Financial stability, monetary autonomy and fiscal interference: Bulgaria in search of its way, 1879-1913

The Bulgarian monetary system was established, immediately after it gained independence, at a time in which the very meaning of money was being redefined at an international level, with the diffusion of the gold standard. Within this framework, the possibility of attaining monetary stability in peripheral countries was increasingly associated with the decision to peg their currency to an external reference. Having experienced it already under Ottoman rule, newly independent Bulgaria adopted the bimetallic standard. Without being a member of the Latin Monetary Union, it tried broadly to follow the principles of the convention, yet with some exceptions, the most important of which concerned the limit on silver coinage (Nedelchev, 1940). The absence of such a clause in Bulgaria turned out to be crucial since the financial needs of the recently established state triggered excessive silver coinage which resulted in a persistent agio (BNB, 1929). The interference of fiscal authorities obstructed the Bulgarian National Bank’s ability to manage money in circulation and to secure the monetary stability required by economic development (Avramov, 2007; Bernholz, 2008). The attempts of the Bulgarian monetary authorities to eliminate the agio were unsuccessful until they acquired the right to issue silver-backed banknotes. Soon after that, in 1906, Bulgaria introduced a short-lived typical Gold standard. The objective of this paper is to study the interaction between fiscal and monetary policy in Bulgaria, in the period between independence and the outbreak of the Balkan wars, and the ensuing financial instability resulting in a deviation from the established monetary standard. While the attempts of the Bulgarian National Bank (BNB) to eliminate the agio seem compliant with the concept of financial stability prevailing at that time, fiscal interference in monetary issues was primarily intended to provide extra revenues for government spending in an effort to finance the building and management of the new autonomous state. This study is a continuation of a broader research on the peculiar transition of Balkan countries from the bimetallic system to the Gold standard (Dimitrova and Fantacci, 2009).