital as well as cooperation measures based on foreign capital to accomplish economic growth focused on agriculture. Thus, the legislation was amended to ensure equal treatment of foreign and Romanian capital and to put order in public finances, the customs tariff was revised in order to reduce the level of customs protection and to move towards the protection of the branches that exploited domestic agricultural production, external loans were contracted for monetary stabilization (1929) and then for development (1931).
In retrospect, it can be argued that the policy of the national peasant government to attract foreign capital had indeed contributed to the external creditors' support for the Romanian government's achievement of monetary stabilization.
The foreign central banks agreed to cooperate with the Romanian authorities to carry out the stabilization operation on two conditions: 1) regulating Romania's external debt; and 2) the application by the Romanian government of an “open door” policy towards foreign capital.
Nevertheless, in interwar Romania, the economic policy was taken aback by developments in the world economy. Thus, during 1922-1928, the liberal governments pursued a policy of economic and semi-autarchic nationalism (“through ourselves”), at a time when the European countries were making an effort to restore free trade. In the years 1928-1931, when the Romanian economy came up against the crisis, and the European economy evolved towards a new area of protectionism, the National-Peasant administration tried to liberalize foreign trade (“open door”). The reorientation of the trade policy from this liberalism promoted during the crisis to the restriction of the economic relations for fear of the outbreak of the war also occurred with a rather large delay compared to other European states that ended up adopting similar measures.
The content and essence of the monetary reform in 1929
The law and the set of measures for the implementation of the monetary reform were adopted by Parliament on 7 February in 1929.
Consistent with the 1929 monetary law, Romania's monetary unit is still called “leu” and is defined as containing 10 milligrams of gold at 90% purity. The country’s monetary system remained the Gold Standard, which was adopted in 1890. The 1929 leu (10 milligrams of gold) was however massively devalued (over 32 times) compared to the 1890 leu (322,580 milligrams of gold). In this way, the strong depreciation suffered by Romania's national currency during 1890-1929, due to the inflation during the First World War and the first postwar years, officially became official.
The law also includes a number of provisions regarding the central bank, its banknotes and the state's divisionary coins. Thus, there are no provisions in this law on gold and silver coins, which means that the 1929 monetary law enshrined the disappearance of gold and silver coins from circulation as well as the predominance of bank notes, with the sole exception of the divisional coins issued by the state in cheap metals. The fact that the new monetary law no longer included any provision regarding the coinage and circulation of gold coins shows that the monometal – gold system in 1929 was different from the traditional one.
Indeed, the law confirms the monopoly of banknote issue held by the National Bank, as well as the legal course of bonds issued by this bank, and then regulates the modalities of banknote conversion.
The 1929 leu (10 milligrams of gold) was however massively devalued (over 32 times) compared to the 1890 leu. In this way, the strong depreciation suffered by Romania's national currency during 1890-1929, due to the inflation during the First World War and the first postwar years, officially became official.
Thus, the law restored the convertibility of banknotes of the National Bank in three ways, at the choice of the issuing bank: a) in gold coins having a legal exchange rate; b) gold bullion; and c) foreign currency convertible into gold. It reflects the fact that the conversion modalities characteristic of all three forms of the gold standard were adopted: the Gold Standard, Gold Bullion and the Gold-Exchange Standard. Given that the central bank was able to choose one of these three possibilities of conversion and that the most advantageous for it was, obviously, the conversion of banknotes into foreign currencies, it was clear that the 1929 monetary law practically replaced the Gold Standard, adopted in 1890, with the Gold Exchange Standard.
Compared to the reform on the stabilization of the French Franc, which served as model for the initiators of the stabilization of the leu, the 1929 Romanian law was innovative in terms of convertibility. Thus, while the Gold Bullion Standard was adopted in France, the Gold Exchange Standard was being adopted in Romania. The explanation lies in the general orientation of the initiators, Romanian and French authors of the monetary stabilization in Romania. More precisely, given that the entire operation was to be financed by external loans negotiated in Paris by the Bank of France on behalf of the National Bank of Romania, there was the possibility that the latter would house a significant stock of French and American currency in gold for the security of the leu.
