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in deposits with this bank; for on May 20 While the causes of the financial disturbances Government deposits increased to 840,000,000 of last spring may be traced to the economic yen and private deposts to 385,000,000 yen. crisis of 1920 and the heavy blow dealt by Government deposits subsequently fluctuated the earthquake of 1923, banks did not lack between 750,000,000 and 870,000,000 yen, and prudence in the management of their affairs private deposits varied from about 150,000,000 during these years; it was the accidental dis- to 300,000,000. The movement of advances closure of their weakness which excited anxiety and deposits was reflected in the note issue. among depositors generally and precipitated An increase to 1,408,000,000 yen on March 23 the panic. There was in fact nothing in the was followed by temporary contraction to the nature of a sudden change in the fundamental 1,200,000,000 yen level and the following economic situation of our country to account month by expansion that resulted in the peak for this incident; and should our banking and of 2,659,000,000 on April 25. A gradual financial institutions be restored by improve- decline from this peak brought the issue nearly ments in their management, we need not take down to normal, and it stood at 1,682,000,000 a pessimistic view of the future. All depends, at the end of the year. The large gain in however, upon what readjustments are effected. deposits is the principal reason for the fact It is the duty of this bank to give every- that the increase in the volume of the note possible assistance to efforts which are being issue did not follow the great increase in made to improve the situation. The measures advances. taken by the bank since the outbreak of the National loans other than Government rice panic necessarily brought about an expansion purchase notes were issued to the amount of in the currency. This must be endured if it 651,000,000 yen during the year; and as re- contributes to financial stabilization; but con- demptions including purchases out of the sink- sidering the essential function of this bank as ing fund amounted to 451,000,000 yen, the net the central bank, and bearing in mind that increase in the debt was 199,000,000 yen. the problem of lifting the embargo on the Offerings of loans in the open market were export of gold is yet to be solved, we must limited to conversion issues. Redemption by direct our efforts toward readjusting the present means of the sinking fund was carried on abnormal situation and preparing for a return during the year both by purchase in the open to normal conditions. market and by the drawing of lots.

ANNUAL REPORT OF THE BANK OF POLAND FOR 1927 The annual report of the National Bank of funds held abroad by the Bank of Poland in Poland for 1927, presented to the meeting of October, 1926, that is to say, before receiving shareholders on February 10, 1928, contains the stabilization loan, were greater by 15 per the following sections dealing with economic cent than the reserves at the end of 1924, conditions in Poland and with the operations when they stood at the highest level attained of the bank: up to that time. Production has developed General situation.—The favorable turn taken in proportion to the increased purchasing by the economic situation of the country begin- power of money, as is shown by the decline in ning with the second part of the year 1926 was unemployment figures. In spite of certain still more marked during the past year. In temporary fluctuations toward the end of the this year the equilibrium o£ the budget, year, a distinct improvement is observable in achieved for the first time in 1926, was estab- every field of our economic life. * * * lished on a more permanent basis as a result The stabilization plan published on October of increase in receipts and in treasury reserves. 13, 1927, after the floating of the international The stability of exchange, brought about by loan, included provisions designed to insure domestic resources, was placed upon a solid budget equilibrium which had been achieved foundation through the stabilization loan, for the first time in 1926-27. The plan pro- which safeguards the national currency from vided for an increase in receipts of at least any combination of unfavorable circumstances. 300,000,000 zlotys during the budget year Although our commercial balance was unfavor- 1927-28 to cover additional administrative able, the increasing volume of imports has expenditures as well as annual amortization been to date of a productive character, and payments for the stabilization loan, and to the excess of imports was covered by foreign create an effective surplus. Part of the yield credits. The metallic reserve and the available of the foreign loan was allocated to a special

