Exchange Currency

Bank of Estonia

Bank of Estonia was established on 24 February 1919 by the decision of the Provisional Government of Estonia, on the basis of which the Statutes of the Bank were also approved. The statutory tasks of Bank of Estonia were to arrange currency circulation and the movement of payments within Estonia and abroad as well as the useful investment of free funds. The Bank also possessed the sole right to issue banknotes.

In March 1919 a three-member commission was formed for the purpose of founding Bank of Estonia. E. Aule, M. Pung and J. Sihver were included on the staff of the commission. In the same month Mihkel Pung became the first President of Bank of Estonia. The Government allocated 10 million marks from the State Treasury for the initial capital stock of the future central bank. The funds were transferred to the accounting records on 3 May 1919 and the Bank commenced operations.

In August 1919 Eduard Aule was appointed Acting President of Bank of Estonia, and in October 1921 he was nominated President of Bank of Estonia.

The issue of treasury notes was initially the responsibility of the State Treasury. The 15 million gold rubles received from Russia in accordance with the Tartu Peace Treaty were also acquired by the State Treasury.

In 1921 the share capital of the Bank was increased to 250 million marks. The Government established the Board of Bank of Estonia, consisting of nine members, for the management of the institution. The Bank began issuing its circulating media — banknotes. A clearing house commenced operations at the Bank.

Bank of Estonia, whose shares were owned by the state, was formed into a state bank fully subordinate to Government control and fulfilling the functions of monetary and credit regulation. Therefore, Bank of Estonia as a credit bank began providing the devastated economy with long-term investment loans. At the same time, the operation of Bank of Estonia as a common deposit and credit bank made it into the largest commercial bank in Estonia. In keen competition with other banks, Bank of Estonia increased its loan portfolio nearly twofold and its deposits were approximately three times greater than those of all other banks combined.

According to the Statutes of the Bank, the Estonian currency should have been on a par with the gold frank (1 mark = 0.29032 grams of gold). However, as the central bank did not have any real reserves backing the money issued, the banknotes put into circulation were actually just paper money without any support.

After the failure of the economic policy orientation towards Russia credit inflation, excessive optimism concerning anticipated markets and inappropriate crediting decisions due to the above facts led to an extensive wave of bankruptcies and a great recession by the year 1923. In addition, 1923 was an extremely unfavorable year for agriculture which further damaged the economy. Attempts to refinance the loans that had proven to be illiquid failed. Two other factors intensified the crisis even more. Firstly, public revenues were lower than expected due to the inefficiency of the tax collecting authorities, and secondly, overall national economy was in a poor state.

The attempts made by the central bank to cover the ever-increasing credit demand and the state budget deficit by issuing more banknotes increased the demand for foreign currency. In order to maintain the exchange rate of the mark, the Bank was forced to use the national gold reserves, which decreased from 15 million gold rubles to 2.5 million. This led to the continuous devaluation of the mark.

The crisis of Bank of Estonia’s first period of operation clearly indicated that such an extensive financing of the economy did not allow the central bank to efficiently fulfill the Bank’s primary function — to guarantee the stability of the currency.

Artur Uibopuu was the President of Bank of Estonia from October 1925 to November 1926.

In order to resolve the crisis, the Bank implemented restrictions on lending even though the main problem was due to previously granted bad loans. It also began to valorize loans based on the price of gold. Prior to that a new theoretical monetary unit was introduced — the gold kroon (with a gold content of 0.403226 grams). Other supplementary measures taken included the irregular sale of sections of forest and restricting imports by increasing tariffs. The exchange rate of the mark was somewhat stabilised but due to the bad loan portfolio the central bank’s situation remained strained and insecure, and therefore, reforms were unavoidable. Although some stability and revival in the national economy were achieved, as well as an increase in industrial and agricultural exports, a positive foreign trade balance and a balanced state budget; in the long run the economy still needed more radical measures in order to finally recover from the crisis. Therefore, it was decided to reform both the central bank and the monetary system. The League of Nations was approached for assistance; its Monetary Commission sent Estonia a corresponding package of proposals for monetary and central bank reform. At the same time, the co-operation with the League of Nations also marked the beginning of the closer integration of the Estonian economic and monetary policy with the European economic zone.

Juri Jaakson was appointed President of Bank of Estonia in November 1926, and he remained at that post until July 1940.