Restoring the principle of convertibility of the National Bank's banknotes, the 1929 monetary law still contained two limiting provisions. Thus, the conversion operations could have only been carried out at the bank’s headquarters in Bucharest, only sums over 100,000 lei were admitted for conversion. However, the existence of such a threshold – generally set at the value of a gold ingot – was a feature of the Gold Bullion Standard. In other words, in 1929 the Gold Exchange Standard was combined with the Gold Bullion Standard system.
In this context, the 1929 Monetary Law forced the National Bank to hold as security gold, or currencies convertible in gold, equal to at least 35% of the total amount of its promissory notes. At least 25% of these promissory notes were to be covered in gold at the treasury or as freely deposited abroad. This shows that the basis of the estimate on which the security coefficient was applied consisted of the banknotes in circulation plus the funds available in the National Bank. This expansion of the monetary estimation that had to be secured in gold was imposed as a result of the development of non-cash expenses in Romania.
The 1929 Monetary Law was accompanied by a “Romanian Government Program for Monetary Stabilization and Economic Development”. This program included a series of measures relating to monetary stabilization, the status of the National Bank, the state budget and the organization of its treasury, railways and external loans. It was drawn up at the request and according to the advice of the experts sent by the Bank of France.
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The application of the monetary reform in 1929
As the main element of the monetary stabilization was to restore the convertibility of the leu, and this was only possible by contracting foreign loans, the implementation of the 1929 reform was mainly aimed at obtaining these loans. During 1928-1929, the Romanian authorities contracted several loans from central banks in the main developed countries: France, USA, England, Italy, Germany, Switzerland, the Netherlands, Belgium, Austria and Czechoslovakia. The bonds were issued in several installments in three currencies: French Francs, Dollars and Pounds Sterling.
Thus, the “7% Stabilization Loan” of 1929 had a nominal value of lei 16.842.343.626 or in foreign currencies: £ 2 million, $ 69 million, FF 561,683,000. “The 7,5% Development Loan” of 1931 had a nominal value of lei 8,678,500 or FF 1.325.000.000.
In order to guarantee the stabilization loans, the Romanian state granted foreign creditors its most important sources of revenue: the monopoly of tobacco, salt, explosives, cigarette paper, gambling cards and matches.
In general, the conditions of these loans were particularly onerous, with the Romanian state finally committing to reimburse three times the amount received over a 30-year period. As a result, the debt burden (installments + interest retes) increased by lei 1.789 million starting with the first year.
Since the resources obtained through the stabilization loans were spent very quickly, the state contracted in 1930-1931 three other loans totalizing $8 million. These new loans were granted by almost the same foreign and Romanian banks, who also agreed to the previous loans, but the conditions imposed by the creditors were even more onerous/ They were also guaranteed by state revenues and used, among other things, to pay the public debt coupon
The second important way of implementing the 1929 reform was the policy of balancing the state budget. This policy consisted essentially of raising indirect taxes and of introducing new taxes. In 1929, state revenues increased surpassing the amount of the ones of the previous year, but the 1930 budget registered a deficit, due to the rising public debt burden following the stabilization loans and other financial arrangements, also following the lack of order in the management of newly established state-owned companies, as well as the first consequences of the global economic crisis on Romania's economy. The budgets of the following years also ended up registering deficits, as they were increasingly affected by the crisis.
The law restored the convertibility of banknotes of the National Bank in three ways, at the choice of the issuing bank: a) in gold coins having a legal exchange rate; b) gold bullion; and c) foreign currency convertible into gold.
Under these circumstances, the Romanian government suspended on 15 August 1933 the repayment of external loans. For the resumption and rescheduling of foreign public debt payments, on July 24, in 1934, several agreements were reached with foreign holders of securities issued by the Romanian state. According to these agreements, the balance of unpaid coupons during 1 August 1933 - 31 March 1934 was to be consolidated by means of a new loan. The amortization of capital remained suspended between 1934 and 1937, and the share of annual coupons paid amounted 25% for the period April 1934 - March 1935, 35% for April 1935 - March 1936 and 42% for the period April 1936 - March 1937.
Upon expiry, those agreements were prolonged annually until 1939, subject to the above-mentioned conditions. Under the conditions of the outbreak of the war, for the budgetary provisions for 1939/1940, no agreement was reached with the foreign holders of Romanian bonds, but the Romanian state proceeded, without the consent of the external creditors, to the adjourning of the capital amortization and to the reduced share of coupon payment.
