Today cash represents around 64% of all payment transactions in Luxembourg. But, around 150 years ago, it was difficult to convince people to use bank notes. Even more so when people were divided over the two banks that printed them.
By the 1870s, Luxembourg was experiencing a period of economic growth success thanks to the creation of roads and rail infrastructure. Because of its size and the importance of trade with neighbouring countries, several currencies were in use including the florin, the thaler, franc, and since 1854, the Luxembourg franc.
The first issuing bank
The Banque Internationale, founded in 1856, was the first bank in the country to issue notes. It had a tough time--most people used coins for smaller purchases and its notes were not endorsed by the government. Things improved when, in 1859, their notes were accepted in payment of taxes, according to Paul Margue and Marie-Paule Jungblut in their book “Le Luxembourg et sa Monnaie”.
But it knew that issuing money alone would not keep it in business and later diversified to become a credit institution. The Banque Internationale maintained the monopoly for printing bank notes until a new challenger appeared on the scene in 1871.
A second issuing bank
The Banque Nationale du Grand Duché de Luxembourg emerged at a time when a large number of national banks issuing were being founded. Objections that there just wasn’t the business in Luxembourg to warrant a second issuing bank were met with optimism that the railway would encourage new investments.
At the same time, small- and medium-sized business owners, bitter at what they saw as preferential rates offered to big businesses by the Banque Internationale, hoped the new bank would break the monopoly and bring down the cost of borrowing.
Photo shows a 5-thaler bank note printed by Banque Nationale, among the historic notes held at the MNHA in Luxembourg City. Photo: LaLa La Photo
Cash to flash
With an initial capital of 7.5m francs, the bank began operations in 1873 and the printing presses warmed up. It wished to print 16.25m francs according to Margue and Jungblut. It was a huge amount for a population of 200,000 people and worked out at 80 francs per inhabitant (at the time Germany issued money at a rate of 40 francs per resident).
The bank intended for its bank notes to be used in Germany, where Luxembourg did a great deal of trade since joining German customs union the Zollverein in 1842. But the German empire, which was undergoing its own monetary reform, refused to accept them. A spat ensued as the Luxembourg state defended its right as a member to issue its own money, meanwhile the two issuing banks were at loggerheads.
Taking sides
After an alleged smear campaign from the Banque Internationale to discredit the Banque Nationale, the State took sides and refused to accept notes issued by the Banque Internationale, according to Margue and Jungblut. “The Grand Duchy found itself in an absurd situation: despite the presence of two issuing banks, German money was the only one to be accepted universally,” Margue and Jungblut wrote.
The situation was worse for the Banque Nationale, whose main activities were based around printing money. Germany appeared ready to reconsider if the bank stopped issuing reichsmarks. It didn’t and when its chief investor Jacques Errera-Oppenheim sold his shares to an investor named Philippart, who was unpopular in the German rail organisation, the die was cast.
The Banque Nationale's capital was reduced in 1880, temporarily increasing liquidity but losing confidence. It expanded its operations by offering credit through extended engagements with “risky” French customers, and liquidity declined. The government appeared to be unaware of the mounting difficulties, which only came to light when then bank director Jules Funck demanded the early repayment of loans granted to Banque A Fehlen & Cie.
Burning bank notes
A year later, on 26 September 1881, Banque Nationale closed, taking with it some 1.8m francs in savings from everyday citizens, according to the original inquiry dated 1882. Furious at the way the affair had been handled, customers reportedly burned its notes in Place d’Armes.
While it was never a state bank, the State covered these losses. Fehlen et Cie never recovered and succumbed to bankruptcy in 1886, the same year the Banque Nationale was officially declared bankrupt. A subsequent government inquiry blamed the bank’s demise on a lack of foresight in establishing a second issuing bank in such a small country, poor governance practices and risky lending.