PRINCIPALITY OF SERBIA ON THE ROAD TOWARDS EUROPEAN MONETARY STANDARDS

Kneževina Srbija je 1868. godine donela odluku da posle više od četiri veka obnovi kovanje nacionalnog novca po uzoru na standarde Latinske kovničke unije. U radu se objašnjavaju međunarodne okolnosti u kojima je doneta ova odluka i analizira se specifičan plan za sproveđenje monetarne reforme. Zbog opšte nestašice sitnog novca u opticaju, Srbija će odlučiti da najpre počne sa kovanjem domaćeg bakarnog i sitnog srebrnog novca, pa tek onda sa kovanjem krupnijih apoena srebrnog, kao i zlatnog novca. Istraživanje je zasnovano na arhivskim dokumentima Državnog saveta Kneževine Srbije koji se čuvaju u Arhivu Srbije u Beogradu.


Introduction
In the economic history studies, an opinion prevails that the Principality of Serbia accepted the coinage minting standards of the Latin Monetary Union as late as in 1873, by adopting the Law on minting of Serbian silver coins.However, archival documents indicate that those minting standards were accepted in Serbia already in 1868, when it had been decided that domestic coins were to be minted in accordance with the "monetary system of French francs under the Convention signed in Paris on 23 December 1865 between France, Belgium, Italy and Switzerland".In that way, Serbia was among the first countries that joined the movement for monetary integration in continental Europe, with France playing a pivotal role.The facts relevant for rebuilding the Serbian monetary system are presented in a number of recently published works [J.Hadži-Pešić, 1995; V. Dugalić, 1999; V. Dugalić et al., 2004; D. Gnjatović, 2006; Lj.Đurđević, M. Šojić, 2007; V. Matić, 2014].This paper elaborates these facts even further.The elaboration is based on archival documents of the State Council of the Principality of Serbia that have not been analyzed up to now.Among those documents there is a Project on the solution of monetary issue which was presented to the State Council of the Principality of Serbia by M. A. Petronijević, representative of the Finance Minister Kosta Cukić, on March 11, 1868[Project, 1868].This project was a basis for the decision of the State Council of the Principality of Serbia, made on March 14, 1868, to accept French minting standards and to persevere in the following decade in minting and putting in circulation, at first only copper coins, then silver ones and, finally, larger Belgija: srebrni novac od 5 franaka, 1866.
Belgium: 5-franc silver coin, 1866 denominations of silver coins and golden coins, too, "entirely in accordance with the measure, weight and diameter of French coins".

Roots of monetary integration in Europe
The ideas of France concerning monetary integration in Europe began to be realized on December 23rd, 1865 when, after a year of negotiations and a month of meetings in Paris, France, Belgium, Switzerland and Italy signed the monetary convention on unified money minting standards.Convention stipulated that the four countries were creating a monetary union and in 1866, the British press named it the Latin Monetary Union.In that way, Great Britain wanted to make it clear to France how far monetary integration could spread in Europe [L.Einaudi, 2000].It was the time of accelerating development of the world trade, with Great Britain and France being the two key European trading powers.With the development of international trade, the influence of national currencies of these two countries: British pound and French franc grew.While golden British pound was an internationally accepted currency mainly in overseas colonies, French golden coins formed the largest share of money in circulation in continental Europe.
Before the creation of the Latin Monetary Union, France concluded bilateral arrangements for mutual acceptance of national currencies with neighboring countries, with which it had developed trade relations: Sardinia (Piedmont) in 1816, Belgium in 1832, Switzerland in 1850 and Italy in 1862.This system was based on decimal metrics, free minting and melting of golden and silver coins, all with 900/1000 finesse and on fixed gold/silver ratio 1:15.5.Golden coins were minted in denominations of five, ten, twenty, fifty and hundred francs and silver coins in denominations of five, two and one franc as well as fifty and twenty centimes.Thereby, the most accepted in international ments was golden coin of twenty French ancs [M.D. U evropskom bimetalističkom bloku, Francuska je držala devet desetina rezervi plemenitih metala, pa je bila u poziciji da ima vodeću ulogu u arbitražnim poslovima na evropskom novčanom tržištu.Bimetalistički monetarni blok dejstvovao je kao nosilac arbitražnih poslova u krajnjoj instanci; odnosi cena dva monetarna metala oscilirali su oko zakonom utvrđenog odnosa, za iznos troškova topljenja novca od jednog metala i kovanja novca od drugog metala [M.Flandreau, 1996].
