peter mickelsson a central bank Antti Kuusterä & Juha Tarkka connecting finland with the world economy or two hundred years the Bank of Finland antti kuusterä of Helsinki has been at the hub of the nation. At the University is a distinguished F same time it has acted as a bridge linking expert in banking history. His Finland to the world economy. bank oF previous works include acclaimed The history of the bank has its share of dramatic studies of local banks Ideals and moments. Political and economic crises have bank of money. The savings banks in always been reflected at the Bank of Finland. Finland Finnish society 1822–1994 (in finland Finnish, Otava 1995) and The first volume of this work spans the period Close to the people. 100 years from its foundation in 1811 to the outbreak of 200 of cooperative banking war in 1939. It tells how Finland obtained its own 200 (in Finnish, Otava 2002). monetary system half a century before inde- years pendence from Russia. It also describes the fate of the Bank of Finland under the revolutionary years People’s Delegation in spring 1918, and how the young governor Risto Ryti struggled to protect the markka during the Great Depression. imperial cashier I This book offers a unique perspective on the to central bank peter mickelsson birth and emergence of the country. I juha tarkka has long worked isbn 978-951-1-24273-4 at the Bank of Finland and was 36.22 head of its research department otava.fi from 1996 to 2004. He has published numerous scientific studies of monetary policy and monetary history and is the author of the university course book Money and monetary policy (in Finnish, 1993). bank of finland 200 years Antti Kuusterä & Juha Tarkka BANK OF FINLAND 200 YEARS I 6 Acknowledgements 9 Prologue 19 International intrigue engulfs Finland 32 Northern European monetary conditions at the time of foundation 41 Early banking in the Kingdom of Sweden 63 Monetary development in Russia 73 First promises of a Bank of Finland 90 A convoluted creation process 111 Slowly moving Finland 118 e Bank of Finland’s early years 145 e Bank as a lender, – 157 Eorts to replace Swedish currency 165 Sweden’s currency reform 172 e rouble goes back on silver 180 Finland prepares for a reform 197 Bank of Finland regulations 205 International development of central banking principles 214 Monetary consequences of the Crimean War 220 Russia fails to return to silver standard 226 Towards monetary reform in Finland 247 Eects of the state fund reform 250 e Bank of Finland as a lender – 261 e Bank of the Estates 272 Subordinate to the Diet 278 International moves to gold 286 War in the Balkans prolongs rouble weakness 288 Finland moves to the gold standard 299 Fixing of the rouble to gold 306 Demands for monetary unification 313 e economy picks up 320 Monetary policy under the gold standard 334 Becoming a central bank 353 Structures of governance 370 Operations and sta 394 e World War and monetary system 410 Bank of Finland during the civil war months 438 Bank’s finances in the crisis years 446 Ground zero: monetary policy in ¢–¢ 460 Back to the gold standard 484 Monetary policy on the gold standard 503 Currency crisis, gold standard abandoned 522 e sterling club 535 e Bank of Finland as bank rescuer 544 A more bank-like appearance 551 Fast turnover among board members 565 Banking in the ¢¤s and ¢s 592 e Parliamentary Supervisory Council 600 rough fortune and adversity to “a magnificent undertaking” 626 Appendix 629 Sources and literature 643 Name index e history of the Bank of Finland constitutes an interesting and unique perspective on the political and economic development of Finnish society as a whole. For two hundred years the bank has been at the hub of the nation’s economic policies and has always experienced repercussions from political upheavals, sometimes in dramatic ways. is first volume of a ¤-year History of the Bank of Finland spans the period from its foundation until autumn ¢¢, when the outbreak of the Second World War triggered a major change in its operations and social role. e authors owe a debt of gratitude to many. is history project has been supported by an expert editorial group. e chairperson during the writing of this first volume was Dr Sinikka Salo of the Bank of Finland’s board, who, from the outset, supported our work unstintingly. Other members of the editorial sta were Professor emerita Riitta Hjerppe, Professor emeritus Jouko Paunio (until ¤), Dr Jukka Pekkarinen, Professor emeritus Erkki Pihkala, Dr Antti Suvanto, and Vappu Ikonen of the Bank of Finland’s archives. Vappu and the entire archive sta have patiently helped us find the material we sought. Outi Pöysä translated sources from Russian for us. Our thanks to all of them. We would also like to express