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Dr Laza Paču – financial genius

Dr Laza Paču was the most famous and successful Minister of Finance Serbia has ever had. He will be remembered as one of the toughest taxmen ever. He was not an economist, but a medical doctor. This great administrator, resilient to corruption, gave new life to Serbian finances during a time of great peril and pressure.

After he had decided that he did not want to heal people, Dr Laza Paču started dealing with finance and, at that time, Serbia was shaken by great problems – after the massacre of King Aleksandar Obrenović and Draga Mašin in May 1903, King Petar I Karađorđevic became the new leader of Serbia, and the country should have been economically empowered, but the Austro-Hungarian pressure did not lessen. However, while he was running Serbian state finances, the dinar was a hard currency. He accepted only gold-based money. Even during the Balkan Wars, he did not allow a deficit to occur in the budget – which is the only recorded case in the history of banking and the history of war. The world knew about the “financial genius”, and at that time, Serbia was able to raise credit at any world bank.

When Laza Paču became the Finance Minister for the first time on 26th January 1904 in the Sava Grujić Government, the state did not have any outstanding, unpaid debts. But it was important to keep it that way. Paču was supposed to get much greater financial means for long-term political plans: the emancipation of Serbia from the Austro-Hungarian tutoring, outcasting weak Turkey out of the Balkan peninsula… Serbia was preparing for “great historical work”, because of which it had to arm itself better and widen the internal railway network, and the money for all this was supposed to be created along with an ever increasing need. Everyone expected Paču to simply create those means. From the very beginning of his term, he started to make Serbia stronger from domestic means.

Taxes and super taxes

As he described, the circumstances which allowed Paču’s Ministry of Finance to create an immediate surplus of more than 6.3 million dinars in the first year of its functioning despite the rise of the expenditures, Dr Milorad Nedeljković stressed the almost rampant increase in supertaxes, on average by 40%. So, in 1904, Serbian taxpayers paid 75% of set state supertax, 40% extra tax, 25% school tax, 7% railway tax, 5% tax for military constructions, 5% for repair, 5% personal tax and a 4% police supertax. All in all, the taxpayer paid 166 dinars of supertax for each 100 dinars of tax in 1904. Paču explained in Parliament that this “one-year supertax of 40%” was set as a “great sacrifice” in order to organize Serbian finances. The next year, in 1905, the supertaxes were withdrawn, but the taxes increased as well as the tax basis, so the whole tax situation remained unchanged.

The second of Paču’s measures which was very significant for balancing the national budget was a law according to which the state could indebt itself by up to 10 million dinars a year at the National bank until it settled foreign creditors from the income of the Independent Monopoly Authority (which happened only in the middle of the year) and did not suffer a surplus of their income. This solved the “seasonal” problem of a lack of sufficient budget income in the first half of the year, which was even bigger because the government was not allowed to issue treasury bills for a sum higher than 6 million dinars (while budget costs were 20 million at the time, even in the first half of the year).

The third way which increased budget incomes was the considerable rise of custom incomes and the rise of excise pressure on monopolized products (here we also had “excise taxes” of 40%). Just by raising the prices of tobacco and petrol, Paču contributed 1.5 million dinars more into state incomes in 1904 compared to the previous year.

Besides novelties in customs and tax politics, Dr Paču launched a new five-dinar nickel coin with the image of Karađorđe and King Petar in the beginning of his term, as well as the next five-para and two-para coins. Over 6,650,000 dinars were changed and re-forged, and as a deeper currency reform was not taking place, the amount of money in circulation was probably a lot higher.

Paču’s budget and monetary politics resulted in the increase of circulating golden bills in Serbia of over 4 million dinars, which had never happened before. The demand for those gold-based bills was so strong that the privileged National bank completely ran out of the printed quantities of banknotes – and that was also the case in the following years.

Custom War

During 1904, the market price for Serbian securities was in constant rise. Paču gave the information that, for example, Serbian loan papers with a 4% rate of interest between February and November 1904 increased from 68.73 to 79.55 dinars (by 10 dinars at nominal rate), and loan bonds of 5% jumped from 79.65 to 89.40 dinars. This was the result of the Independent Monopoly Authority revenue rise, and especially the better railway activity (which the most gainful loans were relying on) and which would profit by 8.5 million dinars in 1904, compared to a loss of 6.8 million dinars from the previous period.

The Custom War between Serbia and Austro-Hungary, which broke out in 1906, threatened to diminish the Serbian industry. Austria-Hungary closed its borders to Serbian cattle, saying that this was because of disease. This ban included the Serbian border with Bosnia and Herzegovina, which was Turkish territory at the time, but under Austro-Hungarian protectorate.

However, Laza Paču negotiated new markets for Serbia – he gained profit by attracting foreign capital to Belgrade, mostly French. As a result of this, a French–Serbian and then a Prague bank were opened. The market for our cattle was found in Belgium, Germany, France and even Egypt. Foreign trade turnover was increased by 100% (it was 200 million dinars in gold in 1912). Serbia, in other words, Laza Pаču was offered credits from everywhere. By being financially disciplined and a true miser, he succeeded in covering the state budget of 103 million golden dinars in 1909.

Dr Laza Paču was an incredibly fair and economic man. Taking something that belonged to somebody else, let alone taking money from the treasury – those were mortal sins for him. He cut all privileges he considered to be bad for Serbia. Everyone that tried to do something about that found all doors closed – from the Minister to the King.

He only recognized money backed with a gold standard. Even during the Balkan Wars, he never allowed a deficit in his treasury which is unprecedented in history of banking and war.

No exception for the King

There are a lot of anecdotes about Dr Laza Paču. One of them was that when King Petar I Karađorđevic needed 200,000 urgently, he sent his assistant to Minister Paču to pay him this sum in advance and subtract it from the governor’s salary. Dr Paču listened to the secretary, smiled bitterly and said: “No, I will not do that.”

He explained his decision to the astonished secretary:

“The King dies, God forbid, and he is mortal like every one of us. Who will then pay back to the treasury? – Laza, of course. Or the politicians make the King abdicate. Who will pay the debt? – Laza, of course. So, brother, in order not to create problems for me, go to Creditor Union and let them give you the loan. I know you are an honest man, I will be the endorser on your bond, and you take their 200,000. You cannot do it here! Period!

The secretary returned to the court although the job had not been done, but the King did not get angry after all.

Biography

Laza Paču (1855 – 1915)

1880 He moved to Serbia

1889 – 1897 He was the chief of the Monopoly Authority

1904 – 1905 The first term in the position of Minister of Finance in the Sava Grujić Government

1904 In the first year of his management at the Ministry of Finance, a surplus of 6.3 million dinars was made in the budget

1904 He introduced the first five-dinar nickel coin with the engraved image of Karađorđe and King Petar, and new two-para and five-para coins; 6,650,000 dinars were changed and re-forged

1906 – 1908 The second term in the position of Minister of Finance

1906 The ‘so-called’ Customs War broke out between the Austro-Hungarian Empire and Serbia; Paču found new markets (Germany, Belgium, France, and Egypt) and increased foreign trade

1909 The state budget is completely covered in the amount of 103 million golden dinars

1912 – 1915 The third term in the position of Minister of Finance

1912 Foreign trade turnover was increased by 100% (it was 200 million golden dinars)

1912 – 1913 The Balkan Wars, from which Serbia came out with no financial losses

1915 Died before the end of his third term

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