The average annual inflation rose to 15.1 percent last year, making it the second highest in the history of the independent Czech Republic. It devalues wages, salaries and savings. People also faced a decline in living standards during the difficult transformation of socialism into capitalism in the early 1990s. They lost money due to inflation also during the First World War and as a result of the Nazi occupation and again during the communist currency reforms.
More than a hundred years ago, inflation in the Czech lands – as well as in the whole of Austria-Hungary – was set off by the First World War. It buried the moderate policy of the Vienna Central Bank, as the government began to use money issuance to finance the war effort.
Within four years, the volume of banknotes in circulation in Austria-Hungary grew from two to 30 billion crowns, and the volume of war loans was even higher. The price level of basic needs in the Czech lands increased eight times, but wages rose only three times, which meant a tremendous drop in the standard of living.
With the end of the war and the disintegration of the Habsburg monarchy, inflation did not stop, the turn was brought only by the monetary separation promoted by the Minister of Finance Alois Rašín. In March 1919, he separated the new Czechoslovak crown from the falling Austrian currency during the so-called stamping. This cut the republic off from hyperinflation, specifically from the Austrian central bank, which continued to issue loans and money. The introduction of the crown was associated with the withholding of half of the money of households, it was 2.5 billion crowns, and these funds were transferred to government bonds with one percent interest. Money was gradually released from them and was also used to repay the newly introduced property benefit. It drained the excess purchasing power and mainly the earnings associated with previous war supplies.
The price level remained high anyway. Inflation, which reached 77 percent in the first year after separation, was suppressed only by the subsequent government policy of strengthening the koruna. Alois Rašín also promoted this in the interest of the most powerful financial institution in the country, Živnostenská banka. After all, he was her longtime employee before joining the finance department.
“But Rašín was an extremist fighter against inflation, his anti-inflation and revaluation program was the opposite extreme of today’s extravagance, and it stifled growth and employment,” claims economist and former central banker Pavel Kysilka a century later. Significant deflation and the associated expensive loans contributed to the post-war depression, from which the economy only emerged in 1924. Moreover, a strong currency was not possible without loans from Great Britain and the USA and budget cuts, and it was accompanied by social tension. Rašín himself, before President Tomáš G. Masaryk could remove him from office, was fatally shot in January 1923 by left-wing assassin Josef Šoupal.
Falling prices during the crisis
Despite contemporary criticism not only from the left, but also from Czech industrialists including Tomáš Bata, the strengthening of the domestic currency enabled a rapid stabilization of the economy. At the same time, the surrounding Central European states fell into financial chaos, the depth of which is evidenced by the fact that, for example, one new Austrian crown was exchanged for ten thousand old crowns after its demise. In Germany, the new mark was even worth a trillion inflation-adjusted marks.
In Czechoslovakia, significant economic growth occurred in the second half of the 1920s, despite the increase in the cost of investments in the modernization of enterprises. Together with Switzerland, the fastest in all of Europe. But only after the end of the efforts of Rašín’s successors to further strengthen the crown and after the reduction of its exchange rate.
The world economic crisis that broke out in 1929 strengthened deflationary tendencies again in Czechoslovakia, as in the whole world. The drop in prices was palpable: while in 1925, according to the statistics of the First Republic, bread cost 3.15 CZK, in 1935 it cost only 2.10 CZK. It was similar with other goods and services, the price index fell from 100 to 74 points between 1929 and 1934. Modest inflation, which twice rose to five percent, came only after the mid-1930s. It was a consequence of the growing indebtedness of the state due to the decrease in budget revenues and the concurrence of expenditures on social benefits and armaments. And above all, the consequence of the double devaluation of the koruna in 1934 and again in 1936. This step made imports from abroad more expensive, including supplies of raw materials, without which Czechoslovak industry could not do.
Protectorate chaos
Substantial devaluation of the currency came under the protectorate, when, according to the economist František Vencovský, the forced inflationary emission of the crown became a method of economic exploitation by the Nazis. One such mechanism was export to the Empire. The Czech Central Bank, which was the settlement point for such a transaction, first paid the domestic companies in unsecured currency. And money from Germany, from companies and the army, came to her either late, or mostly not at all.