Thanks to the arbitrage deals with golden and silver coins, French private banks gained large profits.Britain had been on gold standard since 1816 and thus it did not accept silver coins in payments of larger international transactions.There all European countries, regardless of the monetary standard they used, had to meet their financial obligations to Great Britain in gold [B.Stojanović, 2013].On the contrary, both gold and silver at fixed 1:15.5 ratio were equally acceptable to France because both golden and silver coins were legal tenders in that country.The monetary system in continental Europe was relatively stable during the first half of the 19th century because relations of market prices of gold and silver were relatively stable, too.However, during 1850s, a fall in the price of gold in relation to the price of silver due to the discovery of new gold reserves in California (1848) and Australia (1851) led to the overvaluation of golden coins in European mints [Ch.Kindleberger, 1993].So, it became profitable to melt silver coins and to sell silver and buy gold at market prices.Even worn silver coins with lower than prescribed silver content started to disappear from circulation and a general problem of shortages of small silver coins in circulation arose.
The countries of the European bimetallic block tried to solve this problem with the help of unilateral measures.First, in 1862, Italy decided to reduce silver content in coins worth fifty and twenty centimes to 835/1000.The example of Italy was then followed by Switzerland who reduced silver content of its silver coins to 800/1000.Soon after that, devalued small silver coins from Italy and Switzerland flooded France and Belgium.Thus, additional problems were created because minting profits from those two countries were dragged away.Finally, France reacted in 1864, by reducing silver content of all silver coins, except for those worth five francs, to 835/1000 as well as by suspending the acceptance of Italian and Swiss silver coins in all customs offices [H.P. Willis, 1901].
Greece: 5-drachma silver coin, 1876 After a ies of unilateral measures which ated bilateral agreements of the European countries of bimetallic block, Belgium suggested common action.So, in Paris, on December 23rd, 1865, France, Belgium, Switzerland and Italy enacted a monetary convention on common standards for coinage minting [Traite (Recueil) 1864-1867].This convention obliged four contracting countries to mint golden, silver and copper coins of the same weight, diameter and finesse of monetary metal.Unified percentage of acceptable weight loss of coins due to wear and tear was to be determined later.
The monetary convention on unified money minting standards came into force on August 1st, 1866.
One of the main goals of common action of the European countries of bimetallic blocks was to standardize the value of silver coins and to limit their supply.
Manje razvijene zemlje kontinentalne Evrope očekivale su relativno velike ekonomske koristi od prihvatanja Pariske novčane konvencije iz 1865.godine.Na unutrašnjem planu, standardizacija vrednosti kovanog novca na principima decimalnog metričkog sistema i ograničavanje količine sitnog srebrnog novca u opticaju bio je preduslov za smirivanju fluktuacija deviznih kurseva i prevazilaženju nestašice sitnog novca.Na spoljašnjem planu, očekivao se boljitak u trgovinskim i finansijskim vezama, pre svega sa Francuskom.Istovremeno, pristupanje Latinskoj novčanoj uniji nije podrazumevalo neki veći gubitak monetarnog suvereniteta.Prvo, nije bilo predviđeno da novčane jedinice zemalja potpisnica Pariske novčane konvencije menjaju imena i obeležja; drugo, u Konvenciji nije bilo reči o ograničavanju kovanja sitnog bakarnog novca niti o količini papirnih novčanica koje bi u sr use cou all contracting countries under following conditions: five francs coins will be accepted by public offices without any limitation; coins worth less than five francs will be accepted up to the sum of 100 francs.Each contracting country will exchange silver coins worth less than five francs minted in other contracting countries for golden and silver five francs coins under the condition that the sum to be exchanged is not worth more than 100 francs.Each contracting country will mint silver