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Central banking in nineteenth-century Belgium: was the NBB a lender of last resort?

Published online by Cambridge University Press:  06 October 2008

Erik Buyst  and
Ivo Maes
Erik Buyst
Affiliation:
University of Leuven and National Bank of BelgiumErik.buyst@econ.kuleuven.beandivo.maes@nbb.be
Ivo Maes
Affiliation:
University of Leuven and National Bank of BelgiumErik.buyst@econ.kuleuven.beandivo.maes@nbb.be
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Abstract

The creation of the National Bank of Belgium (NBB) in 1850 marked a fundamental reform of the Belgian financial system. It clearly aimed at rendering the financial system more crisis resistant, especially by restricting the leverage of the banking sector. The NBB, which received the privilege to issue banknotes, was subject to strict rules to grant only short-term credit against collateral. The NBB took up a key role in maintaining monetary stability, especially by safeguarding the convertibility of banknotes. The NBB also took part in certain rescue operations of financial institutions. However, this was mostly on explicit demand from the finance minister and for crises concerning discount banks. It would then be an exaggeration to consider it as a lender of last resort, in the sense of taking responsibility for the stability of the financial system. This should be no surprise, given the limitations imposed by its statutes, especially the limitation to short-term credits and the strict rules on collateral, the role of the profit motive in its commercial activities and the priority for safeguarding the convertibility of banknotes.

Résumés

La création de la Banque Nationale de Belgique (BNB) en 1850 a marqué une réforme fondamentale du système financier belge. Elle a clairement eu pour but de rendre le système financier plus résistent aux crises, spécialement en restreignant l'influence du secteur bancaire. La BNB, qui avait reçu le privilège d'émettre des billets de banque, était sujette à des règles strictes de n'accorder des crédits à court terme que contre nantissement. La BNB a joué un rôle clé dans le maintien de la stabilité monétaire, en particulier dans la sauvegarde de la convertibilité des billets. La BNB a aussi pris part à certaines opérations de sauvetage d'institutions financières. Cependant, c'était surtout à la demande explicite du ministre des finances et pour les crises concernant les banques d'escompte. Il serait donc exagéré de la considérer comment prêteur de dernier ressort, c'est-à-dire en étant responsable de la stabilité du système financier. Ce qui ne constitue pas une surprise, étant données les limitations imposées par ses réglementa, en particulier la limitation des crédits à court terme et les règles strictes sur le nantissement, le rôle du motif des profits dans ses activités commerciales et la priorité de sauvegarde de la convertibilité des billets.

Abstrakte

Die Schaffung der Belgischen Nationalbank (NBB) im Jahre 1850 signalisierte eine fundamentale Reform des belgischen Finanzsystems. Sie zielte deutlich daraufhin ab, das Finanzsystem krisenresistenter zu machen, insbesondere durch die Beschränkung des Verschuldungsgrads des Banksektors. Die NBB, die das Privileg zur Herausgabe von Banknoten erhielt, unterlag strengsten Regelungen die ihr nur gestatteten, kurzfristige Kredite gegen entsprechende Sicherheiten zu gewähren. Die NBB nahm eine wichtige Stellung bei der Aufrechterhaltung der Währungsstabilität ein – insbesondere dadurch, dass sie die Konvertierbarkeit der Banknoten absicherte. Die NBB beteiligte sich ebenfalls an bestimmten Rettungsoperationen für Finanzinstitute. Dies erfolgte jedoch meist auf ausdrückliche Anweisung des Finanzministers und bei Krisen, die Diskontbanken betrafen. Es wäre daher übertrieben, sie als “Kreditgeber letzter Instanz” zu bezeichnen, wenn man diesen Begriff in dem Sinne interpretiert, dass eine Verantwortung für die Stabilität des Finanzsystems übernommen wird. Dies dürfte keine Überraschung sein, wenn man die Beschränkungen berücksichtigt, die der Bank durch ihre Statute auferlegt wurden – insbesondere die Beschränkung auf kurzfristige Kredite und die strengen Vorgaben in Bezug auf Sicherheiten, die Rolle, die das Gewinnmotiv in ihrer gewerblichen Aktivität spielte und die Priorität, die Konvertierbarkeit von Banknoten abzusichern.

