1920: Attempts to attract foreign capital

Already in August of 1919 the newspaper "Valdības Vēstnesis"("The Government Herald") reported that "(..) it is only a matter of a few weeks, for our Latvian national [central] bank to open."[1] However, implementation of the idea was slowed down by the post-war situation and political events. Ādolfs Bļodnieks, member of Latvia's first legislative institution — the People’s Council (Tautas Padome) acknowledged on November 14, 1919 that using external borrowing would be impossible until the Bermont-von der Golz military adventure of a joint German-White Russian-Baltic German army  was fully defeated ending Russian-German hegemony in the Latvian territory and making Latvian independence possible.[2] 

On November 16, when the Latvian army had already sent Bermont packing from Riga, Bļodnieks wrote: "With our military victories and the increasing prospects of Latvia strengthening, the exchange rate of our national currency is increasing by the day. What I pointed out in this newspaper last week, has now materialised. Those who were disparaging the Latvian money and making all efforts to get rid of it are stuck now with worthless [Russian] tsarist rubles and are suffering large losses. I would like to believe that our farmers and other enthusiasts of tsarist rubles will have learned [a lesson] from this "game" to appreciate the national currency better and not sell it off for a laughable sum, when the money speculators might again set the rate of Latvian rouble at their liking at 85 tsarist kopeks - as they did during the days preceding the liberation of Riga. With every step that we move deeper into Kurzeme the rate of our currency will increase until its full value is established when the entire land will be liberated completely."[3] Forecasting that the country would have to cope on its own with the task of stabilising the Latvian currency, he wrote: "This has always been the case: prior to embarking upon a larger undertaking, we are looking around with longing and hope and waiting for an outside assistance. Experience to date shows that so far we have almost always been waiting in vain. We endure the situation until we finally get to work on our own."

The work that needed to be done immediately was the establishment of the central bank of Latvia. In the process of choosing between a state-run or private bank of issue, Ā. Bļodnieks advised to opt for the latter as the one capable of protecting the society against government's propensity to "print" money, which had been enhanced by  the conditions of war.[4]  Another important issue was about Latvians as shareholders.

"The council of the State Bank of Issue should mainly be composed of Latvians and foreigners are free to join, although never in a leading position," postulated the newspaper "Baltijas Vēstnesis ("The Baltic Herald") "The administrators have to be capable people and friends of progress, not kept in bondage by  ideas of the past as these always slow down the functioning of the state apparatus."[5]

Main building of Bank of Latvia, Nikolaja St., Rīgā. Inscription above the door – Latvijas Valdība / Lettlands Regierung. After Bermont. National History Museum of Latvia.

I. 1920: Attempts to attract foreign capital

By the end of 1919 and the beginning of 1920, officials and politicians had already managed to secure the first promises in correspondence and negotiations with foreign entrepreneurs to provide capital for the planned state bank of issue. This is evidenced by the response of the Ministry of Finance to the request on February 24, 1920 of the Finance and Budget commission of the People’s Council to the Finance Minister to inform immediately "with which groups of foreign financiers talks are currently under way in connection with the establishment of the Bank of Issue".[6] Jānis Rapa, Director of the Credit Department, explained that there had been several offers, including some, that arrived already in the autumn of 1919, "from a certain Mr. Sckaff, who represented a Danish businessman of unclear metier, and from Mr. H. Simson with whom negotiations were not commenced, given the character of the proposal. Recently, an American proposal has come from a representative of a certain Paul Klopstock and Co. and a telegraphic proposal from Senator of the Franco-Russian society (Noulens, Société Commerciale Industrielle et Financiére pour la Russie[7]), which promises the same as the Fortington Group".[8] The most serious bid according to the Finance Ministry was that of the Fortington Group (Harold H. Fortington) linked to The National Metal and Chemical Bank in England, and negotiations had been conducted already in the autumn of 1919, when the Finance Minister happened to be in London. J. Rapa informed that talks with Fortington, who demonstrates quite an obliging attitude, were continuing and that the draft agreement proposed by Fortington, which had undergone several revisions, would soon be submitted to the Cabinet of Ministers in the final version.

