The Egyptian pound became the de facto currency in the coastal regions of Syria. However, within Syria's interior, transactions remained predominantly in gold, particularly the Ottoman lira. This preference stemmed from the population's unfamiliarity with paper money and the concentration of occupation authorities in coastal cities. The circulation of the Egyptian pound persisted until 31 March 1920. After Syria came under the French mandate, the High Commissioner issued a decree abolishing the use of the Egyptian pound and introducing Syrian-Lebanese paper currency, which was pegged to the French franc. "The Bank of Syria" was granted the authority to issue this currency, and it commenced issuing banknotes in May 1920.
However, the decree of 31 March 1920 did not extend to the interior region, where the Arab Kingdom under King Faisal I had been established. On 12 April 1920, the Faisalid government enacted legislation outlining the monetary system of the Faisal era. This system adhered to the bimetallic standard, with the dinar established as the primary monetary unit. The dinar weighed 6.45161 grams with a purity of 0.900, and it was subdivided into 100 piasters. The legislation also mandated the minting of the Arab riyal, a 25-gram silver coin with a purity of 0.800, valued at 25 piasters each. While the Faisalid government allowed the Egyptian currency to retain its legal tender status, its tenure was short-lived. Following the Battle of Maysalun on 24 July 1920, French forces occupied the interior regions. The High Commissioner issued the first decree on 9 August 1920, expanding the applicability of the existing monetary system from the coastal to the interior regions of Syria.
The decree of 31 March 1920 established the Syrian-Lebanese pound as the primary currency unit in the country. The backing for this currency primarily consisted of French francs, overshadowing other elements of reserve. The pound was subdivided into 100 piasters and was redeemable, allowing holders to exchange it for checks drawn on Paris at a rate of 20 French francs.
The Mandate authorities withdrew Egyptian pounds from circulation through banks and army funds, facilitating the exchange of Egyptian currency for Syrian currency at a fixed exchange rate of 325 Syrian piasters for each Egyptian pound. Through the issuance of Syrian currency and the withdrawal of the Egyptian pound from circulation during this period, France achieved two significant objectives:
The French authorities can now finance their armies using Syrian currency. The continued circulation of the Egyptian pound necessitates the French authorities' purchase of Egyptian pounds with sterling pounds or gold, depleting their reserves and affecting the exchange rate of the franc in currency markets.
Withdrawing the Egyptian pound from circulation, rendering it obsolete, and substituting it with Syrian pounds resulted in France accumulating a significant amount of withdrawn Egyptian currency. This bolstered its foreign exchange reserves, enabling it to fulfill its financial obligations within the sterling area.
January 1924 Agreement
It was untenable for the monetary system in Syria and Lebanon to rely solely on decisions issued by the French High Commissioner, nor was it acceptable for the issuance rights to be granted to a foreign bank by an occupation decree without local government approval. Consequently, negotiations commenced under the supervision of the High Commissioner between the local governments and the "Bank of Syria". On 23 January 1924, these negotiations culminated in the signing of a monetary agreement. Under this agreement, the local governments recognized the Syrian-Lebanese currency and authorized the "Bank of Syria," renamed the "Bank of Syria and Lebanon," to issue currency for a period of 15 years, starting from 1 April 1924. The agreement also affirmed the existing monetary framework established by the High Commissioner's decision in 1920. Despite strong opposition from the people and their representatives in the Federation Council since the signing governments were products of the mandate, the agreement was concluded under pressure from the mandate authorities.
February 1938 Agreement
Negotiations commenced with the governments of Syria and Lebanon to renew the 1924 agreement two years before its expiration on 31 March 1939. These negotiations led to the signing of a separate agreement with the Lebanese government on 29 May 1937. Under this agreement, the issuance privilege of the "Bank of Syria and Lebanon" in Lebanon was renewed for a period of 25 years, starting from 1 April 1939.