coins worth less than five francs in the amount of up to six francs per capita [Traite (Recueil) 1864-1867].Thus, when it comes to silver coins, free minting and melting and unlimited was meant only for five-franc pieces.Different limitations introduced for minting and accepting other silver coins of less worth reduced them de facto to token money.For denominations less than five francs standard 835/1000 was chosen because everyday transactions were already exercised mainly through French and Italian coins of that value.By limiting the mintage and use of silver coins worth less than five francs, the states signees of the Paris monetary convention opted for gradual abolition of bimetallism and transition to gold standard.Already in 1873, this process was continued with temporary suspension of free minting of five francs silver coins.Namely, at that moment it became profitable to buy silver as a metal and convert it into money of significantly higher nominal value because there had been a sharp decline in the market price of silver.In danger of getting flooded with five-franc silver coins and in fear of losing golden coins from circulation, the member states of the Latin Monetary Union temporarily suspended free mintage of fivefranc silver coins only to definitely stop their minting in 1878 [V.Meichsner, 1954].Less developed ntries of continental Europe were expecting relatively large economic benefits from accepting the 1865 Paris Monetary Convention.Internally, the standardization of the value of coinage on the principles of decimal metric system and limitation of quantity of fractional silver coins in circulation was a precondition for alleviating the exchange rates volatility and overcoming the problem of shortage of small denominations in circulation.Externally, betterment was expected in trade and financial ties primarily with France.At the same time, joining the Latin Monetary Union did not assume any greater loss of monetary sovereignty.First, it was not expected from countries signees of the Paris Monetary Convention to change the names and insignia of their monetary units; second, neither limiting the coinage of small copper coins nor the quantity of banknotes to be issued by national central banks was mentioned in the Convention.Thus, the countries deciding to accept the French minting standards would still be left with abundant room for unilateral actions.These facts were definitely of political and economic importance for many European countries including Greece, Romania, Austro-Hungary, Serbia, San Marino, Papal State, Spain and Bulgaria to decide, one after another, to harmonize the minting standards of their currencies with those of the Latin Monetary Union [M. de Cecco, 2007].Serbia made such a decision after Greece, Romania and Austro-Hungary.opticaj puštale nacionalne emisione banke.Prema tome, zemljama koje bi se opredelile da prihvate kovničke standarde Francuske bio je ostavljen širok prostor za unilateralne akcije.Ove činjenice svakako su bile od političkog i ekonomskog značaja za to što su se, jedna za drugom, mnoge evropske zemlje, među kojima Grčka, Rumunija, Austro-Ugarska, Srbija, San Marino, Vatikan, Španija i Bugarska, opredelile da usaglase standarde kovanja svog novca sa standardima Latinske novčane unije [M.de Cecco, 2007] As early as 1833, Greece moved away from the silver monometallic to gold and silver bimetallic standard.The national currency, i.e. silver drachma, was introduced with the gold/ silver ratio fixed at 1:15.5.In practice, however, this ratio was constantly disturbed due to fiscal problems which had burdened the State.In 1867, with a new monetary law, Greece started a monetary reform.The adoption of minting standards of the Latin Monetary Union was meant for the restoration of shaken stability of drachma and for calming down the fluctuation of exchange rates of various types of domestic and foreign coins in circulations.Just after the new monetary law was adopted, Greece signed an agreement on joining the Latin Monetary Union.It was stipulated that Greece would become its full member immediately after the new law came into force on January 1st, 1869.However, this would happen only in 1885 due to the violation of the rules of the 1865 Paris Monetary Convention [S.Lazaretou, 2003].