Sir Walter J. F. Williamson, a financial expert at the League of Nations, was hired in 1927 for the execution of the reforms. He worked as a counselor for Bank of Estonia until 1932. In1927 Nikolai Kostner was nominated the Minister of Finance’s representative at Bank of Estonia. In 1928 he became the Government’s commissioner at the Bank.

Bank of Estonia was reformed in 1927. A new version of the Statutes was approved, according to which Bank of Estonia became an independent note-issuing central bank with limited functions. The main tasks of the Bank remained to guarantee the value of the money through currency circulation and through the arrangement and regulation of short-term credit volume. Through the sale of Government securities, the Bank became a true joint-stock bank. The Bank’s Full Assembly (Plenary Meeting) and its Board consisting of 10 members were fixed as the governing bodies of Bank of Estonia in order to guarantee independence from the Government. It was decided that the president was to be the executive manager of the Bank, and the Executive Management the executive body.

A foreign loan of GBP 1.35 million (27.6 million kroons) was taken to supplement the foreign currency reserves, of which Bank of Estonia received GBP 1 million. The gold and foreign currency reserves of the State Treasury were also transferred to the central bank. The fixed capital of the Bank was increased from 2.5 million kroons to 5 million kroons. The sizes of the issues in relation to the reserves backing the kroon were determined. The loan operations of the central bank were regulated and the loan portfolio was set on a sound basis. Long-term loans that had become illiquid were transferred to the Long Term Loan Bank, founded specially for the purpose of releasing Bank of Estonia from this burden.

The currency reform carried out in 1928 laid the foundations of an up-to-date monetary system in Estonia. According to the new Currency Law, the banknote issued by Bank of Estonia — the Estonian kroon became the legal tender. Each kroon was made up of 100 sents and each sent was equal to 1 former mark. The Estonian kroon was considered equal to the Swedish kroon. The gold standard established in 1924 remained unchanged, but received real coverage with the reserves truly backing the kroon. The issue of Treasury notes and exchange notes was terminated. In order to secure the credibility of the kroon, Bank of Estonia took upon itself the responsibility to exchange kroons for foreign currency.

All these measures taken restored confidence in the domestic banking and monetary sector, contributing to the economic reinvigoration of the country and to the improvement of the reputation of the Estonian state in the international arena.

After the onset of the global economic crisis in 1930, Great Britain’s decision to renounce the gold standard resulted in a fall in the exchange rate of the British pound. Bank of Estonia (the majority of whose reserves backing the kroon were in British pounds) sustained losses of 6.9 million kroons. Initially an attempt was made to maintain the exchange rate of the kroon. Imports were restricted and Bank of Estonia was released from the obligation to sell foreign currency. At the same time, the Bank was given the sole right to purchase and sell foreign currency and the right of foreign currency regulation. In addition, almost all foreign currency transactions were consolidated at the central bank. Bank of Estonia became the organizer of all of Estonia’s foreign trade and other foreign economic relations, as well as the institution responsible for their success. N. Kostner, who supported the devaluation of the kroon, retired from the post of Commissioner for the Government in 1932, the most difficult year of the economic crisis. In 1932 a 15-percent tax was imposed on the sale of foreign currency, which in fact constituted hidden devaluation.

These measures, in spite of the positive foreign trade balance, were nevertheless unable to prevent a decrease in the reserves backing the kroon. Therefore, in June 1933, under the pressure of the overall economic depression and after heated internal policy disputes, Estonia was forced to devalue the kroon by 35%. The greater part of the reserves backing the kroon were then exchanged for gold. In November 1933 the kroon was once again tied to the British pound (1 pound = 18.35 kroons).

During the following years Bank of Estonia was able to maintain the stability of the kroon’s exchange rate, which raised the prestige of the Bank as a social institution. The foreign currency balance improved. The circulation of notes and coins, as well as the volume of demand deposits and of the loan portfolio, increased. Bank of Estonia also carried out active operations in the loan market, offering relatively economical credits in comparison to other banks. In spite of the negative foreign trade balance, the bank’s reserves increased from 19.7 million kroons in 1932 to over 60 million kroons in 1939, and the coverage of the issue of banknotes with gold and foreign currency reserves exceeded 100%.

Devaluation and the improved set of circumstances in the foreign markets had a stimulating effect on the country’s production and export activities. The economic upturn that had begun in 1934 continued year to year at a high rate. The stability of the currency, a properly functioning monetary system and smoothly operating credit institutions guaranteed the trust of the people and ongoing saving, which in turn provided evidence of the balanced nature and strength of the economy. The outbreak of World War II somewhat disturbed economic life but was not initially able to endanger the operations of Bank of Estonia and the development of the economic life of the country as a whole. Unfortunately, the invasion of Estonia by foreign armies and the following forfeiture of national independence interrupted the development which until that moment had progressed successfully.