Other groups have not submitted written proposals to the ministry. One such group was the Dutch company Nederlandsche Handelmaatschappy, which had close links with the British Mediterranean Company for Trade. Its representative wrote to the Latvian Provisional government, that the company "would be glad to participate in establishing Bank of Issue in Latvia", allotting for this purpose a sum exceeding three million pound sterling, in exchange for the right to buy Latvian flax and exploit Latvian forests.[9]

On February 23, the Cabinet of Ministers discussed a draft agreement with a group of British financiers on the establishment of  bank of issue. The draft Statute of the Bank of Latvia was drawn up by V. Vitols, Deputy Director of the Credit Department of the Ministry of Finance, modelled on the joint-stock bank.[10] The main theses of the draft Statute stated that "the Bank of Latvia is a private joint-stock company, its stocks may be held by the state in an unlimited number", and that stockholders or proprietors are Latvian citizens and only 1/3 of stocks can be held by foreigners.[11] In addition, the Bank of Latvia would be the sole bank in the country with the right to issue banknotes and such a right was intended to be granted for 30 years.

Latvian national central bank as an English-Latvian bank project

An explanation of the Finance Ministry's Credit Department to the People’s Council dated March 1, 1920 concerning the establishment of the Bank of Latvia was typographically printed (On March 1, the Cabinet of Ministers adopted the draft Statute of the Bank of Latvia and instructed the Ministry of Finance to prepare the final version).[12] The explanation summarized that "of all the proposals submitted on this issue from various groups of foreign capitalists, that of The National Metal and Chemical Bank turned out to be the most advantageous and an agreement was reached on the basis of the attached draft Statute of the Bank of Latvia". The draft envisaged that the bank's share capital would be 150 million lats (three million British pounds sterling). The name of the bank was most probably one of the topics of discussion, as the original wording "The Latvian National Bank" ("Latvijas nacionālā banka") has been going through the process of fine-tuning during the drafting as either "Angļu-latviešu banka"[13] or "Anglijas-Latvijas banka"[14] (both translate as "The English-Latvian Bank"). The subscription for shares would be initiated by The National Metal and Chemical Bank, giving priority to the citizens of the Republic of Latvia.

The newspaper "Valdības Vēstnesis" ("The Government Herald") informed on March 5, 1920, that the question of establishing the Latvian bank of issue was nearing its resolution – concluding an agreement with a group of foreign capitalists. "On the most important issue – that of governance - in the initial project a majority on the shareholders' side was envisaged, i.e. five members for the shareholders and four for the government. Now, on the contrary, the conditions are straight opposite – the government has five representatives, the shareholders have four. These nine members form the bank's central board, which determines the bank's general financial policy, controls the annual report and budget for the following year, and also sets the bank's maximum for customer loans. (..) It should be mentioned finally that the first project provided for the bank's rights of issue for 30 years and in addition to that, the government could withdraw the rights of issue after 15 years, and only pay a certain amount, which could be up to 50 million. Under the current project, the rights of issue are granted to the bank for 15 years only, without any redemption provisions."[15]

On March 15, Prime Minister of the Provisional Government Kārlis Ulmanis decided to send a delegation to London, authorizing them, together with Georgs Bisenieks from the Latvian Legion in London, to "hold concluding negotiations with the Fortington Group on the Bank of Issue, agreements on forest exploitation and flax sale and to revise these agreements adding a provision that they would commence after their approval by the government and the People's Council. [16]

However, the project did not move forward. It was submitted to the People's Council, but the discussion was suspended when the Minister of Finance left for England. Elections to the Constitutional Assembly ( followed, and on May 1, 1920, what was the first democratically elected legislative body in Latvia it began its work. The project was withdrawn and reworked by the Ministry of Finance making additions and amendments. From September 16, 1920, the draft Statute of the Bank of Issue was [among the agenda items] discussed by the Finance Council. Professor Kārlis Balodis, an eminent Latvian economist of the period, expressed the opinion that "(..) there will be little benefit from the Bank of Issue if the currency is not regulated".[18] Deputy Minister of Finance Voldemārs Āboltiņš asked the members of the council to comment on whether it would be necessary to set the rights of issue for 30 years or whether 20 years would still be sufficient. [19] Former Finance Minister Roberts Erhards informed that in Germany and England the bank has this right granted forever, in Austria and France it was limited to 50 years, and recommended to stick to 30 years, which was supported by the council. What sparked debate was the right to issue banknotes with a face value of 5, 10 and 25 lats. Erhards recommended to allow the bank to issue notes starting from 50 lats, because otherwise the bank "could be earning too much". Despite  objection that this could lead to the creation of "lats of two sorts" – the worthless state-issued banknotes and the valuable banknotes, the council voted for granting the right to the bank to issue banknotes starting with the face value of 50 lats.