Resúmenes

a creación del Banco Nacional de Bélgica en 1850 estableció una reforma fundamental en el sistema financiero belga. Claramente se proponía hacer que el sistema financiero fuese más resistente a la crisis, especialmente con la restricción del apalancamiento del sector bancario. El BNB recibió el privilegio de emitir billetes, fue sujeto a normas estrictas para condecer solo crédito a corto plazo a cambio de garantía. El BNB desempeñó un papel clave en el mantenimiento de la estabilidad monetaria, especialmente al salvaguardar la conversión de los billetes. El BNB también participó en ciertas operaciones de rescate de instituciones financieras. Sin embargo, esto fue debido principalmente a la explícita petición del Ministro de Finanzas y a las crisis que concernían a los bancos de descuento. Sería entonces una exageración considerarlo prestamista como último recurso, en el sentido de asumir la responsabilidad de la estabilidad del sistema financiero. Esto no debería sorprendernos, dadas las restricciones impuestas por los estatutos, especialmente la restricción de crédito a corto plazo y las estrictas normas de garantía, la función del motivo en las ganancias en sus actividades comerciales y la prioridad de salvaguardar la conversión de los billetes.

Type
Articles
Information
Financial History Review , Volume 15 , Issue 2 , October 2008 , pp. 153 - 173
Copyright
Copyright © European Association for Banking and Financial History e.V. 2008

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References

1 The authors would like to thank all those who contributed to this project, especially J. Abraham, S. Bertholomé, A. De Schepper, S. Lazaretou, Ph. Lefèvre, K. Oosterlinck, L. Quaglia, A. Suvantti, J. Tarkka, C. Van Nieuwenhuyze and the participants in seminars at the Bank of Finland, the Second Economic History Panel (PPP2, Bank of England and CEPR) and the Second Conference of Southeast Europe Monetary History Network (ONB, Vienna). The usual caveats apply.

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19 Belgium and France de facto formed a monetary union. So there was a serious danger that Belgian specie would be drained massively towards France (Janssens, V., Le franc belge: un siècle et demi d'histoire monétaire (Brussels, 1976))Google Scholar. In 1865 Belgium joined the Latin monetary union (Flandreau, M., The Glitter of Gold: France, Bimetallism, and the Emergence of the International Gold Standard (1848–1873) (Oxford, 2004)CrossRefGoogle Scholar).

20 Letter of 18 March 1848 from the Société Générale to the government (printed in Annales parlementaires de Belgique, 20 March 1848).

21 Moniteur belge, 21 March 1848. By comparison: total central government expenditure in 1848 – excluding ‘credits spéciaux’ – amounted up to 126 million BEF (Pirard, L'extension du rôle de l'Etat, p. 835.)

22 Pluymers, B., De Belgische industriële revolutie. Reconstructie van een databank van de fysieke produktie en de bruto-toegevoegde waarde, Workshop on Quantitative Economic History, Research Paper 92.01 (Leuven, 1992), p. 27Google Scholar.

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25 Walthère Frère-Orban was finance minister from 1848 to 1852 and from 1857 to 1867. He combined the positions of ‘prime’ minister and finance minister in the years 1868–70. In the period 1878–84 he was again ‘prime’ minister.

26 Frère-Orban had also studied in Paris.

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30 Kauch, La Banque Nationale de Belgique, p. 99.

31 Discussion du projet de loi relatif à l'institution d'une Banque Nationale. Chambre des Représentants, Session of 28 February 1850 (Lois organiques, statuts, p. 198). This had happened to the Société Générale in the 1820s. In that period the Société Générale became heavily involved in the public finances of the United Kingdom of the Netherlands which undermined confidence in its banknotes (Houtman-De Smedt, ‘Société Générale’).

32 Moniteur belge, 16 May 1850 and 5 September 1850.

33 ‘Exposé des motifs du projet de loi concernant l'institution d'une Banque Nationale’, in Lois organiques, statuts, p. 78.

34 ‘Exposé des motifs’, p. 51.

35 When the NBB opened its doors on 2 January 1851 the discount houses of Brussels, Tournai and Verviers stopped their activities.