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treasury reserve which should insure permanent foreign countries, which might develop a pre- equilibrium of the budget; and the Govern- mium on importations and expose the country ment, in accordance with the plan of stabiliza- to the danger of an increase in the volume of tion, agreed for the next three years not to imports, a lowering of production, and an in- float any long-term loan either at home or crease of unemployment. Under these cir- abroad to provide for budgetary needs. The cumstances legal stabilization of the exchange system of monthly appropriations was main- was much to be desired. The Bank of Poland tained, and arrangements were made that was of the opinion that any considerable treasury balances should be deposited with fluctuations in the exchange were undesirable. the Bank of Poland. At Warsaw, the dollar, which was quoted at The money market.—The situation in the about 8.99 zlotys in January, declined to 8.95 money market underwent some changes. zlotys in February and to 8.93 zlotys in April. During the first five months of the year the Following stabilization of the zloty, the rate market was sufficiently supplied with liquid on New York was reduced in October to 8.90 capital from increase of savings, from funds zlotys, which corresponds to the ratio of 172 made available under the more liberal credit zlotys for 100 gold francs, the ratio established policy of the Bank of Poland, and also from as the basis of stabilization. * * * funds forthcoming in the prospect of a foreign On examination of the increase in the Bank loan, which stimulated an influx of foreign of Poland's gold and foreign exchange reserves capital in the form of merchandise credits, one may distinguish two periods—the first, capital loans, or the purchase of shares and from the beginning of the year to the end of securities. September, when the bank increased its gold Beginning with the month of June a general reserve by ordinary purchases; and the second, stringency became apparent in the market, including the last three months of the year, caused partly by a less liberal credit policy on during which the metallic reserve, entirely the part of the Bank of Poland—which policy aside from its revaluation on the basis of the in turn followed upon the unfavorable commer- new parity, was considerably strengthened from cial balance and the suspension of conversa- proceeds of the stabilization loan. tions regarding the international loan; partly Throughout most of the year the reserves in by a moderate revival in industry and agricul- foreign exchange rose steadily, at first as the ture and the increasing demands for liquid result of a favorable balance of payments until funds which this revival brought about. April, and thereafter as reflecting a stability of The total volume of money in circulation economic conditions in the country; this caused increased during the course of the year, from foreign currencies hoarded in Poland as well as about 1,021,000,000 zlotys at the beginning of capital sums from abroad to be presented for January to 1,312,300,000 zlotys on December deposit at the bank. The gold and foreign 31. Thus the volume of circulation increased exchange reserves rose during the first nine by 28.5. per cent, whereas the wholesale price months of the year from 264,000,000 to index for principal commodities increased by 400,000,000 zlotys, or by 53 per cent. A large only 6 per cent. The expansion in circulation part of its foreign holdings were used by the was due entirely to increase in the issue of bank for the purchase of gold, so that reserves, bank notes. Notes issued by the State declined which at the beginning of the year amounted not only relatively as new issues of bank to only 138,000,000 gold francs, increased in notes were put out but even absolutely in the nine months by 44,000,000 gold francs. amount. Currency reform made two important The exchange value of the zloty, which was changes in the account of gold and foreign- stabilized at about 9 zlotys to the dollar in the exchange reserves. The first, a purely formal second half of 1926, was maintained through- one, concerns revaluation of these reserves out the past year at nearly this level. Recon- which until October 10 were reported at their struction of the gold and foreign exchange re- former metallic parity (1 zloty equal to 1 gold serves enabled the Bank of Poland to con- franc), and beginning with October 13 at the trol the exchange market and to check specula- new gold parity (1.72 zlotys equal to 1 gold tion on depreciation of the national currency— franc). As a result of this revaluation the even to the extent of inducing a slight apprecia- metallic reserves and the available deposits tion of the zloty. There was the danger, abroad rose to 761,000,000 zlotys on October however, that any considerable rise in the 20, the profit from the revaluation amounting exchange might easily bring about a disparity to about 311,300,000 zlotys. After having set between the level of prices in Poland and in aside 231,600,000 zlotys out of this exchange