In mid-December 1920, the Ministry of Finance planned to submit the project to the Cabinet of Ministers. "The Constitutional Assembly will discuss the draft at its next session in January," the newspaper "Latvijas Vēstnesis" ("The Government Herald") informed and pointed out that "(..) taking into account the lively public interest in the establishment of the Bank of Issue", it provides its readers with information on the draft Statute of the bank (it would be a joint-stock bank with 75 million lats in share capital and the rights of issue for 30 years; one third of shares may be owned by foreigners; share price at 500 lats).[20] Readers learned that the group of English capitalists (The National Metal and Chemical Bank) has "set new, less favourable terms", but concluding an agreement with this group was no longer crucial, because the Latvian government had at its disposal a fund of gold worth 12 million gold francs which was quite sufficient for launching bank's operations.

Latvian-Finnish bank: rejection of the idea of a private foreign bank

At its meeting on May 14, 1920, the Finance Council also discussed the issue of establishing a Latvian-Finnish bank. Eight main theses considered by the Council envisaged that it would be a joint stock company headquartered in Riga with branches elsewhere in Latvia and abroad; founders - the Consul of Finland in Riga Alexander Herrmaki, Kārlis Taurīts and citizens of Finland B. Siren, J. N. Wallenius and H. Mahsing. [21] The planned share capital was one million Latvian rubles in 4,000 shares (250 rubles each), which would be divided between the founders and their invited persons. The members of the council had to decide whether operation of such a bank would be preferable.

J. Simsons, an expert from the Ministry of Finance, pointed out that the question of whether foreign banks should be allowed to operate in Latvia at all should be clarified first and that he would be opposed to it because "foreign banks would seize the financial power into their hands". "In general, financial capital is not a simple matter, it is a factor of power," J.Simsons explained. "This bank would work with fixed capital, but it is relatively very small. The rest of the capital will be sourced domestically and the bank will use it as it pleases. Before the war, there were two financial camps in Riga, one Latvian, the other - international. At the moment, power is in our hands, and we need to muster enough skill to hold on to it. All other countries have faced a similar situation, and everywhere it has led to the denial of foreign banks. Only financially strong countries, such as England, have allowed an exception." [22] Roberts Erhards, on the other hand, believed that foreign banks should be allowed to operate in Latvia because "we have enough power in our hands to be able to fight against undesirable consequences and phenomena". Andrejs Krastkalns (Latvian Mutual Credit Union) recommended that the bank be allowed to operate for a few years, provided that it is run by a Latvian citizen. In turn, Alvils Freijs (Riga City Discount Bank) believed that the Latvian-Finnish bank would be of no assistance, because "all our money would flow into these banks and foreigners would steer our economic life the way they please".

The issue of public confidence in banks was important. R. Erhards recognised that trust in the existing (old) banks had been lost, so attitudes towards the new bank could be different. "It seems to me that the establishment of a bank that people trust is going to make a good impression. Through this we will come closer to a normal life. People will get used to bringing their money to the banks again, and it may even happen that they will start depositing their money where they have done it in the past."[23] J.Krastkalns concurred by proposing to use foreign capital at the beginning. "I would like to say that the government is largely to blame for the loss of public confidence in the banks. A tax after tax had been imposed. As long as such a policy is pursued, there will be no trust in banks."[24] Jānis Dāvis from the Council of the Latvian Trade and Industry Bank (Latvijas Tirdzniecības un rūpniecības banka) pointed out, on the other hand, that no new Finnish money  would flow into Latvia through this bank and that it would suffice with local banks, many of which were resuming operations. J.Simsons suggested gaining public confidence in banks by explaining the current situation, acknowledging that the government had not even attempted to do so.

As a result, Vasilijs Skubiņš (Director of the Department of Agriculture) proposed not to consider the draft Statute of the Latvian-Finnish Bank before the council had agreed on the principle of either endorsing or rejecting foreign capital and banks in Latvia. The decision was entrusted to a commission, comprised of R. Erhards, S. J. Zakss (Sachs) from the Northern Mutual Credit Union (Ziemeļu Savstarpīgā kredītbiedrība), J. Simsons, J. Dāvis and A. Krastkalns. Their views differed. Some maintained that foreign banks were not merely interested in profits, but also in determining the economic life in accordance with their own goals, which "may be contrary to Latvia's interests".[25] Others, however, believed that with the help of foreign capital it would be possible to regain the trust of the population in banks. At the meeting on May 20,  Chairman of the Council Edgars Švēde put to the vote that Council considers the attraction of small amounts of foreign capital by local banks, which was insignificant for the improvement of local economic life, to be detrimental to Latvia's interests, but supports the attraction of large foreign capital. [26] It ended with the Statute of the Latvian-Finnish bank rejected from deliberation.