Since 1937, the coupons of securities of stabilization loans held by Romanian citizens have been paid only after the stamping of the respective titles (allowed until 1 January 1938). Debt securities and loans denominated in lei were due to be paid and liquidated by a law on the amortization of domestic public debt adopted on 1 May 1947.
As regards the titles of these loans owned by foreign citizens, the payment of their coupons was suspended in April 1941. After the end of the Second World War, the authorities in Bucharest did not resume the payment of the external public debt. The liquidation of the obligations arising from the interwar foreign public debt was achieved through bilateral agreements on the settlement of pending financial problems concluded between the Government in Bucharest and the governments of the states concerned.
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The consequences of the monetary stabilization in 1929
The main provision of the monetary law was to restore the convertibility of the leu. This measure – applied for a short period of time – influenced the formation and evolution of the level of the leu’s exchange rate.
Thus, before the reform, i.e. as long as the leu was not convertible into gold, its exchange rate was based on the demand and supply on the main foreign exchange markets, which made the evolution of this exchange be characterized by great volatility. However, in the last years before the reform, the leu had been relatively stable. This de facto stability of the exchange rate of the leu was mainly achieved through the intervention of the National Bank, which has often sold foreign currency, thus increasing its market supply.
It was clear that the 1929 monetary law practically replaced the Gold Standard, adopted in 1890, with the Gold Exchange Standard.
By re-establishing the gold convertibility of the banknotes, the gold point’s mechanism was put into operation, which greatly limited fluctuations in the exchange rate of the leu. But this time, the necessary conditions for the efficient functioning of this mechanism were created not only by the evolution of the “fundamentals”, but also by the intervention of the National Bank on the market by the conversion of banknotes into gold. But, for both the foreign exchange intervention and the banknote conversion, the bank needed foreign currency, and it came from external loans. It is true that immediately after the reform, the bank had a much larger volume of currency than before, but, being used for the aforementioned purposes, this stock of currencies soon began to diminish (Figure no.6).
Fig. no. 6: International reserves, 1929-1938
Source: Stoenescu V., ş.a., op. cit., p. 8.
Setting up a large stock of foreign exchange reserves at the disposal of the bank can be explained by the decision to adopt the Gold Exchange Standard. This circumstance had two consequences. First, the monetary system of the leu was linked to the French Franc and the US Dollar. In other words, Romania entered the “block” or the “monetary area” of the franc and, to a certain extent, of the dollar. In both cases, its position was that of a “satellite” country. Secondly, the establishment of the security for the banknotes in circulation in the form of gold-backed foreign-currency of some powerful states equaled the granting by Romania, a “peripheral” country, of a loan to France, to the USA and to England, that is, precisely the to the countries from which it borrowed under onerous conditions. Thirdly, the backing established for banknotes led to an increase in the supply of money and thus created the risk for inflation, which would soon materialize.
In general, the conditions of these loans were particularly onerous, with the Romanian state finally committing to reimburse three times the amount received over a 30-year period.
In order to be protected against this risk, the Romanian authorities attempted to exchange into gold the foreign currency stock made up of loans contracted abroad and intended to cover the national currency legally, but the technical counselor of the National Bank opposed this strategy. This happened at a time when, after the crisis, some key currencies were or would be devalued (the British Pound Sterling – September 1931, the US Dollar – January 1934, the French Franc – October 1936, etc.). It is true, however, that the losses incurred by the National Bank following these decisions of the great powers were covered by the state.
Another consequence of the provisions of the 1929 Monetary Law on the security of the leu was the artificial increase in the money supply as a result of the revaluation of the gold stock. As stated, the law stipulated that, in addition to foreign currency, the issuing bank would have 25% security in gold in sight commitments. In physical terms, the gold stock developed as follows (figure no.7):
Figure no. 7: the gold reserves, 1929-1938
Source: Stoenescu V., ş.a., op. cit., p. 11.
However, by the effect of the same law, the gold stock was revalued in lei in 1929, which resulted in a significant artificial increase in the nominal value of the security in metal. This method was used several times in Romania (for example, in November 1936, when the leu was again devalued), which allowed the central bank to meet the needs of state funds to the detriment of the stability of the leu which it was supposed to provide.