The agreement with the Syrian side progressed slowly and faced numerous challenges. However, on 25 February 1938, the two parties reached a draft agreement. This draft was not presented to the Syrian Parliament due to the suspension of constitutional processes by the mandate authorities on 8 July 1938. Instead, governance was transferred to a board of directors with executive authority, and legislative powers were exercised through the issuance of legislative decrees ratified by the High Commissioner. On 29 March 1939, two days before the expiration of the 1924 Agreement, the French High Commissioner issued a decision extending the validity of the agreement until March 1964. Subsequently, the Government of Directors issued a decree on 9 September 1939, endorsing the 25 February Agreement and its accompanying Basic Bank System. The entry into force of the agreement was postponed from 1 April 1939 to 1 January 1940.
The Foundations of the Syrian Monetary System Between the 1924 and 1938 Agreements:
The price of the Syrian-Lebanese pound was set in the aforementioned agreements between the Syrian and Lebanese governments and the Bank of Syria and Lebanon in relation to the French franc, at a rate of 20 francs per pound. The bank intervened in the money market, buying and selling Syrian pounds in exchange for the franc at this price.
Coverage Elements in the 1924 Agreement
Article Eight of the 1924 Agreement stipulated that coverage against the issued liras should consist of:
1) Gold or obligations of foreign governments convertible into gold.
2) Foreign or local commercial papers, with a maturity not exceeding 90 days. Foreign commercial papers must bear two acceptable signatures, while local commercial papers must bear at least three acceptable signatures.
3) A mandatory coverage which includes deposits in French francs held on demand in an account with the French treasury, not exceeding one-third of the issued cash. The French treasury is required to pay interest on these deposits at a rate of no less than 1.5%.
4) Optional coverage which is provided in francs deposited upon request into an account held by the Bank of Syria and Lebanon with the French treasury. Interest on these deposits must be at least equivalent to that paid on standard French deposits. This optional coverage, along with coverage in the form of commercial papers, must not exceed 22% of the issued cash.
5) bonds issued by the French government or guaranteed by it are acceptable forms of coverage. These bonds must have a maturity period not exceeding two years and must be deposited with the Bank of France.
Coverage Elements in the 1938 Agreement:
The 1938 agreement delineated coverage elements with greater precision compared to its predecessor, dividing them into two categories: mandatory and optional. The mandatory elements comprise gold, initially set at 10% and gradually increasing to 30%, along with a required deposit in French francs. This deposit is to be held in the central fund of the French Treasury in Paris, accruing an annual interest of no less than 1.75%. The agreement specified that this deposit should constitute 25% to 26% of the total circulating papers. Additionally, an interest-free advance of 250,000 Syrian pounds was mandated for the Syrian government.
Regarding the optional coverage elements, they consist of:
Characteristics of Coverage in the 1924 and 1938 Agreements
It is evident from the comparison that the 1924 agreement prevailed throughout much of the interwar period, heavily relying on assets denominated in French francs for coverage. While the agreement mentioned the inclusion of gold or foreign notes convertible into gold, it did not specify a minimum percentage for these assets. Consequently, the Bank of Syria and Lebanon did not have to incorporate gold or foreign exchangeable notes into the coverage, and the average gold value comprised merely 4% of the coverage during the agreement's term.
The 1938 agreement, in contrast to its predecessor, introduced several notable deviations. Firstly, it abolished the upper limit for monetary circulation, a feature present in the 1924 agreement which capped circulation at 25 million Syrian-Lebanese pounds. Additionally, the 1938 agreement differentiated, albeit formally, between the Syrian pound and the Lebanese pound. Under this new agreement, the Bank of Syria and Lebanon became subject to taxation, whereas it had previously enjoyed exemption.
Moreover, the 1938 agreement mandated that any profit resulting from the appreciation in the value of gold coverage would be allocated to the governments of Syria and Lebanon. Furthermore, it stipulated that regular profits from the coverage would be shared between the bank and the aforementioned governments.
