Banknotes in Spain: Bank of Spain's Issuing Monopoly

In January 1874 a new law ended with issuing plurality and handed over to the Bank of Spain the monopoly of banknote emission. The creation of an emission monopoly directly resulted from the difficulties by the Spanish state to service a growing mountain of debt, which was accumulated after a long a period of internal unrest, as well as financing (and losing) colonial wars.

After replacing the banknotes of provincial banks with its own, the Bank of Spain—still a privately owned bank—assumed two main objectives: giving credibility to its notes and extending their circulation to all parts of the Spanish peninsula. In order to achieve the latter, from 1884 onwards the bank made active use of an increased number of branch offices in provincial cities.

During the last few decades of the nineteenth century, banknote emissions by the Bank of Spain lost connection with its paid capital. In just two decades, the relationship between paid capital and banknotes increased tenfold. On the other hand, from 1882 the bank only redeemed its banknotes in silver, allowing for a free float of the peseta, whose exchange rate fluctuated below its official gold value. However, the Bank of Spain continued to maintain its emission guarantee, as it was still obliged to keep the equivalent of a third (or fourth) of the value of issued notes in gold and silver reserves.

Later, in 1921, a new law (the Ley de Ordenacion Bancaria or Banking Ordinance Law) set the framework that regulated the functioning of the whole Spanish financial system from that time up to the start of the civil war in 1936. This law demanded that 45 % of the value of issued notes had to be guaranteed in gold reserves. The 1921 law, also known as Ley Cambo, was also responsible for the conversion of the activities of Bank of Spain to fit the “modern” concept of the central bank. In this process it increased the bank’s capital, extending by 25 years its monopoly on issuing of banknotes, giving it the duty of inspecting private banks and establishing preferential interest rates for rediscounting with other banks.

Between 1936 and 1939 the civil war impinged a temporary hiatus on currency circulation. The Bank of Spain separated itself into two different entities: one that focused on issuing banknotes for the “national zone” (based in Burgos) and a second one for the “republican zone” (initially based upon Madrid, although it moved to Valencia and later to Barcelona). The currency issued by both banks represented each side of the conflict, and their value was only recognised in their respective zones of influence.

Once the Spanish civil war ended in 1939, something that had been feared throughout the nineteenth century happened. The inconvertibility of banknotes into metallic was decreed (cours force) through a regulation of Franco’s regime. This move took place after the law of 9 November 1939, which declared that the banknotes issued by the Bank of Spain were legal tender (poder liberatorio) but removed the need to hold guarantees (which had been demanded up until then). The passing of this law was partially forced by these circumstances but its contents were confirmed and amplified by the Bank Ordinance Law of 1946 (Ley de Ordenacion Bancaria). This law specifically stated:

the privilege of issuing, in all circumstances, and in particular when this concession entails the faculty of creating money which is fully legal tender, without any metallic counterpart, should not be the object of a contract with the state. The state, as part of its sovereignty, has the power to confer and determine what is money in circulation, the state is the only one who has the duty of regulating the concession and use of the aforementioned privilege.

From 1946 onwards, the Spanish state institutionalised that it would be the authority regulating everything with regards to money emission and circulation (including banknotes). However, it must not be forgotten that, in those days, the Bank of Spain was still a private entity. Its shareholders still had an important role in the decision-making for the institution, even though their representation in the Consejo General Bancario (General Banking Council) had been reduced. Finally in 1962, the Bank of Spain was nationalised and was given the powers of a central bank.

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