The other measures taken in 1929, along with monetary law, also had some economic consequences. Thus, prior to the reform, the main items in the National Bank's balance sheet were the loans granted to the state and the rebate credits. These items were almost entirely immaterial because the borrowers (the State and the signatories of the commercial effects of the discounted portfolio) were in most cases insolvent. A central bank with such a “rotten” portfolio was invariably stuck, especially since the issuing of banknotes was limited by law.
After the end of the Second World War, the authorities in Bucharest did not resume the payment of the external public debt. The liquidation of the obligations arising from the interwar foreign public debt was achieved through bilateral agreements on the settlement of pending financial problems concluded between the Government in Bucharest and the governments of the states concerned.
Subsequent to the reform, more than half of the National Bank's assets consisted of items of clear worth: gold in the country, freely circulating gold abroad, foreign currency – gold and other foreign currency. Part of the “rotten portfolio” had already been taken over by the state, and the rest was being taken over. As far as the state debt was concerned, most of it was liquidated, and what remained in the balance sheet could be mobilized by the bank through the sale of open market operations. Under these circumstances, the National Bank could resume its functions, in particular the one of “bank of banks”, consciously influencing the volume of loans, the level of prices, and thus the economic activity, making use of instruments specific to a central bank.
This reestablishment of the National Bank’s role did not generate costs because they were fully borne by the state. Moreover, by re-establishing the convertibility of banknotes in foreign currencies, i.e. by establishing a security in foreign currency on sight deposits, the central bank gained an important source of revenue, which was added to its other sources of income, which, in turn, had been reactivated and increased. An important aspect of the 1929 monetary reform, with its many social and economic consequences, was the use of stabilization loans. Thus, most of the loans obtained through the 1929 loan were used for arrears, i.e. old debts of the state and of the railway organization to domestic and foreign suppliers. Another part was used to liquidate the “rotten” portfolio of the National Bank, as shown above.
The establishment of the security for the banknotes in circulation in the form of gold-backed foreign-currency of some powerful states equaled the granting by Romania, a “peripheral” country, of a loan to France, to the USA and to England, that is, precisely the to the countries from which it borrowed under onerous conditions.
Under the conditions of the crisis, the trade balance surplus was not enough to cover the balance of payments deficit. To cover the gap, the National Bank had to resort to its stock of foreign currency, which led to a drastic reduction and later on the depletion of this stock. In order to limit, to some extent, the outflow of foreign currency from the country, the National Bank increased the discount fee three times (from 6% to 9.5%), which led to a strong increase in the interest rates on domestic loans (18%-24%) at a time when it was necessary to stimulate economic activity.
Maintaining foreign exchange earnings at low rates, in addition to massive capital withdrawals, also led to the imposition of the monopoly of the National Bank of Romania on currency trade (May 1932).
Despite these measures, the currency stock continued to decline.
Socio-economic consequences also resulted from the concessions granted by the Romanian state to foreign investors when contracting various stabilization loans. Thus, there was an outbreak of a series of scandals related to the concession of monopolies to foreign companies as well as of other contracts of the Romanian state with foreign suppliers (for matches - Svenska Tändsticks Aktiebolaget, for road construction - Svenska Vagaktiebolaget, for firearms - Skoda, etc.).
There was an outbreak of a series of scandals related to the concession of monopolies to foreign companies as well as of other contracts of the Romanian state with foreign suppliers.
The 1929 monetary stabilization was completely compromised by the effects of the economic crisis of 1929-1933. Nine months after the suspension of the gold convertibility of the pound sterling (September 1931), the National Bank of Romania introduced currency control. In this way, the failure of the “stabilization” of the leu was formally recognized.
The Monetary Stabilization (MS) in 1929 was the most extensive and resounding monetary reform in Romania ever since the adoption of the ROL currency system in 1867. The goal of the MS was only partially reached. The MS was completely compromised by the effects of the economic crisis in 1929-1933.
Nine months after the suspension of the gold convertibility of the pound sterling (September 1931), the National Bank of Romania introduced currency control. In this way, the failure of the “stabilization” of the leu was formally recognized.
Its failure has shown that a (“peripheral”) poorly developed country did not have the ability to stabilize and consolidate its currency but with the support of the Great Powers and through considerable domestic effort. In the inter-war period, the domestic effort was not constantly possible and did not benefit from the best international circumstances to be successful.
