MONETARY POLICY OF CZECHOSLOVAKIA, 1945–53

s of Doctoral Dissertations 117 plans were the premiums and advancement beckoning to those managers who fulfilled or overfulfilled the very ambitious plan of physical output. Both these causes led to a desperate competition for resources the supply of which the Planning Office was not able to guarantee. This competition was based on illegal premiums offered to these factors. Financial means to make the premiums possible had to be secured at all costs. In the face of these incentives for financial irresponsibility, restraining measures proved to be inadequate. The managers soon realized that they would be judged almost exclusively by the physical ouput of their factories. Against charges of financial mismanagement they had several lines of defense: (a) changes in prices ordered by the Planning Office during the year forced them to spend more than planned; (b) lack of some raw material forced the use of expensive substitutes; (c) their industrial customers failed to pay for goods, and the resulting "chain-indebtedness" made it impossible to trade responsibility, etc. That these financial disorders had to lead to a serious waste of resources is clear. Actually, official publications in the 1952-55 period contain examples of waste of resources of an extraordinary size. However, because of essential unity between the financial and the real sectors of the economy, losses caused by errors in policies are so intertwined as to defy isolation. Meanwhile, money supply and prices rose continuously. Prices of consumption goods rose by 139 per cent from 1947 to 1953; of goods and services purchased by the government by 104 per cent; of investment goods by 135 per cent. Prices of rationed consumption goods rose by 99 per cent from 1947 to 1952; of unrationed consumption goods by 287 per cent. Finally, in 1953, the government ordered another monetary reform. After close scrutiny of the two monetary reforms of 1945 and 1953 it was discovered that in both cases the government removed not only excess liquidity but decreased the quantity of privately held money assets below the equilibrium level. All the scattered semisecret and secret cash and deposit reserves were brought to light, and a more rigorous control of the financial affairs of the enterprises was made possible. Rationing and dual-price systems proved to be destructive of incentives to work and were abolished. Finally, the investment program for the year 1953 and the following years was substantially scaled down. Thus the supply of the factors of production was increased and the demand for them decreased with obvious consequences for monetary stability. The entire study shows that monetary policy in a centrally planned This content downloaded from 157.55.39.249 on Wed, 03 Aug 2016 05:51:10 UTC All use subject to http://about.jstor.org/terms 118 The Journal of Finance economy faces some special problems. Because of a social system that demands what is equivalent to a guaranteed annual wage for every employee and because of the state ownership of almost all enterprises, it is impossible to make any distinction between the monetary policy of the state and the financial policy of the enterprises. Enterprises, in these circumstances, enjoy money-creating power no different from that of the banking systems. Traces of such power can be found even in a capitalistic economy. Indeed, the entire price-wage spiral argument is based on it. Probably the most important distinction is that in the capitalistic economy this money-creating power is not promptly and automatically available to each single enterprise, not even to each industry. In a centrally planned and state-owned economy this money-creating power of enterprises is the very heart of the problem of monetary stability or instability. The ability of the central authority to exert effective control over the financial affairs of a huge number of enterprises, each in a position to act as a small central bank, determines the fate of any monetary policy. This content downloaded from 157.55.39.249 on Wed, 03 Aug 2016 05:51:10 UTC All use subject to http://about.jstor.org/terms