The idea of a joint Baltic bank of issue

What played a significant role in the development of this idea was the involvement of ministry officials in the preparation of issues to be discussed at the Bulduri Conference[28], which actualized the idea of ​​the Union of the Baltic States. At the meeting of the Finance Council on June 15, the project prepared by S. J. Zaks (Northern Mutual Credit Union) of the joint bank of issue in the Baltic border countries was discussed.[29] The document envisaged that the Baltic States would jointly establish one private joint-stock bank of issue, conscripting foreign capital. In circulation in each country, alongside the national treasury bills (paper), there would also be banknotes (gold) issued by the joint bank of issue, while the bank's head office would be located outside the Baltic States who would each host its own branch of the head office. The section of the draft operational program of the Finance Subdivision of the Conference on common banking policy recommended the exclusion of foreign banks.[30] However, the idea of ​​a Baltic bank of issue was not developed further.

[1] Kārkliņš, Aleksandrs. Latvijas Banka. Ekonomists. 1923, Nr. 12 (15.06.1923.), 457. lpp.
[2] Bļodnieks, Ādolfs. Latvijas Banka. Valdības Vēstnesis. 14.11.1919.
[3] Bļodnieks, Ādolfs. Latvijas Banka kā emisijas iestāde. Latvijas Sargs. 16.11.1919.
[4] Bļodnieks, Ādolfs. Latvijas nacionālā banka. Latvijas Sargs. 24.12.1919.
[5] Rēpšs, K. Par nacionālas emisijas bankas atvēršanu. Baltijas Vēstnesis. 17.12.1919.
[6] LNA LVVA, 4620. f., 4. apr., 156. l., 53. lp.
[7] Ibid, 37. lp.
[8] Ibid, 54.–54. lp. o. p.
[9] Ibid, 39. lp.
[10] Purmals, P. Mūsu naudas reforma. Ekonomists. 1925, Nr. 4 (15.02.1925.), 157. lpp.
[11] LNA LVVA, 4620. f., 4. apr., 156. l., 4.–11. lp.
[12] Ibid, 41. lp. [tipogrāfiski iespiests]; parakstījuši finanšu ministrs R. Erhards un Kredīta departamenta direktors J. Rapa.
[13] Ibid, 42.–52. lp.
[14] Ibid, 2. apr., 602. l., 287.–303. lp. o. p.
[15] Latvijas Banka. Valdības Vēstnesis. 05.03.1920.
[16] Valdības darbība. Ekonomists. 1920, Nr. 3, 94.–96. lpp.; šeit: 96. lpp.
[17] The first meeting took place on March 25, 1920. Sk. LNA LVVA, 4620. f., 4. apr., 21. l., 233.–237. lp.
[18] LNA LVVA, 6824. f., 2. apr., 397. l., 3. lp.
[19] Ibid, 4620. f., 4. apr., 21. l., 5. lp.
[20] Latvijas emisijas banka. Latvijas Vēstnesis. 16.12.1920.
[21] LNA LVVA, 6824. f., 3. apr., 248. l., 2. lp.
[22] Ibid, 13. lp.
[23] Ibid, 14. lp.
[24] Ibid.
[25] Ibid, 17. lp.
[26] LNA LVVA, 6824. f., 3. apr., 248. l., 20. lp. o. p.
[27] Ibid, 4620. f., 4. apr., 21. l., 164. lp.
[28] Intergovernmental Conference of the Baltic Sea States took place in 1920 from August 6 to September 6 in Bulduri, which decided to establish the Baltic Union, a legislated trilateral cooperative initiative between Estonia, Latvia and Lithuania (attempts to realise this goal between 1919-1925) or the Baltic Entente (between 1934 and the the Soviet occupation of the three states in 1940). The conference was attended by representatives of the governments of Estonia, Latvia, Lithuania, Poland, Ukraine (People's Republic of Ukraine) and Finland. At the end of 1920, the Baltic Office was established, tasked with implementing the Treaty of the Baltic Union adopted at the Bulduri Conference.
[29] LNA LVVA, 4620. f., 2. apr., 602. l., 281. un 282. lp.; 4. apr., 21. l., 33. un 34. lp.
[30] Ibid, 348. lp.