Axenciuc V., Introducere în istoria economică a României. Epoca modernă, Editura Fundaţiei ''România Mare'', Bucureşti, 1997; Avuţia naţională a României (1912-1939), Editura Centrul Român de Economie Comparată şi Consensuală, Bucureşti, 2000; Produsul intern brut al României. 1862-2000, Editura Economica, Bucureşti, 2012
Isărescu M., (coord.), Rosentuler S., Mariţiu S., Salater W., Viaţa şi opera lui Virgil Madgearu, BNR, Restitutio, nr.2, aprilie 2002
Isărescu M., Păunescu C., Marian C., Tezaurul Băncii Naţionale a Romaniei la Moscova: documente, Editura Oscar Print, Bucureşti, 2011
Kiriţescu C., Sistemul bănesc al leului şi precursorii lui, Editura Enciclopedică, Bucureşti, vol. II, 1997
Madgearu V., Politica noastră financiară în cursul depresiunii economice, Bucureşti, 1933; Drumul echilibrului financiar, Atelierele ''Adeverul'', Bucureşti, 1935
Murgescu B., România şi Europa. Acumularea decalajelor economice (1500-2010), Polirom, Bucureşti, 2010
Păunescu C., Banca, banii şi bancherii. Pagini de istorie bancară, Editura Oskar Print, Bucureşti, 2009
Răducanu I., Stabilizarea monetară şi câteva probleme în legătură cu ea, Cultura Naţională, Bucureşti, 1928.
Stoenescu V., (coord.), Blejan E. Costache B., Iarovici A., International Reserves of the National Bank of Romania 1920-1924, 12.2006, BNR, p. 5, http://www.bnro.ro/Studies-3215.aspx
 Apud Murgescu B., România şi Europa. Acumularea decalajelor economice (1500-2010), Polirom, Bucureşti, 2010, p. 222: Axenciuc V., Introducere în istoria economică a României. Epoca modernă, Editura Fundaţiei “România Mare”, Bucureşti, 1997, p. 222.
 Kiriţescu C., Sistemul bănesc al leului şi precursorii lui, Editura Enciclopedică, Bucureşti, 1997, vol. II, p. 118.
 Idem, p. 89-118.
 V. Isărescu M., Păunescu C., Marian C., Tezaurul Băncii Naţionale a Romaniei la Moscova: documente, Editura Oscar Print, Bucureşti, 2011.
 Kiriţescu C., op. cit., p. 118-131; Murgescu B., op. cit., p. 223.
 Kiriţescu C., op. cit., p. 127; Murgescu B., op. cit. p. 223.
 Kiriţescu C., op. cit., p. 135.
 Kiriţescu C., op. cit., p. 285.
 Apud Murgescu B., op. cit., p. 223: Axenciuc V., Avuţia naţională a României (1912-1939), Editura Centrul Român de Economie Comparată şi Consensuală, Bucureşti, 2000, p. 621.
 Kiriţescu C., op. cit., p. 297.
 Author’s own calculation based on the data provided by: Axenciuc V., Produsul intern brut al României. 1862-2000, Editura Economica, Bucureşti, 2012, vol. II, p. 118, 226.
 Kiriţescu C., op. cit., p. 298.
 Idem, p. 298-299.
 Idem, p. 300.
 “Nostrification” can be defined as “the legal imposition whenever possible to transfer property owned by foreigners [often BM] former enemies) owned by their own citizens, preferably in the possession of the ethnic majority whose interests were reprezented mostly by the state” (Cambridge Economic History of Europe vol. VIII, Cambridge: Cambrige University Press, 1966-1989 (chapter by A. Teichova). Apud Murgescu B., op. cit., p. 251.
 V. Murgescu B., op. cit., p. 251.
 Gold bonds = convertible and payable in gold.
 Kiriţescu C., op. cit., p. 314.
 Kiriţescu C., op. cit., p. 315.
 Apud Isărescu M., (coord.), Rosentuler S., Mariţiu S., Salater W., Viaţa şi opera lui Virgil Madgearu, BNR, Restitutio, nr.2, aprilie 2002, p. 27-28.
- Madgearu, who at that time acted as the general secretary of the Peasant National Party, was assassinated by legionaries (members of a nationalist-fascist orientation organization), this being an itegrative part of a broader plan aimed at destroying the real or imaginary proponents of King Carol II.