Commitment to French minting standards
The fact that Greece signed an agreement on joining the Latin Monetary Union was a strong impulse for a movement towards the monetary integration in continental Europe.Among the first countries that followed Greece was Romania.At that moment, Romania had not yet minted its own money.In order to withdraw numerous foreign types of coins from circulation, Romania passed a monetary law in 1867 and adopted the decimal metric monetary system 'as it exists in France, Belgium, Switzerland and Italy'.The national monetary unit, lei, was introduced in par with the French franc and it was decided to mint golden, silver and copper coins in denominations, weight and finesse in accordance with the standards of the Latin Monetary Union.The Romanian monetary law differed from the 1865 Paris Monetary Convention only in that it did not envisage free mintage of five-franc silver coins [V.G. Stoanescu et al., 2011].Also, the Romanian law stipulated that golden and silver coins of the Latin Monetary Union member states would be accepted in all public offices while all other foreign coins would be withdrawn from circulation six months after minting and putting in circulation all types of domestic golden and silver coins.However, only after the international recognition on the Berlin Congress in 1878 and minting of sufficient quantities of golden and silver coins, Romania succeeded to withdraw from circulation the foreign coins that were not minted in line with the standards of the Latin Monetary Union [K. Dimitorva, L. Fantacci, A. C.Tuncer, 2011].
At the end of 1867, Austro-Hungary decided to mint golden coins in line with the standards of the Latin Monetary Union.This happened immediately after this country abandoned its monetary system based on the silver monometallic standard.Such decision was made after the dissolution of the German Confederation in 1866, when the Vienna Coinage Treaty was signed in 1857 between the states of German Customs Union, Austria and Lichtenstein ceased to be in force.On December 24th, 1867 Austro-Hungary signed a separate agreement with France accepting the standards of the Latin Monetary Union for minting golden coins.Based on this agreement, Austro-Hungary succeeded in minting and putting in circulation only two types of golden coins: eight-florin golden coin at par with the French 20-franc golden coin and four-florin golden coin at par with the French 10-franc golden coin [C.Jobst, T. Scheiber, 2014].
After Greece, Romania and Austro-Hungary, the Principality of Serbia decided to adopt the Latin Monetary Union rules.It happened in 1868, when in Europe there was still a belief that French minting standards were likely to become widely accepted.From the Project on the solution of monetary issue it could be seen that such a belief also existed then in the Principality of Serbia.
The  .ovog zakona je zapsano da "Srbija prima načela i odredbe novčane konvencije koja je 23.decembra 1865.godine u Parizu zaključena između Francuske, Belgije, Italije i Švajcarske, i kojoj su konvenciji pristupile Grčka 1. januara 1869.i Rumunija 14. aprila 1867.godine", a u članu 2. da je "osnovna jedinica srpskog monetarnog sistema jedan dinar čija je vrednost 100 para i da the Principality of Serbia on accepting the French minting standards was made only after the agreement between Austro-Hungary and France had been finalized.In line with the explanation of M. Flandreau, smaller and economically less developed countries prefer monetary standard (currency) used by their major trading partner [M.Flandreau, 1996].So, respectful of the current monetary trends in continental Europe and primarily of the fact that Austro-Hungary -i.e. the major trading partner of Serbia turned to the Latin Monetary Union, the Serbian Government adopted the Decree on minting Serbian copper coins on March 14th, 1868.This Decree was signed by Prince Mihailo Obrenović on March 15th, 1868.As it was written in this decree, it was adopted" in an intention to introduce monetary system of franc in accordance with the Paris convention signed on December 1865 between France, Belgium, Italy and Switzerland", and in line with the minting standards of France "to replace copper coins at the moment in circulation in Serbia with the Serbian copper coins"[Decree, 1868].
Commitment to the standards established in the 1865 Paris Monetary Convention was reaffirmed for the first time on November 30th, 1873 by adopting the Law on minting Serbian silver coins, which regulated only the mintage of domestic small silver coins.In article 1 of this Law it was written that "Serbia accepts the principles and provisions of the monetary convention concluded between France, Belgium, Italy and Switzerland on December 23rd, 1865, and that the convention was joined by Greece on January 1st, 1869 and by Romania on April 14th, 1867" whereas article 2 stated that "the basic monetary unit of the Serbian monetary system is the dinar worth 100 paras, whose finesse, weight and dimensions are the same as those of the franc in the above mentioned states".

