International Relations Committee Meeting, ESCB
Helsinki 9 July 2009
Ladies and gentlemen,
Let me as an appetizer give you a small piece of the history of the Bank of Finland and in this way illustrate some aspect of the rather complicated history of Finland.
As a topic I have chosen Finnish participation in monetary unions of Europe. Indeed, EMU-membership is not the first time.
As an introduction, let me mention some facts of the Bank of Finland. It was established in 1811. The appeal for the establishment of a National bank had been made in the Diet of Porvoo (we will visit the near-by town Porvoo on Saturday) in 1809, when as a consequence of collapse of the Swedish Empire, its eastern part, Finland, became an autonomous Grand Duchy of Russia. The reason for the establishment of this bank was to stabilize monetary conditions in Finland and, in particular, to get rid of old Swedish money still circulating in the country. To achieve this took 30 years. Only after a monetary reform in 1840, the ruble, in the form of silver coins and Bank of Finland notes, became the dominant circulating medium in Finland.
The country could enjoy this stability of its monetary conditions only for 15 years before major instabilities occurred again in 1854-1856, caused by the Crimean war between Russia and Turkey – the latter participated this war together with its allies Great Britain, France and Sardinia.
By the way, during that war, known here as “Oolannin sota – War of Aland”, the British-French navy bombarded our coastline, also the Suomenlinna - Sveaborg fortress where we shall have dinner tomorrow evening. During the war, the convertibility of the ruble to silver was suspended in Russia, and also in Finland. Value of the ruble started to depreciate and silver coins disappeared from circulation.
This of course was detrimental for the Finnish economy. As a consequence, the question of returning to the silver standard was suggested by several influential persons in Finland. This was not agreed at first, but our Grand Duke, Emperor Alexander the Second (whose statue you can see nearby, on the Senate Square) agreed in 1860 to give Finland its own currency, the markka,
One markka was then defined equal to one quarter of a ruble. Because Russian notes were still accepted as legal tender in Finland, the value of markka fluctuated still with the paper ruble. The original target of binding markka to silver standard could not yet be achieved.
However, as a result of the efforts of two Finnish ministers of finance – first Baron Fabian Langenskiöld, and after his death, J.V. Snellman (whose statue is right in front of this building, and after whom this dining room is called the Snellman Hall) – thanks to their efforts, the decision to put the markka on the silver standard was finally allowed by St. Petersburg. Immediately after that, a big loan was arranged by the banking house M.A. Rothschild of Frankfurt in order to purchase the silver needed.
The final declaration allowing Finnish markka to be released from the link to the paper ruble, and move to the silver standard was approved by Alexander II in November 1865. In this way Finland returned to silver standard with its own national currency. The point of the monetary reform was more integrationist than separatist, however: it was to stabilize the currency, by linking it to the international silver standard which prevailed in the Northern Europe and Germany at the time. Joining this area of stability was the core of monetary thinking of Mr. Snellman.
We can note that the stability of the value of money, and joining in the European monetary system were our objectives also more than 130 years later, when Finland in the 1990s first tied the value of markka to the euro and thereafter also switched from the markka to euro currency. Giving up the national currency may seem an act opposite to obtaining it in the 19th century. However, the reason was the same: international integration and the stability of the currency.
But the introduction of the silver markka was not the only precedent for Finland’s membership in the euro area. When Finland, following the European trend, wanted to move to the gold standard, it took the model from the Latin monetary union, which had been created around the French franc after 1865. Latin monetary union consisted of France, Italy, Belgium, Switzerland, and, later, also Greece. That was the first time when people dreamed of universal money, based on the gold franc.
Finland tied its markka to the gold standard in 1878, and by the act became a de facto member of the Latin monetary union, because the weight and gold content of the gold markka was defined to be exactly equal to the French franc. Indeed, under the gold standard, the exchange rate of the markka vis-a-vis the franc remained completely stable, one for one, for no less than 36 years! That is real stability. That was also the period of the economic take-off for Finland, which was made possible only by our economic and financial integration with the European markets.
Ladies and gentlemen:
With these small glimpses on our history, I once again warmly welcome you to Finland, Helsinki, and to the Bank of Finland, and suggest a toast to the success of the 10 year old monetary union. May it continue to bring us stability, which is the perennial goal of monetary policy. And may I also suggest that we give a small thought to Mr. Snellman who, a long time ago, here in Finland, was actively working for that goal of stability!