FINANCE  

The Banking System in Czechoslovakia under Command Economy

by Deniz Arikan

Czechs did not have an important financial institution until the early 19th century. The first bank of Czech history was the Loan Bank in Brno. Czech banking developed only in the second half of the 19th century, when the Zivnostenska Banka (Trade Bank) was established in 1869. It was the first bank in a form of joint stock company and later became the biggest trade bank in Czechoslovakia.

The Czechs started to see the good effects of establishing banking services in the economy, but only a few years later, in 1873, the Vienna Stock Exchange crashed and only Trade Bank, Czech Union Bank and Industrial Loan Bank could survive the crash. This effected the Czech economy severely and this crisis of Czech monetary system lasted till the 1890s. In 1890 the Municipal Bank and in 1898 the Czech Industrial Bank were established, but the leading institution was still the Trade Bank. The Trade Bank increased its assets to eighty million crowns and gained a monopoly position after the World War I.

The CIA fact-book states that the newly created Czechoslovak state averted financial crisis through separation of currencies and taking over of Austrian and Hungarian enterprises. Thus the Czech Commercial Bank and the Bank for Industry and Commerce (originally Landerbank) were founded. Similarly, with a capital share of the former Anglo-Austrian Bank and with the help from the Bank of England, the Anglo-Czechoslovakian Bank was established.

There was one thing missing in the banking system until 1926. The system in Czechoslovakia had no central bank. The role of the central bank was done by the Ministry of Finance. Later on The National Bank started to do the job of a central bank and became the central authority for currency administration. Currency control was its major task. It had exclusive rights, for 15 years, to issue bank notes, and obligation to maintain their at least 25% gold coverage. Unfortunately, during the World War II, Bohemia and Moravia were invaded by the Nazis and the National Bank was divided into three. The National Bank of Bohemia, The National Bank of Moravia and The National Bank of Slovakia. The National Banks of Moravia and Slovakia  were established in the Slovak State, but unfortunately they were being controlled by the Nazis. After the World War II resulted with the defeat of Germans, the Nazis had to leave Czechoslovakia and the National Bank continued its activities in the original extent.

One fact the CIA fact book states is that in 1948, the whole banking system was nationalized by the Communist government. Two years after the nationalization, in 1950, the National Bank changed its name to State Bank of Czechoslovakia. The State Bank was the central bank, the government's financial agent, the country's commercial bank, an investment bank, and the clearing agent for collection notices. One of the important jobs of the central bank was to work with some specific ministries in order to formulate the financial plan for Czechoslovakia in addition to supervising the other banking in the country. The other banks, also state owned, were subordinate to the State Bank and each one had special functions. The Commercial Bank of Czechoslovakia was primarily the bank for foreign currency transactions. Three additional banks (two of which were savings banks, one for each of the republics, providing credit to individuals) completed the banking system in 1980.

The main function of the banking system was to act as the government's agent in implementing the financial plan, an important part of which consisted of expanding and contracting credit to meet the economy's needs. The central authorities controlled most investments directly, and the national plan regulated production. The State Bank acted as a supervisory agent in extending credit to the enterprises, ensuring that the investments met plan goals. The bulk of bank credit was for working capital, largely utilized to finance the purchase of materials and the sale of finished products. The powers of the State Bank appeared to be somewhat limited, however, since credit was extended according to guidelines for planned production. The central authorities set interest rates, which neither reflected the cost of capital nor appreciably affected the flow of credit. Instead, beginning in the 1970ís, interest rates were differentiated to accomplish objectives of the plan. Interest rates were low for enterprises modernizing a production process. Punitive rates were used if firms deviated from plan goals. In the mid-1980s, the greatest portion of investment credits went to the industrial sector, followed by agriculture, construction, and retail trade.

The banking system operated within the framework of the financial plan. Major elements of the financial plan included allocation to consumption and investment, foreign and domestic financing of investment, and wage and price changes. Planning authorities were in a position to use the centralized banking system to carry out major corrective measures, as occurred in 1953 when inflation rose up very high and the savings of the population have lost most of their value by a conversion of the currency. After this experience, officials placed stricter controls on investments, permitting real wages and the standard of living to rise gradually. But in the late 1970s, and particularly in the early 1980s, the terms of trade got worse, and there was need for large investments in energy and industry, which combined to limit the allocations for consumption. Imposition of the Soviet model introduced a chronic inflationary bias into the Czechoslovak economy, although the inflation was not necessarily reflected in prices. Control of prices (only private food produce, especially fruit and vegetables, were priced freely) repeatedly produced inflationary manifestations in other areas, such as shortages in the market and increased savings by the population. Although officials generally limited the rise in prices (causing price indexes to advance slowly), by the mid-1970s prices had to be adjusted upward more frequently. This trend continued into the 1980s, and major food price increases occurred in 1982.

Only after the fall of the Communist regime in 1989 were new banks established and the banking system started to work under the conditions and rules of free market.

Sources:

1-                 Czech Open Info Project (http://www.open.cz/project/economy/finance/bank.htm)

2-                 IMF and the Economies in Transition

3-                 Business Cycles in Czechoslovakia under Central-Planning

4-         The CIA fact book

 

 

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