Roumania's Financial Progress Since the War

Manager, Banque Chrissoveloni, New York

TO understand the financial situation of Roumania since the armistice a general statement is necessary, in which certain facts that have affected Roumania's situation fundamentally and radically must be mentioned. We shall not speak of the loss in man power, of the devastation of its territory wrought by the enemy, of the enemy's disorganization of the railroads and all other economic equipment, of the disappearance of live stock and agricultural implements, all of which are losses that were suffered by all countries engaged in the war. We shall not even dwell on the fact which is unique in the annals of the great war, that Roumania was devastated simultaneously by the German enemy troops and by the Russian Allies in revolt, and that a Roumanian division received on the same day orders to attack the Germans in front of them and to prepare to defend itself against their former Russian comrades.

However, certain special factors have affected Roumania's economic and financial structure to such an extent that particular mention must be made of them if the postwar situation is to be understood. A complete statement of the facts was presented to the American War Debt Funding Commission in Washington by the Chairman of the Roumanian Debt Funding Commission on the occasion of Roumania's funding its war debt to the United States in November, 1925.

The facts, briefly summarized, are as follows:

1. In the fall of 1916 Roumania, at the request of her Allies, destroyed her oil wells and oil-refining plants to prevent them from falling into the hands of the Central Powers. In exchange for this contribution to the common Allied cause, Roumania's only compensation is a remittance of part of her war debt to Great Britain and to France.

2. Also at the request of her Allies, Roumania sent her national treasure, representing over 300 million lei gold, together with art treasures, jewels and the like, amounting to more than 200 million dollars in all, to Moscow. This deposit was later confiscated by the Soviet Government, and not one cent of it has been restored to date.

3. During the occupation of two-thirds of Roumanian territory by the Central Powers, the latter resorted to a method, which is inadmissible, of extorting enormous values from the country under the appearance of purchases. In order not to depreciate their own currency, the Germans issued special money through a banking institution, the "Banca Generala," and they purchased on the basis of gold prices goods belonging to private individuals which they immediately exported to Germany. This issue amounted to 2,173,000,000 lei, or $419,498,069. When Russia made a separate peace with Germany, Roumania was obliged to reimburse the Roumanian citizens to the value of these notes by withdrawing the notes of the Banca Generala in 1920, so that its citizens should not be left with notes which were absolutely valueless, and in order to ensure the monetary unity of the country. This unavoidably became a source of inflation.

4. For the Allied and Associated countries the war ended on the 11th of November, 1918. For Roumania the war continued one year more, as she had to repel the continuous attacks of the Bolsheviks both on the eastern frontier, where they were instigated from Moscow, and on the western frontier also, harassed by Bela Kuhn from his headquarters at Budapest.

5. Roumania has been allotted only 1.1 percent of German reparations. It is true that Roumania has been awarded 10.5 percent on the non-German reparations, but in order to permit Austria to contract a reconstruction loan, Austrian reparations were adjourned for 20 years. As regards Hungary, too, in view of the difficult financial situation in that country, Roumania, Jugo-Slavia and Czecho-Slovakia took in September, 1923, the initiative in a plan for the economic reconstruction of Hungary through the League of Nations, based on the suspension of almost all reparations for twenty years. It was Roumania which made the greatest sacrifice by accepting the suspension of reparations from Hungary, because the main reparations due to Roumania are those from Austria and Hungary, and as a result, although Roumania is one of the countries which suffered the most during the war, practically speaking, she received almost nothing as reparations.

Roumania found itself, therefore, at the termination of the war with the entire life of the country completely disorganized and her finances seriously affected.

To understand Roumania's recovery from this situation since the war, it will be necessary to analyze her budget, study her currency and exchange situation, and her trade balance.

Since 1901 and up to the beginning of the Great War, the budget of the old Kingdom of Roumania showed an excess of income over expenditure. The budget for 1913-14 showed expenses of about 100 million dollars and was closed at the end of the fiscal year (March 31, 1914) with a surplus of about 19 million dollars. The pre-war budgets have always been characterized by two facts:

1. Steady increase in the yearly expenditures.
2. Surplus receipts over expenditures at the end of the fiscal year.

At times the remaining surplus amounted to as high as 25% of the actual receipts. During the first years after the war, budgetary equilibrium was completely disrupted. From 1916 to the beginning of 1919, Roumania financed itself practically with paper money. The first regular budget presented to Parliament, the one for 1919-1920, was as follows:

Beginning with the budget of 1921-22, not only was the balance between expenditures and revenues again established, but from that year on Roumania's budgets begin to show a surplus of actual receipts compared with the budgetary estimates. The figures are given below:

The expenditures have also been larger than the budgetary estimates, and the necessity of opening supplementary credits during the year arose. These credits have been covered by the surplus of revenue above mentioned. In this way Roumania's budgets have been balanced during the last five years. This is, indeed, an enviable achievement, and one which few countries in Europe have equalled. The fact that it was possible to cover each year the supplementary credits out of surplus revenue over budgetary estimates, permitted the spending of considerable sums for the reconstruction of railroads, schools and other capital expenditures.