In June 1940, after the annexation of Estonia, Bank of Estonia was nationalized and its shareholders’ assets expropriated. In July J. Jaakson was removed from the position of President of Bank of Estonia and was replaced by Juhan Vaabel.

The puppet government helped into power by the foreign conquerors forced Bank of Estonia to fund the activities of the occupiers with an interest-free loan totaling more than 40 million kroons. The Bank was obligated to transfer all the gold in its possession (kept in Sweden, Great Britain and the United States of America) to the State Bank of the Soviet Union by means of a compulsory sale. Of this gold, Moscow only succeeded in obtaining about 10 million kroons, the amount that was held in the State Bank of Sweden. All of the foreign currency reserves of Bank of Estonia also had to be transferred to the account of the State Bank of the USSR. At the same time, up to the introduction of the rouble, kroon issues were performed. They were accompanied by inflation.

The incorporation of Estonia into the Soviet Union in 1940 was followed by the reorganization of Bank of Estonia into the Estonian Republican Office of the State Bank of the USSR. The position of President of the Bank was abolished and J. Vaabel was dismissed. The obligations acquired in accordance with the deed on the transfer and receipt of values and assets, were ignored by the State Bank of the USSR (by canceling, freezing or in some other way making them non-existent), but great energy was expended in appropriating claims.

In November 1940 the ruble was introduced in Estonia. Kroons and kroon accounts were exchanged for rubles at the rate of 1 kroon = 1.25 rubles (their actual value was 1 kroon = 8-10 rubles). Although the kroon had to be withdrawn from circulation by January 1, 1941, according to some estimates approximately 8 million kroons still remained unchanged to rubles and in the possession of the people.

In August 1941, after the outbreak of war between Germany and the Soviet Union, the Estonian Office of the State Bank of the USSR was evacuated to Moscow. Although Bank of Estonia had been liquidated, i.e. actually despoiled, some of Bank of Estonia’s assets still remained untouched in foreign banks. The buildings of Bank of Estonia also remained physically intact.

After Tallinn was taken by German troops on 28 August 1941, Bank of Estonia was nominally restored to operation. Formally it bore the name Bank of Estonia, but in reality it was not a central bank in the true meaning of the term. It was a bank operating under the control of the occupation authorities rendering services to local governments and other institutions and arranging the turnover of the occupation currency.

In 1943 Bank of Estonia, under the name Gemeinschaftsbank Estland, was reorganized into a sub-agency of Gemeinschaftsbank Ostland, which was situated in Riga. The Bank operated under that name until Estonia was re-occupied by the Red Army in 1944. The Financial Main Cashier’s Office, founded on the model of Bank of Estonia, managed the financial transactions of the local authorities and performed cash issues.

From 1941 to 1944 Hugo Partelpoeg was the Manager of Bank of Estonia, the top executive position at that time.

Throughout the period of 1944-1990 banking in Estonia was once again re-oriented to the monetary and banking system of the Soviet Union and the central bank as an institution was completely absent. The Soviet Union indeed tried very actively to acquire the assets of Bank of Estonia from the independence period that had been deposited in foreign banks, but all those attempts failed (excluding those kept at the State Bank of Sweden, as mentioned earlier).

1987 provided a clear indication of the upcoming crisis in both the economy of the Soviet Union and in its banking system. The solutions offered by the reforms and experiments for how to recover from the low state of the economy produced no results. The political authorities neither made it possible nor wished to switch over to a real market economy. At the same time, 1987 proved to be decisive, a year that may be considered the beginning of the period of preparation for the restoration of Bank of Estonia. Namely, a proposal made by S. Kallas, T. Made, E. Savisaar and M. Titma concerning the transition of the Estonian SSR to full financial independence was published in the newspaper „Edasi” (Forward) in September 1987. By further developing the idea, the program IME (Isemajandav Eesti — „A Financially Independent Estonia”) was elaborated upon. In May 1989 the Supreme Council of the Estonian SSR approved the basic concept of the self-financing of the Estonian SSR and adopted the law „Fundamentals of the self-financing of the Estonian SSR”. Both documents foresaw a national banking system, including the establishment of a central bank and the introduction of a national currency. In addition, a Soviet law acknowledging the application of the principles of financial independence in the Baltic countries came into force in November 1989. Although the law was rather declarative in many ways and lacked any real backing, it still granted a certain legal support to the aspirations of the republics of the Union of that time.

