The rise and growth of Serbian banking until World War I: Part three: Serbian banking system - operations and relations of the private banks and the National Bank (1878-1914)

Abstract

The development of Serbian banking during the 19th century was a gradual process that underwent two distinctive stages with the turning point in 1878 when Serbia became an independent state by the international agreement concluded at the Berlin Congress. During the second stage, after 1878, a decisive programme of economic development and modernization resulted in the mushrooming growth of banks and creation of the national banking system that consisted of the Privileged National Bank of the Kingdom of Serbia (National Bank) as a bank of note issue, private banks, state banks and farm cooperative societies. The majority of private banks were small joint-stock unit and universal banks which developed basic banking (discounting, savings deposits, passive and active current accounts, cashless payments, Lombard credits, trade in securities) and non-banking activities (establishment of industrial firms and conducting domestic and foreign trade). Relations between banks and the National Bank had been intensified until 1908 on voluntary basis, primarily by the National Bank's everyday credit operations, undertaken rules and measures. From 1908, however, these relations were regulated by the new Act on the National Bank (1908) through the instrument of interest rate ceiling (Article 6e) and thus became obligatory for both parties. Unfortunately, implementation of this new instrument led to deteriorating of relations between the banks and the National Bank, thus preventing the National Bank to continue with strengthening its role as a central bank. The Serbian National Bank succeeded in achieving two main aims of a central bank - monetary stability and helping in development of national trade and production, particularly industry. However, it was limited in achieving stability of the banking system because it could not fully perform its lender of the last resort function. This function was constrained, not by unwillingness or incapability of the National bank, but by its two legal obligations - to maintain legal cover and to respect limited issue of the silver notes, i.e. credits in silver. Thus, two systemic banking crises that took place in 1908 and 1912 were successfully managed by the concerted actions of the National Bank and the Serbian state.