Russian version

State banknotes (T-Notes) with full or partial metal provision

Paper money is a relative novelty in the financial world (see Fig. 15). For the first time it was put into circulation in ancient China in the IX century, when the government deprived merchants of their right to issue receipts and printed its own receipts of fixed value, which became the official replacement for coins and significantly facilitated payments. This was the first step in the world taken to form a currency — the monetary unit of a given State, established by law124

However, in other countries substitutes for «real money», i.e. coins, were broadly used as well. Their face value was confirmed by a monarch’s stamp or a merchant’s (banker’s) signature and private stamp. For example, in ancient Russia pieces of stamped leather were used for the purpose, and in 13th-century China Khubilai Khan ordered to «mint» money from mulberry tree bark, which he attested with his own Imperial stamp..

The initial causes of the evolutionary origin of banknotes lie in the following factors:

  • Firstly, governments, realizing an opportunity to get gratuitous public credit, adopted merchants’ practice.
  • Secondly, previously minted defective billon coins logically led to a decision to replace metal as the bearer of value information with a more convenient and less expensive one, i.e. paper.

In connection with this issue, Karl Marx remarked: «In its role of a circulation intermediary, gold had experienced all sorts of misfortunes, it had been cut or even thinned until it became a simple symbolic scrap of paper". 125".

The first experiments with paper money sometimes were quite funny. «For example, the French Governor of Canada in 1658 ordered to use as money playing cards with his own signature. The reason for such decision was the fact that money from France was delivered to its colonies with a considerable delay, and settlers faced a shortage of means to pay for goods and make other settlement between each other. It was in this situation that the Governor decided to turn playing cards, which were available in abundance, into local credit money. With his signature he attested the right of the owner of such a card to exchange it for real coins, once a ship delivering them arrives from France. The Governor’s signature confirmed his duty to the owner of the card and the right of the latter to «convert» the card into real money.

Thus, plain facts themselves encouraged bankers and governments to realize that money becomes an increasingly symbolic and very cheap instrument of economic activity. Despite the fact that paper notes from bankers were merely a symbol of gold, people didn’t object to using them.

Governments resorted to issuing paper money in North America in the late 17th century, i.e. earlier than in Europe. The first step was made in 1690, when the State of Massachusetts started printing paper money.»126

In Europe, the first banknotes appeared in 1694, with the foundation of the Bank of England. By the Bank Charter Act of Robert Peel, passed in 1844, the exclusive right to issue banknotes was granted to the Bank of England only. This Act also stipulated a special system of banknote backing, which later became known as the «English» system: all currency issue, excluding a firmly fixed sum, was to be backed by the metal supply of the issuing bank, mainly by gold. The issue of banknotes not backed by metal was called fiduciary issue. It was the first system of partial banknote backing, which replaced the system of full backing.

In Russia, issue of banknotes was caused by a number of reasons. Coin circulation during the reign of Empress Elizabeth (1741–1761) and the following years was based on copper money, because silver and gold were in short supply at the time. The broadening of trade links, which embraced the giant territory of Russia, demanded great quantities of money of a more convenient sort than copper coins, which prevailed in circulation, but were hardly suitable for large-scale trade transactions. For instance, a payment worth 100 roubles in five-kopeck copper coins weighted as much as about 1 centner.

Issue of paper money is closely linked to certain technical and material conditions, the level of a country’s productive powers, including invention and improvement of paper production, introduction of paper and other printing industry machines, availability of specialists able to provide for money production. Establishment of a special enterprise is also necessary. Since in Russia, until early in the 19th century, no such conditions were provided, the introduction of paper money was held back.

The first Russian document on introduction of banknotes into circulation was the «personal, given to the Senate Decree of Emperor Peter the Third of the 25th of May, year 1762»".127 In this decree, in particular, it was stated that:

"…We haven’t ceased reflecting upon invention of the most facile and reliable means, to facilitate the circulation of copper money and, in commerce itself, create a convenient and beneficial establishment of a distinguished State Bank, by which each and every person, according to their wealth and wish, for moderate interest rate, could profit, and the circulation of Bank bills to be immediately introduced, as the best means, which by many an example in Europe is verified…"

By the same decree it was ruled that:

1.     Bank bills to be made as soon as possible for 5 000 000 roubles with various face value, viz. 10, 50, 100, 500 and 1000.

2.     These bills to be printed on special paper, specifically made for the purpose, and further precautions to be taken, so that there could be no forgery.

3.     For those who require the bills signed for further security, or for other necessary instructions, a new Decree is to follow immediately after this one.

4.     When made, the aforementioned bills for 5 000 000 roubles to be immediately delivered to bureaucratic institutions, which distribute the greatest share of money, so that these institutions use and spend them as cash money itself, for. –

5.     5. We wish and by this Decree command that these bills are indeed to be circulated as cash currency and as such used to pay all of Our taxes and duties, not excluding customs duties,….."