In 1988, taking advantage of the liberalized conditions and opportunities for free-market experiments, Tartu Kommertspank was established. It was the first commercial bank in the Soviet Union that operated as a joint stock company and also received a license for foreign currency transactions. Ten commercial banks based on the same model were established in Estonia within the next couple of years, until in 1990 Bank of Estonia developed its own procedures for the founding of commercial banks.

The central bank’s working group, headed by R. Otsason and the Government commission, led by Councilor B. Kragh, began compiling the transition concept for the introduction of a national currency. In December 1989 R. Otsason presented the transfer program to the Government and also defined the Estonian national currency: 1 kroon = 100 sents.

It was on 15 December 1989 that the Supreme Council of the ESSR passed the resolution on the re-establishment of Bank of Estonia. On 28 December 1989 it adopted „The Bank Act of the Estonian SSR” which, in addition to the fundamentals concerning the operation of credit institutions, also determined the role of Bank of Estonia. Rein Otsason was nominated President of Bank of Estonia. A public competition for the design of the new banknotes was proclaimed.

Bank of Estonia recommenced operations on 1 January 1990 after an interval of 50 years, though not yet as the central bank of an independent country. The fact that it was possible to restore the central bank in spite of the fact that Estonia was not yet independent was simply a paradox of that time. The Statutes of Bank of Estonia were confirmed in March 1990, and 400 million rubles were allocated for the statutory fund. According to the Statutes, Bank of Estonia was an independent public organization, an issue center subordinated only to the highest authority of the ESSR. The main tasks of the Bank included the following: developing an economic strategy for the country and its execution in the field of currency circulation, the provision of credit, financing, settlements, and foreign currency relations; management of the currency and credit system; securing the stability of currency circulation; guaranteeing the purchasing power of the national currency and determining its exchange rate in relation to other currencies. The governing body of Bank of Estonia was the Board of the Bank, and its executive manager was the President of the Bank. The first Board was appointed with R. Otsason at its head.

Bank of Estonia took over the Tallinn Branch of the Foreign Trade Bank of the Soviet Union, re-organizing it into the Foreign Currency Operations Center of Bank of Estonia. The central bank also attempted to take other steps within its ability for the liberalization of the economy and in order to make the transition to a market economy: it began organizing currency auctions, publishing quotations of the number of rubles in circulation, issuing licenses for foreign payments and settlements, etc.

In April 1990 the date was set for the introduction of the national currency — December 1990. Contracts with American and British companies were concluded for printing the banknotes. A certain rival attitude and opposition between the Government and Bank of Estonia appeared concerning the question of the introduction of the national currency by November 1990, although their ideas were quite similar. The sides indicated the problems and recognized the dangers involved, but both concepts still remained as overly general documents, with rather obscure tenets and no definite operation plan to be used as a possible basis for the preparation of the future monetary reform.

In November 1990 the Board of the Bank was staffed with new members. R. Otsason remained the Chairman but was replaced by A. Veetousme in May 1991.

In March 1991 a Monetary Reform Committee with extensive powers was established and its members were E. Savisaar, R. Otsason and S. Kallas. In 1992 the members of the Committee were T. Vahi, S. Kallas, R. Jalakas and A. Hansson (as a substitute member). First the Committee determined the general principles for the implementation of the monetary reform, and then approved the preparation plan and established temporary foreign currency rules.

In September 1991 Siim Kallas was nominated to the post of President of Bank of Estonia. He proposed the implementation of the monetary reform no later than the first half of 1992. Estonia had re-established its independence, which was the most important pre-condition for the introduction of the national currency. The necessity for rapid monetary reform was also connected with the cash deficit caused by the central bank of Russia and to the continually intensifying hyperinflation.

A new work group was founded at Bank of Estonia to work out the schedule for and prepare the monetary reform. Due to the altered conditions, the above-mentioned work group did not have much to incorporate from the previous conceptions. Bank of Estonia developed the solutions to all conceptual, strategic, tactical and technical questions and performed the calculations of the issue.