appreciation to our editor at Otava, Marita Jaakkola, and graphic designer Jarkko Hyppönen, whose fine work appears on every page. Pat Humphreys translated the volume into English and commented usefully on the manuscript. Illustrations were skilfully managed by Veikko Kallio. We are further indebted to Petri Uusitalo, Pirjo Föhr-Tolvanen, Teresa Magi and Tarja Yrjölä at the Bank of Finland for their participation in producing the book and its statistical diagrams. To present the entire history of Finland’s central bank may be the greatest challenge that a Finnish economic historian and researcher can face. At the same time it is an extraordinary privilege. We appreciate the confidence expressed by the board of management of the Bank in giving us this demanding commission. e board has not involved itself in our writing in any way. e opinions expressed are the authors’ own and do not necessarily represent the Bank of Finland’s stance. Helsinki ¤¤ February ¤ Antti Kuusterä and Juha Tarkka ³´µ¶·¸¹º»¼º½º¶¾¿ t was when Tsar Alexander I, the Emperor of Russia, ratified the establishment and operations of An Oce for Exchange, I Lending and Deposits in the Grand Duchy of Finland. e date of the proclamation, December ¤th, is regarded as the founding moment of the Bank of Finland although it was not until April st in the following year that the board of the Oce first convened, under its chairman Claës Johan Sacklén. e other two directors on the three- member board were Gustav Gadolin, a cathedral dean and professor of theology, and Johan Jakob Dreilick, an industrialist who owned an iron works. e bank was entirely lacking funds at this point so the board’s first act was to ask the Governing council of Finland to grant it an advance of Åroubles in banknotes for the purchase of oÆce supplies. In the months to come, it gradually accumulated a small fund of capital “from tax surpluses” and was able to open its doors to the public on August ¤. Some eight months had elapsed since the founding proclamation.¹ e Bank of Finland is regarded as the fourth oldest central bank in the world. e factual basis for this statement is that, of central banks now in operation, only those of Sweden, England and France are older; Sveriges Riksbank was founded in , the Bank of England in ¢ and Banque de France in . However it is a considerable simplification to claim the Bank of Finland as the world’s fourth oldest central bank. Firstly, it was not a real central bank for decades after its establishment because Finland had no other banks or even real banking houses, unlike London, Paris or Stockholm. Until the second half of the ¢th century, the Bank of Finland was in reality a governmental bank of issue, and it gained the status of a central bank only gradually as the rest of Finland’s banking system developed. ÀÁ·¹·¼Âº ¢ Secondly, at the time that the Bank of Finland was established, there were several other government-owned banks of issue, the most important in the Baltic region being Russia’s State Assignat Bank in St. Petersburg and Denmark’s Kurant Bank in Copenhagen. Still, these institutions subsequently closed down so the Bank of Finland’s fourth ranking among the world’s senior central banks is not obviously false either.² e Russian Empire had annexed Finland from Sweden in the war of –¢. A grand duchy was established in the conquered land, making it a territory of limited autonomy ruled by the Tsar of Russia. e Grand Duchy of Finland was given a central administration separate from Russia’s. Not oÆcially renamed a bank until , the Oce for Bills of Exchange, Lending and Deposits was part of the new administrative machinery. It became the OÆce’s practical function to lend money and to issue small-denomination bills, intended to remedy the shortage of metallic coins in Finland. In issuing notes the bank’s role was to support the objective of Finland’s Imperial Governing council: to drive out the Swedish riksdaler and skillingar in general circulation in Finland, and replace them with Russian roubles and kopeks. Even lending by the Oce was, according to the proclamation of Tsar Alexander I, intended to help “our faithful Finnish subjects in discharging the debts with which many are burdened, either to public funds or to various financiers in Sweden”. us it is clear that one of the main objectives in founding a Bank of Finland was to wean the new Grand Duchy of Finland from its dependence on the old mother country, Sweden, and link it more closely with the Russian monetary system. Naturally the newly established government of Finland also required practical assistance in managing its monetary aairs and the Bank of Finland became not only an issuer of banknotes but also an institution where state funds were deposited and managed.