Project to solve the monetary issue in the Principality of Serbia
At the time when continental Europe embarked on the path of monetary integration, the Principality of Serbia had yet to decide on which grounds it would reestablish its national monetary system [D.Gnjatović, 2006].The arguments for the adoption of the French monetary system, well known in scientific literature, definitely existed: introduction of the decimal metric system in money minting and harmonization of the national monetary system with the European monetary trends [M.Morys, 2014].Significant advantage of the French franc was the fact that it has been based on decimal metric system and usage of grams.During the 1860s, the new metric system showed that it had capacity for international expansion since it had been adopted by the German States and Italy, with Great Britain having allowed its use [L.Einaudi, 2000].By adopting the franc and renaming it in line with local habits, the Principality of Serbia, at that moment still one of the European provinces of the Ottoman Empire, could create a modern and regulated monetary system, getting rid of many types of foreign coins in circulation.
The Principality of Serbia w solving its monetary issue at a time when it was hit by all those troubles against which the entire continental Europe was struggling: speculations in money changing business and shortages of smaller denominations of silver coins in circulation.It was necessary, therefore, to deal as soon as possible with the problems that threatened to paralyze internal trade and economy and, by overcoming them, launch a comprehensive solution of the monetary issue.Foreign exchange market of the Principality of Serbia suffered from instability.Money changers were sarrafs who had their exchange offices in major urban centers [D.Gnjatović, 2012].Even at times of relative stability at the foreign exchange market their job was complex because of the various types of Ottoman and European coins in circulation whose number and structure constantly changed.
During the 1850s and 1860s, fluctuations of exchange rates caused by the fall in gold market price further hampered the legitimate businesses of sarrafs.The State tried to bring order into this monetary chaos by changing monetary tariffs (exchange rate lists, D.G.), aiming to harmonize official exchange rates by means of frequent changes in the market prices of various types of foreign currencies.A particular difficulty arose from the fact that the values of various types of foreign coins were expressed in two different accounting monetary units: tax grosh and market grosh.In accordance with the monetary system of the Ottoman Empire, tax grosh was divided into 40 tax paras and was used in calculating transactions of a public character.Market grosh worth 20 market paras, a local invention, was used in calculating market transactions.It was created as a consequence of devalued Ottoman coins that were in circulation in Serbia.In the Project on the solution of monetary issue it was stressed that, at a time of instability of the foreign exchange market, two accounting monetary units were another suitable ground for speculative activities.
Serbia  (rarely good) grosh and market grosh.Foreign countries are changing their monetary systems.Speculative and trade activities provoke for a short time or for longer periods the rises and falls in the exchange rates of foreign coins of one or other sort which could be found in Serbia at this moment.This creates numerous problems and the Government, in order to help, must constantly legitimize these changes through its decrees, i.e. monetary tariffs [Project, 1868].Rebuilding of the national monetary system by accepting the French minting standards opened a number of social and economic issues: how would a transition from a monetary system based on the Ottoman accounting grosh to the monetary system of the French franc affect everyday life; at what rates would varieties of foreign coins be changed for domestic ones a how would their withdrawal from circulation be performed; how much time and financial sources would the State need to introduce French monetary system.
The facts put in the Project on the solution of monetary issue were stro enough arguments for the Principality's Government to conclude that the transition from the Ottoman to the French monetary system would be relatively painless.First, Serbia did not have its own money in circulation so any decision on its mintage led to a certain solution of the monetary issue.In that sense, in the mentioned Project it was written that "It is thus easier for Serbia which does not have its own money and effective monetary system to decide immediately to implement the French monetary system".Secondly, it turned out that the Ottoman accounting monetary unit could be used in a relatively painless way as a basis for determining the rates at which foreign coins would be changed for domestic ones.Namely, according to the monetary tariff then in force, enacted on April 1st, 1868 [Collection of laws and decrees, 1867], the value of accounting tax grosh had slightly differed from the value of the French franc, having in mind that one silver Fr. franc had been officially valued as two tax grosh and 15 tax paras meaning that 100 centimes were equal to 95 tax paras.
The fact that now one French centime is almost equal to tax para would make it easier for people to get acquainted with the new monetary system; thus at the moment of introducing the new monetary system the value of current tax para would be devalued by five percent only, in another words it would be announced that from now on one Fr.franc is worth 100 centimes instead of 95 tax paras [Project, 1868].With fixing the value of one tax para to the value of one French centime, the parity established between the ench franc and the future national monetary unit dinar, to be introduced with the Law on minting srebrni novac od 1 i 5 dinara, 1879.