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profit for capital account there remained a of long-term credit. At the present time de- special reserve of 79,700,000 zlotys which at posits constitute for the most part available the end of the year was added to the reserve balances in current account and at sight; as fund. these are in the nature of cash reserves of com- The second change effected by the currency mercial undertakings, subject to withdrawal reform was the strengthening of the metallic on demand, they are suitable only for the or- reserves and the creation of a considerable ganization of short-term credits. reserve of foreign exchange in the amount of The volume of savings increased steadily 549,300,000 zlotys—proceeds of the stabiliza- throughout the year, principally of funds on tion loan. deposit with the postal savings bank. It would Acting in conformity with the new bank law seem that the habit of saving is beginning to which requires that at least three-quarters of reassert itself throughout the nation. the legal cover shall be in gold, the bank pur- In Warsaw the rate of interest on bank de- chased abroad in November $20,000,000 worth posits at the beginning of the year ranged from of gold. At the same time a considerable part 7 to 12 per cent per annum, according to the of the gold which had been deposited with the period of maturity, and, beginning with April, Bank of England since 1925 was brought back the rate ranged from 6 to 10 per cent. to Poland. The gold reserve on December 31 Following the decline in the rate of interest, totaled 517,300,000 zlotys, an amount equiva- the increasing available funds were used for lent to 31.1 per cent of the aggregate of bank- the purchase of securities with a fixed yield, note circulation and demand liabilities and thus forming the nucleus of long-term credit. exceeding the minimum required under the Evidence of this is found in the fact that bonds statutes by 1.1 per cent. More than two- put on the market in 1927 by the Bank of Na- thirds of the gold reserve is now domiciled in tional Economy and by the State Bank for Warsaw. Agriculture could be placed within the country In accordance with the requirements of the (about 63,000,000 gold francs during 10 currency reform in general and in particular months), as was true also of obligations of pri- with the obligation of the bank to redeem its vate institutions for long-term credit. The notes in foreign exchange, the restrictions on bourse of Warsaw also was very active in pur- foreign exchange and foreign currency which chasing stocks and bonds. had been in effect for several years were en- With the increase of funds in the money tirely abolished as of November 5. market and under influence of the decline in The credit market.—As a result of better private interest rates, the general price level conditions in the credit market bank deposits for Government loans and securities rose on have increased. Deposits in the several classes the Warsaw bourse during the first half year. of credit institutions have been as follows: The long uninterrupted upward swing par- ticularly affected railway bonds. [In millions of zlotys] Discount rates.—The decline in price of Dec. 31, Mar. 31, June 30, Sept. 30, credit, which began in the second half of 1926, 1926 1927 1927 1927 continued throughout the past year. The Total deposits 1,218. 3 1, 395.6 1,468. 9 1, 616.9 Bank of Poland lowered its discount rate three State banks 1 501.3 612.7 597.6 633.2 times—on February 10 from 9J^ per cent to Private banks 514.0 534.9 568.3 646. 7 Savings banks and credit 9 per cent, on March 10 to 8^ per cent, on cooperatives _ . _ _ 203.0 248.0 303.0 337.0 May 12 to 8 per cent—and it lowered its rate i for advances collateraled on securities four * Exclusive of treasury deposits in the Bank of National Economy, State Agricultural Bank, Postal Savings Bank, and two communal times—on February 10 from 11 to 103^ per banks. cent, on March 10 to 10 per cent, on May 12 The total volume of bank deposits may serve to 93^2 P^ cent, and on October 14 to 9 per as a basis on which to estimate the liquid capi- cent. tal in Poland in comparison with savings before Private banks lowered their discount rate on the war. Deposits in the credit establishments March 11 from 15 to 14 per cent, on May 14 then amounted to about 3,000,000,000 gold to 13 per cent, and on July 15 to 12 per cent. francs, of which 80.8 per cent were held in The legal rate of interest was reduced as of savings banks and credit cooperatives. These March 1, 1927, from 15 to 10 per cent. deposits represented national thrift and re- Credit operations.—Favorable conditions sulted from savings out of income by the middle prevailing in the money market enabled the classes. As the deposits were for long periods, Bank of Poland to enlarge its credit operations the funds could be employed in organization very considerably during the year.

