Spanish Monetary System: Banco de España’s Role 1874-1939
The Banco de España and the Monopoly of Issue (1874-1939)
In 1868, the peseta was declared the basic unit of the Spanish monetary system by the Minister of Finance, and a year later the issuance of peseta-denominated banknotes began.
The Minister of Finance, José Echegaray, pushed through the approval of a decree amending the Spanish financial system. In this decree, the monopoly of issue was granted to the Banco de España as consideration for a credit of 125 million pesetas at 3%. This credit was important for the government, as it was practically bankrupt after three wars. For the Banco de España, the privilege of issue nationwide was initially granted for 30 years, converting it into a veritable “national bank” with a privileged position with respect to other banks. These banks had the possibility of joining the Banco de España as branches, or as credit and discount banks without issuing banknotes. The Banco de España became a public-private institution. It strengthened its public nature as the financial agent of the Treasury and as a fiscal agent for the collection of taxes. Notable in its private activity were the transfers between current accounts of different branches and the use of the same banknotes in all financial centers.
The years leading up to World War I saw an economic boom in which the Banco de España and its shareholders obtained substantial profits.
The Banco de España had been transformed into the national bank, but it could not be considered the central bank, since it did not accept the monetary policy role nor act as a lender of last resort. The basic concerns for the Banco de España were to retain the confidence of its customers and maximize profits for its shareholders. It considered the other banks as competition, whereby granting them loans in serious instances of liquidity shortage, even though they were solvent, would be deemed contrary to its interests.
Gold was the standard in most important economies. Spain tried to adopt it as a standard, but it failed because of the opposition of the Bank.
Spain’s neutrality policy during the Great War meant a period of economic bonanza in which the number of Spanish financial institutions increased significantly. But in the post-war period, there was a crisis that revealed the weakness of many of these institutions, which were on the edge of bankruptcy, such as the Banco de Barcelona. Its bankruptcy entailed a problem for the whole system, so the government pressured the Banco de España to provide it assistance as a lender of last resort. The opinion of the Banco de España was that no institution with problems should be bailed out, as it is the fault of poor management. These situations supported the idea that supervision and control were needed to avert insolvency and the need for last-minute bailouts.
As a result, the Banking Law (Cambó Law 1921) entailed a major reorganization of the financial system and regulated relations between the central bank and private banks. For this, the Law created the Consejo Superior Bancario.
Further, the transformation of the Banco de España into a true central bank, entrusting to it the inspection of private banks and becoming the “bankers’ bank”. It had the obligation of maintaining the value of the peseta, thereby making it responsible for monetary policy, and laid down the Treasury’s participation in the Bank’s profits.
A new reform in 1931 increased the government’s control over the Bank. The Ministry would appoint three directors, and the Banco de España would be obliged to make its reserves available to the Treasury in the event of intervention on international markets motivated by the “national interest”.
During the Civil War, the Banco de España was split into two parts: a bank in Madrid that was relocated to Valencia and Barcelona, and another bank in Burgos. The monetary unit was broken as there were two pesetas, and each Banco de España issued its own without recognizing the operations of the other. The Bank in Burgos managed loans from Portugal, Switzerland, the United Kingdom, and the Axis powers.