At the same time it was necessary to begin transforming Bank of Estonia into an actual regulator of the Estonian banking sector. At that time settlements were performed through Moscow, the local Clearing Center being subordinate to Moscow. Bank of Estonia was not yet able to commence the actual regulation and inspection of the operations of the local commercial banks. It was necessary to form a sharp-witted team at the central bank to turn the Bank into a well-functioning organization and regulatory center. In January 1992 the Estonian Republican Bank of the State Bank of the USSR was subordinated to Bank of Estonia, which terminated the existence of Union-wide banking in Estonia. After that the Estonian Clearing Center of the State Bank of the USSR was also subordinated to Bank of Estonia.

The formation of reserves backing the kroon was commenced. After the recognition of Bank of Estonia as the legal successor of the central bank of the Republic of Estonia, established in 1919 during the independence period, the Government of Great Britain decided to return the gold that had belonged to the pre-war Bank of Estonia to Estonia. The restoration of the membership of Bank of Estonia in the Bank for International Settlements was accompanied by the restoration of its rights to the gold and other assets deposited there. Reserve felling areas from the State Forest Fund worth 150 million dollars were also included in the balance sheet of Bank of Estonia as an additional foreign currency reserve (this had more a moral and an emotional value for the general public than a practical one).

The first mission of the International Monetary Fund arrived in Estonia in November 1991 and marked the beginning of the co-operation between Bank of Estonia and the International Monetary Fund. Estonia became a member of the International Monetary Fund and the World Bank.

The new banknotes reached Estonia in April 1992. The idea to base the future monetary reform on the currency board system became more and more concrete. That meant fixing the Estonian kroon to some foreign currency, and securing the money in circulation and the deposits of the commercial banks kept at the central bank, with freely convertible foreign currency. The relative simplicity of the currency board system and its ability to withstand speculative pressure, guaranteeing a fixed exchange rate even in complicated situations were factors which played an important role in preferring the currency board system over its rivals. Through the application of other systems, the relatively small and vulnerable Estonian money market could have easily been unbalanced. In May it was decided to select the German mark as the anchor currency. The German Bundesbank was informed of this.

A Bureau of Monetary Reform Committee was founded, with E. Teimann, chief of the Foreign Currency Department of Bank of Estonia, at its head. The task of the Bureau was to prepare the documents of the Committee and make the practical arrangements for the monetary reform.

On 20 May 1992 the Supreme Council adopted the three most important laws prepared by Bank of Estonia: the Currency Act, the Act on Backing the Estonian kroon and the Foreign Currency Act. On 17 June 1992 the Monetary Reform Committee issued a decree to execute the monetary reform on 20 June 1992. Several other decrees followed to regulate the operation of the banking sector, the more important of which were decrees on exchanging deposits, on the types of deposits in the Savings Bank and on the securities of the Soviet Union. In addition to those, on June 18, 1992, ten regulations and decisions concerning monetary reform were adopted by the Board of Bank of Estonia.

The monetary reform took place on 20 June 1992. The Estonian kroon was declared the sole legal tender in circulation and Bank of Estonia the only regulator of monetary relations in Estonia. The official exchange rate of the Estonian kroon against the German mark was set at 1 DEM = 8 EEK. Within three days 1500 rubles were exchanged to kroons for each resident natural person at the rate of 1 kroon = 10 rubles. Almost the entire amount of rubles in circulation in Estonia was exchanged to kroons at the same rate (deposits, money held by enterprises, etc.). The rate was considered underpriced by many opponents, but it actually corresponded to the market rate of that time. Time and the later course of events has indisputably proven the correctness of the choice made. All the laws and other legal acts planned for the beginning of the monetary reform came into effect. Bank of Estonia began to publish daily exchange rates of the Estonian kroon against the most important foreign currencies.

The necessary reserves backing the kroon were composed of gold and foreign currency. In addition to the actions of the Bank of England and the Bank for International Settlements, the State Bank of Sweden also compensated for the gold deposited there in German marks. Economically, the time for monetary reform was most appropriate because during that summer a new increase in prices began in the ruble zone.

The Estonian monetary reform earned only words of praise from the West. A seminar thoroughly introducing the Estonian economy and banking took place within the framework of the Annual Meeting of the International Monetary Fund and the World Bank. Co-operation with the International Monetary Fund (S. Kallas became a member of the IMF Joint Procedures Committee) and the Bank for International Settlements became closer. The Bank of Finland began quoting the Estonian kroon.

Useful links

Currency of Estonia:
Estonian kroon
List of Central Banks:
Central Banks
Official website of Bank of Estonia:
Estonia’s country information at IMF’s web site:
Financial Supervision Authority of Estonia:
Estonian Trade Council:
Ministry of Finance of Estonia:
Historical events of Bank of Estonia:
Historical events