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The bank admits foreign exchange bills to the position of the private banks shall have rediscount at a rate equal to the discount rate become firmly established. in the country of payment plus from 1 to 3 Depression in the cotton industry toward the per cent. Under article 51 of the bank law as md of the year resulted in the immediate revised in 1927, only those foreign bills which appearance on the market of numerous drafts have been accepted or indorsed by banks of having a maturity in excess of the legal three the highest standing abroad can be used as months, and being, therefore, ineligible to dis- cover for note issues. Advances are made on count at the Bank of Poland. In this emer- Government obligations up to 80 per cent of gency advances were extended to the banks on their quoted value. this kind of bills up to 90 per cent of their face In conformity with the principles of the sta- value, under article 63 of the bank statutes. bilization plan, the bank has, since publication International loan and stabilization plan.— of the new bank law, discontinued its practice The outstanding feature of the monetary re- of acquiring bills [payable in stable foreign form of October 19, 1927, was that with the aid currencies] under a form of repurchase agree- of foreign capital it assured the stabilization of ment.1 the zloty at a level which had already been On comparison of the credit operations of attained through national efforts and main- the bank during the past year with those of tained for a whole year preceding the reform. the preceding year it becomes apparent that, as Legal stabilization of the zloty was made pos- a result of more extensive operations by the sible by the 7 per cent 20-year loan floated by establishments for providing long-term credit, the treasury for $62,000,000 and £2,000,000, the character of the portfolio of short-term face value, at an issue price of 92. At the same bills held by private banks which formerly were time, under initiative of the New York Federal overloaded with obligations having constantly Reserve Bank and of the Bank of France, the to be renewed, has greatly improved. In pro- Bank of Poland obtained a rediscount credit of portion as the situation of the private banks £0,000,000 from 14 banks of issue, which thus improved, the Bank of Poland imposed, as it participated in the work of monetary reform in will continue to do in the future, more and Poland and indicated their confidence in the more exacting conditions for the admission of regular execution of the stabilization plan. It bills to discount—to the end that the portfolio may be recalled that the Bank of Poland on its of the bank of issue shall contain only paper part participated in a similar credit arranged in representative of equivalent wealth actually December, 1927, in favor of the Bank of Italy produced. During the year credit restrictions on occasion of the stabilization of the lira. were considerably relaxed, so as to permit The entire yield of the stabilization loan was larger credits based on good commercial paper. turned over in foreign exchange to the Bank of Within limitations the bank permitted credit Poland and placed to a special account, while to expand or contract in response to actual the equivalent thereof, amounting to 540,- needs of the commodity market in accord with 000,000 zlotys, was allocated in the following the requirements of a sound monetary circu- manner: 75,000,000 zlotys to increase the capi- lation. Admission of good commercial paper tal of the Bank of Poland; 140,000,000 zlotys to discount, whether directly by the Bank of for redemption by the bank of one-half the Poland or by first-class banking houses, pre- State note issue; 90,000,000 zlotys for conver- sented no great difficulties during the past year, sion into silver money of the other half of the and will probably present still fewer during the State note issue; 25,000,000 zlotys for redemp- year 1928. If, nevertheless, people complain of tion of treasury bonds; 75,000,000 zlotys to certain difficulties and of the high discount rate, treasury reserves; and 140,000,000 zlotys to these complaints, while they are not wholly aid Government enterprises and agriculture. without foundation, refer especially to another Although the proceeds of the stabilization line of credit strictly financial in its effects; or loan were not turned over to the Bank of Poland perhaps come from people who deal exclusively until November 9, a large part of the loan was with second-rate banks or with cooperatives utilized in accordance with its allocation before not yet firmly established, for whom the collec- the end of the year. tion of interest higher than the legal rate is a All of the second issue of shares of the Bank condition of existence. This situation is ex- of Poland are covered by the treasury in the tremely undesirable, but it will not pass until ratio of 150 zlotys for each share of 100 zlotys. 1 See Report of Financial Adviser, published on pp. 338-342 of this The shares will be assigned at the appointed BULLETIN. time in the first place to the former share-

