A number of central banks in Central and Eastern Europe were established in the 1920s with the primary aim of creating monetary stability in the new order following the First World War. This paper examines the philosophies behind the institution of these central banks. It argues that their interwar experience may prove relevant to current institution-building and policymaking efforts following the imposition and subsequent demise of the socialist economic order in these countries.
During the war, many Central and Eastern European countries used highly inflationary practices, such as printing money and issuing short-term treasury bills, to finance government fiscal debt. The international financial conference held in Brussels in 1920 sought to curb such state-induced inflation by establishing politically independent central banks. This paper reviews the main features of the central banking laws adopted in Central and Eastern European countries in the 1920s. It notes that, in general, the views of the Financial Section of the League of Nations, dominated by the Bank of England, were incorporated into these laws. As the United States was not a member of the League of Nations, its views, shaped by a very different central banking tradition, were initially ignored. Under the direction of the League of Nations, the new central banks in Central and Eastern Europe were encouraged to centralize the payments function and manage exchange rates, in order to keep control of the money supply and achieve monetary stability. The importance of banking supervision, a policy advocated by the U.S. Federal Reserve system, was not fully appreciated until the following decade, by which time most central banks in Central and Eastern Europe had been forced to impose rules of behavior on commercial banks. In this regard, the particular experiences of Czechoslovakia, Hungary, and Poland are examined.