Two offices of the State Bank were established in Moscow and Saint- Petersburg. However, with the instantaneous issue of bills for 5 million roubles, the bank was granted only 2 million of backing money (one in silver coins, and the other in copper coins), while the remaining 3 million were to be supplied from the sate treasury in the next three years (one million per year).

The Decree forbid the State Bank to «dispose of the financial capital for its own good or at its own will», but gave the following instructions: «to those who come in possession of bills, and would wish to have cash instead, cash money is to be immediately distributed upon receipt of the aforementioned bills, without any receipts and written recordkeeping; and, most importantly, without any delay or red tape, or if one comes in possession of cash money, and would wish to exchange it for bills of equal value, he is to be served with the same efficiency; for this purpose, Institutions that manage this Bank are to keep a certain amount of exchanged bills… thus, the Bank will remain always inexhaustible, and the circulation of money great, fast and convenient, so that any addition to the 5 000 000 would not seem absolutely necessary, but only a result of Our extreme precaution."

The State Bank had no right to collect any commission for taking or giving out bills, so that their value in circulation was as close as possible to the value of an appropriate amount of coins.

The implementation of this Decree was declined by Catherine the Great, but the beginning of the Russo-Turkish war (1768–1774) made her issue the first paper money in the form of assignations in 1769, according to the Manifesto of the 29th of December 1768.

Specialists from Russsian Gosznak (State Administration for the Issue of Banknotes) A.E. Mikhaelis and L.A. Kharlamov argue that «they vaguely resembled money in the modern sense. Most probably, they were bank liabilities — receipts exchangeable for coins» (here and further bold type mine — A.G.).

Assignations replaced the extremely inconvenient copper money; they were highly popular and beneficial to the development of trade.

They were also used to pay civil servants’ salaries. At first, all issued assignations were backed by coins and, when brought by an individual into a bank, were immediately exchanged for copper, silver or gold coins. Not long after, however, the number of assignations began to exceed the available supply of coins, and because of the excessive assignation issue, especially during the war with Turkey, their exchange rate began to fall. In the last year of Catherine the Great’s reign, one assignation rouble was worth only 68.5 kopecks"129

In France, the issue of banknotes started in 1800–1803, in Germany (then Prussia) — in 1846. Regular bankruptcies of private banks due to uncontrolled issues of banknotes, increase in social tension and aggravation of economic troubles made all European states follow the earlier example of England, i.e. impose a monopoly on banknote issue. These countries introduced a new system of banknote backing, known as the German system. In contrast with the English system, with its limit of fiduciary issue (the issue of banknotes not backed by the precious metal supply of the issuing bank), the German system envisaged a minimal quota for banknote backing. In the late 19th — early 20th century in different countries this quota made up from 50 to 30 percent of total banknote issue. Later on, yet another backing system was formed, known as the American system, the essence of which was the may so be called «doubling» of partial backing: 15 percent of banknote issue was backed by gold and, furthermore, 90 percent — by State securities. Special instructions were in place in France, where the legislator would simply determine the maximum volume of banknotes, which could be in circulation, without pointing out by what and to what percent it was backed, despite that fact that, without doubt, certain minimal backing norms did exist.

Thus, the volume of banknote issue was linked to the size of issuing banks’ gold supplies, which created an opportunity to exchange banknotes for gold, which at the time acted as the monetary metal, but in periods of gold supply shortage the same factor led to financial crises. During the First World War, exchange of banknotes for gold was almost completely ceased, despite that in legislation this fact was grounded only years later. Banknotes, initially, replaced proper money in circulation, and then they replaced paper money as well130

With the introduction of paper money (in Russia — assignations), the essence of money had gone through major changes, and its double nature was confirmed once and for all. A certain object content remained — the cost of paper, ink and print. But it accounted for far less than the actual value of a banknote (assignation). The Central Bank’s promise to pay gold for the assignation became its main value component. Usually, this would be a gold bill of the Central Bank131. On pre- Revolution Russian banknotes one may read: «This bill is exchanged upon presentation for … parts of pure gold".


The previously described banknote issued by a private bank by both its economic nature and its derivative object content, and also by its primary liability content greatly differs from a State banknote.

In case with issue and repayment of State banknotes, not private law, but public law was in force. The essence of liability relations, which arose when a banknote was paid off, was either an unconditional obligation to give out a certain quantity of precious metal or coins of certain weight, content and form, or an unconditional obligation of the government to accept the banknote as the means of paying taxes and customs fees.

The derivative proprietary right of circulation also changed, it was confirmed by the public law obligation to accept money in certain form during all trade operations as the means of payment, which is to be accepted on a compulsory basis. This right of the bearer was supported by the power (the capacity for legal compulsion) of the State.

Cash currency is guaranteed by the property of the State and its Central Bank, by the State’s right to collect taxes.

The holder of a State banknote not only had a proprietary right in the paper note, but also the right to use this note to make any payment anywhere within the country. The banknote symbolizes an unconditional abstract right to demand precious metals or precious metal coins from the State or an abstract right to use the banknote for tax payment.

The holder’s right to accept payment is replaced by the issuing party’s duty to accept payment.


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