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holders. Of the 75,000,000 zlotys deposited cerning the stabilization plan and the conclusion by the treasury, 50,000,000 will be added to of the international loan, it became necessary to the capital and 25,000,000 to the reserves of introduce some changes in the monetary system. the bank. Conformably to the stabilization plan the Under an agreement between the Minister monetary system of Poland is based on gold. of Finance and the Bank of Poland, withdrawal Coins are to be minted in the proportion of of half the State note issue—that is to say, with- 5,924.44 zlotys to one kilogram of fine gold, drawal in the sum of 140,000,000 zlotys—was which corresponds to 1.72 zlotys for one gold begun even before publication of the stabiliza- franc, and to 8.9141 zlotys for one United tion plan and was accelerated during the last States dollar. As the last phase of monetary two months of the year so as to be finished on reform, changes in the statutes of the Bank of December 31. The remainder of the State Poland which were voted by the extraordinary notes in circulation on December 31 in the meeting of shareholders on November 5 may amount of 167,000,000 zlotys will be exchanged be examined. The more important of these in part for subsidiary coins now in the treasury, changes are the following: and, to the amount of 140,000,000 zlotys, for (1) Under article 47 the bank will redeem new silver coins to be minted during 1928. its notes at its discretion in gold coin or in bills Thereafter the monetary circulation will be of foreign exchange. The redemption shall take composed exclusively of notes of the Bank of place only at the head office in Warsaw and Poland and silver and copper coins. Total for amounts in excess of 20,000 zlotys. circulation for account of the State may not exceed 320,000,000 zlotys. Moreover, under (2) Article 51 provides that bank notes in the above-mentioned law in respect to monetary circulation and demand obligations of the circulation, the stabilization plan provides for bank shall be covered in the minimum propor- several other arrangements which assure to the tion of 40 per cent. The gold reserve in coins bank control over the money market. For ex- and bullion shall represent at least three-fourths ample, the treasury undertakes, exclusive of of the minimum cover. Only such foreign the redemption of treasury bonds in the exchange bills shall serve as cover as have been amount of 25,000,000 zlotys, not to increase accepted or indorsed by foreign banks of the item of advances with the Bank of Poland highest rank. beyond the 25,000,000 zlotys actually utilized; (3) Article 5 provides that at the request it will deposit all its available balances with of owners shares to bearer may with consent the bank; and will keep the bank constantly of the president of the bank be exchanged for informed as to the condition of the treasury registered shares. accounts at the Postal Savings Bank and at the (4) Under article 77 shares of the bank, as treasury. well as regular and supplementary dividends, The sum of 75,000,000 zlotys allocated to are exempt from all taxation until December treasury reserves may be employed by the 31, 1937. Government under special conditions provided In carrying out the stabilization plan adopted for in the stabilization plan, and for this by the Polish Government and the provision for reason does not figure in the account of demand election of a foreign member to the council obligations. of the Bank of Poland, a new article (article The remaining sum of about 140,000,000 26 A) was introduced into the statutes of the zlotys constitutes a special fund intended to bank. Under this article Mr. Charles S. Dewey, assist economic development and will be ad- former Assistant Secretary of the Treasury at ministered by the bank under a special law Washington, was appointed on November 5 approved by the Minister of Finance. To to the board of directors of the bank, and December 31 there had been used out of this assumed his functions on November 22 as a fund 17,700,000 zlotys for agricultural credit member of the board and as counselor to the extended solely through purchase of mortgage Government within the limits provided by the bonds of the Credit Foncier and obligations stabilization plan. The bank authorities take of the Bank of National Economy and the pleasure in stating emphatically that collabora- Government Bank for Agriculture. tion of a foreign member on the board is of The monetary system and the statutes of the great advantage to the Bank of Poland and Bank of Poland.—Following the decree of the also for realization of the aims set forth in the President of the Republic on October 13 con- stabilization plan.

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