In total, it was an inflationary 58 billion crowns, roughly ten times the protectorate budget. In this situation, even price regulation did not work, consumer prices increased by 62 percent in six years, with the largest increase already occurring at the beginning of the war, in 1940 and 1941. In addition, goods were scarce, people did not buy much, and the amount of their savings thus decreased during the occupation almost doubled.
por o fixed deposits
The collapse of state finances was supposed to be solved by monetary reform in 1945. Its essence was the reduction of the currency in circulation to a third. People received only 500 new crowns in exchange, and their war savings ended up in so-called time deposits, on which 258 billion crowns were blocked in December 1945. Funds were released from them only with the permission of the authorities.
According to economists, the money from time deposits was supposed to replace the regular issue of money, but too much of it went into the economy, because already a year after the reform, the amount of money in circulation doubled and continued to increase rapidly. The head of the central bank at the time, Leopold Chmela, warned in vain that “inflation from the old currency is moving to the new currency”.
In 1946, inflation rose to an estimated 82 percent today. However, the devaluation of the koruna against the dollar and the high demand for Western imports also contributed to this. And an even greater contribution was made by a threefold increase in workers’ wages, better remuneration for women and, at the same time, bringing Slovakia’s salary level closer to richer Czech countries.
Falling currency, queues and bribes
After the Communist takeover in 1948, the economy was subordinated to a central plan and militarized. The priority development of heavy industry brought decent earnings to miners, metallurgists and workers in armories. On the other hand, due to the restriction of light industry, there was a lack of goods on which the earned money could be spent. Economic imbalances were increasing, shops were empty and black trade flourished despite severe penalties.
In June 1953, the Communist leadership decided on a drastic monetary reform, which immediately liquidated savings, including the remaining fixed deposits and securities. There was a strong reduction in the currency in circulation, the volume of which fell from 52 billion to only 1.4 billion crowns. People could change money at a ratio of 5:1 up to 300 crowns, higher amounts only at a ratio of 50:1.
Inflation itself was kept low during the communist era. It was high only in 1949 and higher at the end of the 1960s, when companies were briefly allowed to increase wholesale prices as part of the reforms that were being prepared and then canceled.
Also at the end of the 1970s, when the socialist economy ran into major problems associated with rising oil prices and the unbalanced development of the previous growth years. Difficulties grew further when a proposal to significantly increase the price of food, which was subsidized from the state budget, did not pass.
“Socialism defended itself against open inflation by having all prices set directly by the price authority. However, it was unable to defend itself against so-called hidden inflation, when goods had, for example, lower weight or quality at a fixed price, and especially suppressed inflation. In this case, the goods are not normally available, under-the-counter and you can get it only for an additional fee in the form of a counter service or a bribe. That is, for a higher price than the official one,” reminds economist Pavel Kysilka.
Inflation was officially inadmissible under socialism. “The economic theory at the time assumed that it would be possible to plan the production of all necessary products and services so precisely that no demand would be unsatisfied, and therefore there would be no rise in prices. Of course, the problem must have arisen when the demand for the given goods was underestimated during planning, and for that reason there was a shortage,” explains CNB chief archivist Jakub Kunert. Another consequence was the fact that citizens’ savings grew, as they could not buy what they wanted in the shops. In the last ten years of socialism alone, deposits grew by 84 percent to 266 billion crowns.
Market recovery tax
High inflation also accompanied the transition from a socialist economy to capitalism. Under this transformation in 1991, in connection with the liberalization of decades of frozen prices, it jumped to 55.5 percent, and in the two following years it still exceeded 11 and 20 percent.
“Transformation inflation was inevitable and was the result of the transformation of socialist suppressed and hidden inflation into open inflation. And also devaluation, which gave the koruna a realistic and sustainable exchange rate, in contrast to the artificially overvalued exchange rate of the previous era,” says former central banker Pavel Kyselka. While at the end of 1989 one dollar was officially sold for 14.29 crowns, at the end of 1990 it was already 28 crowns.
The transition to the market thirty years ago was therefore not without a drop in living standards. “In 1991, 55 percent inflation, after accounting for wage growth, meant a roughly 35 percent depreciation of the purchasing power of the koruna,” adds Kyselka. At the same time, it was a temporary drop in the standard of living – already in 1992, the increase in prices exceeded the average increase in wages.
According to economist Robert Holman, inflation was kept at an acceptable level in the early 1990s. In Poland, for example, in 1990 it shot up to 586 percent.
Nevertheless, even in the Czech Republic, prices rose noticeably. The increased domestic inflation of the late 1990s was due to the wasteful budget policy of the then Klaus governments and the weakening of the koruna after the abandonment of the fixed exchange rate in 1997. The central bank’s switch to inflation targeting then kept inflation low for years, and only this year it rose to the aforementioned 15.1 percent.
