The Czech crown – A brief history of a currency

Mojmír HamplVice-Governor

Czech National Bank

Liberec Economic Forum – LEF 201516 September 2015

Technical Univerzity of LiberecFaculty of Economics

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The crown has a long history in the Czech lands

• Czech Republic has kept currency name from Austro-Hungarian era; crown was introduced by Emperor Franz Joseph I in 1892 to replace old florin

• Czech Republic is only successor state to maintain currency name unchanged to this day

Czechoslovakia andCzech crown neversuffered from high inflation

Territory where the “crown” was once legal tender…

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…but while Alois Rašín was in office in Czechoslovakia after 1918...

Pursued strict deflationary policyAustro-Hungarian crown was still in circulation in successor countries in autumn 1918 and winter 1919On 25 February 1919, National Assembly approved Rašín’s secret plan to stamp banknotes Between 26 February and 9 March 1919, national borders were sealed and notes circulating in Czechoslovakia were stampedOnly stamped notes were recognised as legal tender

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…and the price level went down…

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Prices dropped by 26% in three years

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July 1921 set as 0

Price level in Czechoslovakia, 7/1921–6/1924

Source: Statistical Yearbook 1925

…other countries printed money like there was no tomorrow

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Rakousko Maďarsko Polsko

July 1921 again set as 0

Prices rose by 850% in Poland…

…and by just 620% and 500% in Hungary and Austria

Price level in Austria, Hungary and Poland, 7/1921–6/1924

Source: Sargent, T. J (1982): “The Ends of Four Big Inflations”, in Hall, R. E. ed. “Inflation: Causes and Effects”, University of Chicago Press.

Austria Hungary Poland

This caused the other “crowns” to weaken sharply

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Down means weakening of currency

Czechoslovak crown remained stable…

…while Hungarian and Austrian ones weakened by around 370%

Exchange rate of Czechoslovak, Hungarian and Austrian crown against Swiss franc, 1918–1924

Source: Dornbusch, R. (1994): “Post-communist Monetary Problems: Lessons from the End of the Austro-Hungarian Empire”, An International Center for Economic Growth Publication.

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The present debate? Nothing new under the sun

• Very similar debate took place in our country 80 years ago• Vilém Pospíšil (advocate of gold coverage, i.e. fall in prices, in Alois Rašín’s footsteps)

versusKarel Engliš (advocate of price stability, closer to modern view)

Rašín Pospíšil Engliš

• February 1934: Pospíšil resigns as CB governor and is replaced by Engliš, who is intent on devaluing the crown by one-sixth. Thanks to this, the almost-five-year period of recession and deflation in Czechoslovakia comes to an end the same year.

1953 Currency Reform

Greatest blow to crown came in June 1953

Nevertheless, even “bankrupt” Communist regime preferred direct repayment of public and hidden debt by population to erasure of debt by inflation

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“Our currency is strong and monetary reform will not take place. Class enemies are merely spreading rumours about it.“

Antonín Zápotocký, 29 May 1953

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Česko Slovensko Maďarsko Polsko

Post 1989...

As far as possible (relative prices had to be adjusted) we again followed – and are following – the least inflationary path

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Price level, 1989–2009

1989 set as 0

In 20 years, prices went up by 150% in Czech Republic…

…and by 450% in Poland

Source: Hiranya, K. N and Tochkov, K. (2011): “Relative Inflation Dynamics in the EU Accession Countries of Central and Eastern Europe”, available at SSRN: http://ssrn.com/abstract=1750356 or http://dx.doi.org/10.2139/ssrn.1750356

CZ SK HU PL

…inflation remains under control

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Thank you for your attention

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