36 This is clearly different from the situation in Britain. The Banking Act of 1844 in England created an inelastic system of note issue. As a result deposit currency became the principal medium of circulation. In Belgium, on the contrary, banknotes became the main medium of circulation. Few persons had deposit accounts, especially before World War I. Even important commercial and industrial companies effected most of their payments by means of banknotes. Also operations between brokers on the Stock Exchange were liquidated through banknotes and not by the use of cheques (Chlepner, B. S., Belgian Banking and Banking Theory (Washington, DC, 1943)Google Scholar).

37 Archives of the NBB, A589/14, Circulaire du 14 juillet 1870 aux comptoirs.

38 See Kauch, La Banque Nationale de Belgique, pp. 152–65 and Kurgan-Van Hentenryk, G., ‘The Société Générale, 1850–1934’, in Buyst, E. et al. (eds.), The Generale Bank, 1822–1997 (Tielt, 1997), pp. 65–286Google Scholar.

39 Archives of the NBB, A589/14: Circulaires du 19 et du 29 juillet 1870 aux comptoirs.

40 Kauch, La Banque Nationale de Belgique, p. 168.

41 This was also true for the Bank of England until about 1870 (Collins, M., ‘The Bank of England as lender of last resort, 1857–1878’, Economic History Review, 45 (1992), pp. 145–53CrossRefGoogle Scholar).

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50 Buyst, Maes and Pluym, The Bank, the Franc and the Euro, pp. 76–9.

51 Kauch, La Banque Nationale de Belgique, pp. 261–2.

52 Jules Malou was finance minister from 1845 to 1847 and from 1871 to 1874. He combined the position of ‘prime’ minister and finance minister from 1874 to 1878 and in 1884. Between 1848 and 1870 he was director and in 1871 vice-governor of the Société Générale. In that capacity he was the driving force behind a broadening of the Société Générale's activities, e.g. into the construction and exploitation of railways both in Belgium and abroad (Brion and Moreau, La Société Générale and Kurgan-van Hentenryk, G., ‘Finance et politique: le ‘purgatoire’ de Jules Malou à la Société Générale', in Art, J. and François, L. (eds.), Docendo discimus. Liber amicorum Romain Van Eenoo (Ghent, 1999), vol. ii, pp. 1065–82Google Scholar).

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55 Kauch, La Banque Nationale de Belgique, pp. 192–3.

56 Durviaux, La banque mixte.

57 Archives of the NBB, Conseil d'administration, 17 October 1872; Archives of the NBB, C827 ‘Banque de l'Union’: agreement between the NBB and the Comptoir Spécial d'Escompte of 21 December 1872. For more details about the Société Générale's role, see Crombois, J.-F., ‘Les activités bancaires de la Société Générale de Belgique 1870–1914. Facteurs de développement d'une grande banque mixte belge’, Revue belge d'histoire contemporaine, 25 (1994–5), pp. 1–29Google Scholar.

58 Archives of the NBB, Conseil d'administration, 14 and 21 December 1876.

59 Kauch, La Banque Nationale de Belgique, p. 159 makes a comparison between Malou and Bagehot, criticising also the old-fashioned orthodoxy of the NBB.

60 The estimated losses linked to fraud alone amounted to 24 million francs. This came on top of the huge losses incurred with the bankruptcy of the Philippart empire (Kurgan-van Hentenryk, Rail, finance et politique).

61 Durviaux, La Banque mixte.

62 See Goodhart, The Evolution of Central Banks and A. Plessis, ‘La création de la Banque de France et la génèse des banques nationales d’émission en Europe au xixe siècle', in Feiertag, O. and Margairaz, M. (eds.), Politiques et pratiques d'émission en Europe (xviie-xxe siècle) (Paris, 2003), pp. 25–51Google Scholar.

63 Kauch, La Banque Nationale de Belgique, pp. 238–9 and Buyst, E. and Maes, I., ‘Monetary policy controversies and the creation of economics departments at central banks: the case of Belgium’, in Asso, P. F. and Fiorito, L. (eds.), Economics and Institutions. Contributions from the History of Economic Thought (Milan, 2007), pp. 146-7Google Scholar. This view is confirmed by the nature of the discussions in the Conseil d'administration.

64 For more details see Crombois, ‘Les activités bancaires’, and Kurgan-van Hentenryk, ‘The Société Générale’.