Serbia: 1-and 5-dinar silve coins, 1879 Serbian silver currency llection of laws and decrees, 1874].In this way, the conditions were created to start the mintage of the national currency in line with the French coins and for the withdrawal from circulation of all types of currencies except of those minted under the rules of the 1865 Paris Monetary Convention.
Why did the Serbian Government decide to start the reconstruction of the national monetary system with the mintage of copper coins?This decision was dictated by the actual general acute shortage of small coins in circulation in Europe.This problem was additionally aggravated in the Principality of Serbia because for many years, the devalued Ottoman coins had been extruded out of the country through trading transactions [V.Dugalić et al., 2004].And when almost all small silver coins still in circulation were from the European states, no one could assume that even those coins would be withdrawn, to be used for melting and reminting of golden ones.In the Project on the solution of monetary issue it was particularly stressed that the reminting of "all kinds of national currencies", caused an even greater shortage of small coins in circulation.
Since Serbia does not have silver or semisilver currencies, as middle denominations between copper coins and pure silver ones, it will need more copper coins than other countries; since more copper coins are needed to improve the quality of life in the country, be it for small commerce (of food and beverages) or for the withdrawal of old copper coins from circulation, equal quantities of different types of copper coins will be needed at first.Thus, of each type of coins worth 1, 5 and 10 tax paras (future centimes) or in private transactions worth 2, 10 and 20 paras (currently valid) the same amount worth 7.5 million out of 22,500,000 will be needed [Project, 1868].When on February 20th, 1869 the first quantity of Serbian copper coins in denominations of five and ten paras was put in circulation, minted in line with the French minting standards, the Project on the solution of monetary issue started to be realized.The first small silver coins were found in circulation in 1875 and the first fivedinar silver coins and 20-dinar golden coins in 1879 [J.Hadži-Pešić, 1995].

Conclusion
Between 1868 and 1879, after more than four centuries, the Principality of Serbia renewed the mintage of national currency.Although all denominations of copper, silver and golden coins were minted entirely in accordance with the French standards, Serbia, just as many other European countries, did not succeed in formalizing its membership in the Latin Monetary Union.This was successfully done only by Greece and San Marino [L.Einaudi, 2007].
According to the archival documents of the Ministry of Foreign Affairs of France, Serbia tried three times to become a member of the Latin Monetary Union [J. M. Leconte, 1994].It happened in 1874 for the first time, after the Law on minting of Serbian silver coins was adopted.The second attempt was made in 1879, when Serbia asked for its first 20-dinar golden coins as well as five-dinar silver coins to be minted under the Law on Serbian national currency in the minting house in Paris.The claim from Serbia to have these types of coins minted in the minting house in Paris was in line with the policy of France towards the new applicants for the membership in the Latin Monetary Union.However, due to the renovation of the minting house in Paris, the French authorities accepted only a small quantity of 20-dinar golden coins to be minted.Afterwards, five-dinar silver coins were minted in the Vienna minting house.Once more, in 1880, the Serbian Government asked France for a membership in the Latin Monetary Union.The French Government rejected this claim, too, explaining that it cannot guarantee for the money that was not minted in the Paris minting house [L.Einaudi, 2007].Regardless of the fact that Serbia did not succeed in formalizing its membership in the Latin Monetary Union, Serbia accomplished the goal set by the Project on the solution of monetary issue: it minted money "entirely equal to the measure, weight and diameter of the French coins", until the breakup of the Latin Monetary Union in 1926.
During the negotiations of the European countries of bimetallic block concerning the unified minting standards, Félix Esquirou de Parieu, vice president of the State Council of France announced that the unification of the coin mintage was only the starting point towards a single European currency.In perspective, he saw Europe as a unified monetary space based on the gold standard [L.Einaudi, 2007].Thus, the 1865 Paris Monetary Convention contained an invitation to 'other civilized nations' to sign it.
Project of the solution of monetary issue it was suggested that the problem of shortages of small coins in circulation could be overcome if the Principality of Serbia began its monetary reform by minting domestic copper coins in line with the French minting standards.