The different sources of revenue and the total receipts in the budget are given below:

The direct taxes began with 8 million dollars in the budget of 1921-22 and reached 17.1 million dollars in 1925. This increase of about 135% is due to the adoption of the income tax in 1921-22. It can readily be seen from the above figures that the proportion of the direct taxes to the general revenues of the State is much smaller than the indirect taxes. This is, however, considered only a temporary situation, as it is expected that with a better application and administration of the income tax law, the revenue derived from these sources will considerably increase.

The State monopolies are as follows:

This represents at the present rate of exchange a sum of over 28 million dollars, compared with a total budget (including railroads) for 1926 of over 191 million dollars. The expected increase in revenue from direct taxation will make it possible to meet any decrease in other budgetary resources.

This budgetary income is balanced on the expense side by the following items:

Of these items the most important are compensation and salaries of government employees and the military charges.

Compensation and salaries represented in the 1925 budget 55 million dollars for 290,000 people as against $39,500,000 in 1914-15 for 120,000 people. The salaries of government employees are, therefore, still much lower than the pre-war level. However, a considerable improvement can be noticed during recent years as salaries have increased from 13½ million dollars in 1922-23 to more than 55 million dollars in 1925. The 1926 budget provides for another increase in salaries of 20 million dollars which will permit present salaries to be raised 30%.

For military charges Roumania spent, in 1914-15, 19.6 million dollars and 21.2 million dollars in 1925, although the country has doubled in the meantime not only its area but also its population. Military charges during 1914-15 were 16% of the total amount of the yearly public expenditure. In 1925 they represented only 13%.

Campina - Oil Wells

By the balancing of her budget, Roumania has stopped at the same time monetary inflation.

The following figures regarding the circulation of the National Bank of Roumania are enlightening in this respect:

Since 1922 the State has not borrowed from the National Bank. Every banknote issued by the National Bank after that year has been used for the needs of production and commerce. As can be seen from the figures, the State debt towards the bank has been decreased since 1922. Once the budget was balanced and inflation stopped, Roumania was able to take the next logical step, that is, the resumption of the service of the pre-war and post-war internal and external public debt, by consolidating the floating debts and by meeting, in short, all its liabilities. Roumania showed that the country at large had not only the determination but also the means to fulfill all its obligations.

In the budget of April 1, 1926, Roumania's public debt was figured as follows:

The internal debt represents, therefore, about 32 billions of lei, or at the present rate of exchange about 160 million dollars.

The external debt amounts to £33,629,000 and French Francs 570,000,000 which represents at the present rate of exchanges about 182 million dollars.

The total of Roumania's debt, therefore, internal and external as figured in the 1926 budget amounts at the present rate of exchange to 342 million dollars. The service of this debt which takes care of the yearly interest and amortization payments appears in the 1926 budget with a sum of 4,654, millions of lei, equivalent to 23 million dollars. Besides the debt which Roumania has already booked in its 1926 budget, she has other debts arising from the war and as a result of the peace treaties. The amounts have not, however, as yet been determined. They are as follows:

1. The Inter-Allied War debts.
2. The Austro-Hungarian debt.
3. The debt deriving from the purchase of the private railways in the provinces
    that have been reunited with Roumania.
4. The so-called liberation debt (Treaty of Versailles).
5. Indemnities due to Roumanian citizens who have suffered war damages.

Roumania has settled its war debts to the United States, Great Britain, and Italy. The annuities that it will have to pay on its war debts in 1926 are as follows:

$200,000 to the United States,
£50,000 to Great Britain.

To cover these and other payments in connection with the Austro-Hungarian debt and with the purchase of the private railroads, a special extraordinary credit amounting to 753 million lei has been provided for.

The service of the public debt will absorb, therefore, during 1926 a total of 5,350 million lei (approximately 25.5 million dollars) or about 16.3% of the total budgetary expenditures, the railroads not being considered.

As can be seen, consistent efforts have been made during the last few years to take care of all liabilities connected with the public debt. In the interior, with the exception of war damages due to its citizens, the entire debt has been consolidated. With the exception of the one to France, the Inter-Allied debts have been settled, and early settlements are expected in connection with the Austro-Hungarian debt, the so-called liberation debt and the debt resulting from the purchase of the private railroads.

It is expected that the 1927 budget will provide for the service of all external and internal debts of whatever nature. Roumania will have resumed, therefore, the fulfillment of all its obligations without distinction as to their origin (war debts or others), before it will have received anything which is due to her by virtue of the various treaties of peace and its position of special creditor towards some of its former enemies. And let us not forget to mention that this is accomplished with its own resources without recourse to outside help.

It has always been recognized, of course, that the attainment of monetary stability and the stoppage of inflation were essential if Roumania was to be put on a sound financial basis. A study of the currency and exchange situation in Roumania clearly demonstrates that the country has made great strides towards settling these problems.

