Monetary conditions in the Kingdom of Serbia (1884-1914)

From 1884 to 1914, the Privileged National Bank of the Kingdom of Serbia managed to establish and maintain relatively stable monetary conditions. On the one hand, its interest rates and lending policy contributed to the lowering and stabilization of exceptionally high market interest rates, and on the other, the National Bank managed to preserve relative stability of the domestic currency. The conversion of paper money to gold or silver was ensured at all times, except in two instances – at the outbreak of the Balkan Wars and World War I. The National Bank could not eliminate agio, but did the best it could to ease its fluctuations. Agio declined as a result of a sharp turnabout in public finances never again to reach the level prior to 1903. The effectiveness of the National Bank in achieving relatively stable monetary conditions is particularly important in light of the circumstances prevailing at the time: wars and economic crises, budget deficits and internal political upheavals. It would be right to say that monetary conditions were largely shaped by the state of public finances. As budget expenditures outstripped the revenues, the government was forced to look for additional funds to cover the deficit by borrowing either abroad or locally, primarily from the National Bank. This had a direct negative effect on the level of gold reserves and indirectly affected the stability of the domestic currency and Bank lending activity. Once the public finances were put in order in 1903 and capital began to flow in from abroad, the National Bank was able to implement measures aimed at stabilisation of the dinar and to stimulate lending activity with more success throughout World War I.