Before the war Roumania had the gold standard. The par value of her currency unit —the leu—was 19.35 cents; the dollar, therefore, was worth 5.18 lei. The circulation was assured by the issues of the National Bank of Roumania, a private banking institution with privileges of issuing notes. The notes were issued on bills and acceptances with one-third metallic covering and were convertible in gold at sight. The State never had recourse to loans from the bank (except in 1901 in special circumstances and for the insignificant sum of 3 million dollars). The circulation in 1915 for a population of 7½ million inhabitants amounted to 762 million lei, or 147 million dollars. The circulation per capita amounted to 100 lei or 20 dollars. The stability of the exchange rate of the national currency was constantly assured, and the fluctuations never exceeded 1%.

The special conditions created by the war obliged the State during the period of hostilities to appeal to the National Bank to issue notes.

The continuation of a state of war after the armistice, the exhaustion of the country through the destruction wrought by the war, and the occupation of two-thirds of our richest territory by the German armies, increased the needs of the State and obliged it to make further calls on the issues of the National Bank.

This situation was further aggravated by the obligation of the Roumanian State to exchange the notes issued by the German troops of occupation (2,173 million lei) as well as the crowns and rubles in circulation in reunited territories (these amounted to 5,562 million lei).

At the end of 1921 all issues for Treasury requirements or for monetary unification were definitely stopped.

The State Debt to the Bank of Issue decreased as follows:

This debt is made up as follows:

7,025 million lei for the unification of currency.
3,762 million lei for State requirements.

By the Currency Convention of the 19th May, 1925, the State undertook to reimburse this debt over a period of 15 to 20 years. Since 1921 every issue of the National Bank has been used for commercial requirements.

The circulation converted into dollars at the average annual rate of the national currency gives the following figures:

Compared to the post-war population of Roumania the circulation represents in 1925 six dollars per inhabitant whilst in 1915 it had reached 20 dollars. This means that Roumania has today two-thirds less purchasing power in monetary form.

The following have been the annual average rates of exchange for the respective years.

It can be seen therefore that the balancing of the budget with the consequential stopping of inflation was instrumental in preventing the collapse of the leu, the national currency, and for the last few years a certain stability has been obtained. It is the general belief that ultimately complete stabilization of the currency will be achieved at the present level of about ½ cent per leu, that is, 200 lei to the dollar.

Only recently the Prime Minister of Roumania sought the advice of all leaders of finance, commerce and industry in Roumania regarding this subject. An overwhelming majority expressed themselves for the stabilization of the currency and the abandonment of any plan of revalorization as it is obviously impossible to restore to its pre-war parity a currency which has depreciated about 97%.

Although the average yearly rate has been stabilized during the past years at ½ cent per leu, during the year wide fluctuations have occurred with very unfavorable results to trade and industry. A stabilization at the present level with the ultimate placing of the currency on a gold exchange basis is considered possible without the necessity of a foreign loan because of the unusually favorable crop which Roumania has had this year and also because of the increase of oil production and the surplus of timber available for export.

It is naturally most important for an understanding of Roumania's financial position to know how her trade balance works out and to study the flow of capital to and from the country. The following table contains a brief summary of these important factors:

In 1924 Roumania's balance of payments including visible and invisible items was favorable. In 1925 the trade balance was against Roumania to the extent of one billion lei and the balance of payments was unfavorable to the extent of 5 billion lei, a total deficit, therefore, of 6 billion lei.

In 1926, the country had available for export grain, oil, lumber and cattle of a value of over 7 billion lei. The favorable crop of 1926 makes further available for export this year a surplus of grain valued at 6 billion lei over the amount exported in 1925. Finally, oil production is increasing continuously and the quantity exportable in 1926 will exceed by 3 billion lei that of 1925. Adding these items together we find in Roumania's favor for 1926, 16 billion lei against a deficit in 1925 of 6 billion lei. The favorable balance of payments for 1926 is therefore expected to reach 10 billion lei or about 50 million dollars. These figures show conclusively that a stabilization of the currency at the level of x/i cent can be attempted with reasonable success.

This achieved, the third link in the chain of measures that were intended to put new Roumania on a sound financial basis—balancing the budget, stopping inflation, monetary stability—will have been completed.

The financial policy pursued by Roumania during recent years has been the result of following the simple principle of maintaining public expenditure strictly within the limits of available revenue. The consequence of this policy of controlling and regulating expenditures together with the continuous betterment of the fiscal machinery and the more normal basis on which all government departments have been placed, have produced an increase in revenue each year which has not only made possible the smoother working of governmental administration but has also enabled the country to include in the budget all its obligations both internal and external. It has produced the necessary means for consolidating the floating debts and, at the end of each financial year, has even yielded a surplus which provided for the reconstruction and the equipment of the railroads and other public services. Roumania has found itself financially, it knows exactly where it stands and can consequently plan with confidence for the future.

These results are actual achievements notwithstanding reports to the contrary often appearing in the foreign press regarding conditions in Roumania—propaganda which is not prompted by unselfish motives and is inspired by former enemies. Without any foreign assistance the Roumanian people, who have always been peaceful and orderly, have attained these remarkable results and have every reason to hope that they have started Roumania on the road to that prosperity which, in view of the wealth of her natural resources, should be her natural heritage.