The history of central banking in Poland
In April 1924 the zloty, which was the forerunner of our present currency, was introduced into circulation | HistoryIn April 1924 the zloty, which was the forerunner of our present currency, was introduced into circulation | History
In January 1924 the Sejm (the lower chamber of the Polish Parliament) passed the famous currency reform, which enabled Poland to overcome the disastrous hyperinflation and the resulting economic chaos. In April 1924 the zloty, which was the forerunner of our present currency, was introduced into circulation, replacing the Polish mark whose value had been destroyed by inflation. The new currency was introduced by the then established Bank of Poland – the predecessor of Narodowy Bank Polski. A great man should be remembered in connection with these three jubilees – the brilliant politician, economist, the father of the zloty and one of the founders of the Bank of Poland, Władysław Grabski.
The origins of the abovementioned events of 1924 should be briefly recalled here.
The Polish State was restored at the end of 1918. It took over the issuing institution – the Polish National Loan Office – from the German occupation authorities. The Polish marks issued by this institution became temporary legal tender.
However, already in December 1918 it was announced that the Bank of Poland would be established in the future. The new issuing bank was to be named after the institution that managed monetary and economic matters after 1828, during the short-lived autonomy of the Kingdom of Poland.
In February 1919 the future introduction of the zloty, which was to replace the Polish mark, was announced. This was meant to be a reference to a long monetary tradition. The Polish zloty was a currency that had been in use in Poland since the end of the 15th century. Even during the period of partitions, when foreign currency was in circulation, people were still strongly attached to the zloty. The Polish zloty was e.g. used as the equivalent of 15 kopecks in daily calculations.
The Polish mark was the currency of independent Poland after 1918. Fighting to secure its borders and lacking in Treasury revenue, Poland continued to amass debt. The Treasury debt was covered by printing money. The amount of currency in circulation was rising rapidly and accordingly the exchange rate of the Polish mark was falling fast. In the middle of 1923, inflation turned into hyperinflation. Monthly rises in prices exceeded 50%.
In the middle of December 1923 Władysław Grabski was appointed Prime Minister and remained the Minister of the Treasury at the same time. He intended to balance the budget and obtain revenue from property tax, avoiding foreign loans for fear of political concessions. At the turn of 1924, monetary disaster loomed. Prices rose by over 150% every month.
On January 11, 1924 the Sejm passed the Act on State Treasury Repair and Currency Reform.
On January 20 the statute of the Bank of Poland was passed and the bank was granted the sole right to issue notes. The activities of the Bank were organised by a five-person committee chaired by the future President Stanisław Karpiński. According to contemporary models, the central bank was established as a private joint stock company, which was supposed to ensure its independence. The shares of the Bank were held by 176,000 shareholders. The State Treasury held only 1% of stock. The Bank started its operation on April 28, 1924. It exchanged the Polish mark at an exchange rate of 1,800,000 marks to the zloty. The zloty was on par with the gold franc (i.e. Swiss franc). The initially sound condition of the budget and the balance of payments as well as the accumulated foreign currency and gold reserves provided stabilisation and ensured the success of the reform.
The success proved short-lived, however. The very poor harvest and a deep industrial crisis in 1924, and later the disastrous balance of payments in 1925 weakened the zloty dramatically. Foreign exchange interventions of the Bank of Poland proved ineffective. Fearing a decrease in modest gold and foreign exchange reserves, the Bank decided not to defend the zloty exchange rate any more. Prime Minister Grabski resigned in November 1925. The economic situation led to a renewed budget deficit. The government funded its expenditure by issuing notes and coin. Inflation (dubbed ‘coin inflation’) returned. Prices were rising by more than 15% per year. It was only an upswing in business climate that improved the budget and the balance of payments as well as helped stabilise the exchange rate.
The zloty exchange rate finally stabilised in 1927 thanks to an international loan. The zloty remained a stable and strong currency until the Second World War. Although the monetary policy of the Bank of Poland was often disputed, it was undoubtedly a very important institution of the Second Republic.
Narodowy Bank Polski started its operation in 1945. It was established as a state-owned bank supervised by the Minister of Treasury. NBP soon attracted brilliant professionals, including former employees of the Bank of Poland. Their professional skills and experience continued to be a great asset for NBP for many years.
Initially, NBP adopted principles taken from the statute of the Bank of Poland. The assumption was that it would be an issuing bank, not involved in the direct funding of enterprises. The command-and-control economy soon sharply changed the role of NBP and the currency, however. Already at the beginning of 1946 NBP was entrusted with the financial supervision and direct funding of coal mining, metallurgy and the textile industry. Narodowy Bank Polski was gradually becoming a monobank – a monopoly not only with regard to the issue of currency but also with respect to extending loans and collecting savings. In other words, it was turning into a colossus, dependent on external political and administrative decisions. The zloty became a shadow of those plans, becoming an exclusively internal currency that could not be converted to other currencies. It was even difficult to convert it into goods because queues and market shortages were a constant feature of the centrally planned economy. No wonder that it was losing ground to dollar and other foreign currencies.
Even when the political system limited the role of the central bank, NBP engaged in activities that contributed to the rationalisation of the economy. Organising non-cash settlements, servicing the budget, managing the scant foreign exchange reserves and calculating the balance of payments as well as other synthetic balances of the national economy should be mentioned here.
It was only at the end of the 1980s that the zloty started to return to the world of real money. Reforms were successful in enabling the zloty to perform the function of national currency again and Narodowy Bank Polski became a central bank that was responsible for the value of the Polish currency. At the beginning of the 1990s the considerable degree of dollarisation of the economy was a problem. Currency resources were composed in 75% of foreign currencies and only in 25% of zloty funds (in cash and in bank accounts). These proportions were successfully reversed very quickly. After many years of centrally restricted price movements and distorted pricing structures, and also due to a huge inherited deficit, inflation exploded in 1989 reaching a four-figure level but soon came down to two figures. The introduction of limited convertibility brought the zloty closer to a real currency.
In 1995 a redenomination of the zloty was performed, which was remembered as “the crossing out of four zeroes.” The balance of payments, which was back to normal, enabled the exchange rate of the zloty to be shaped on the foreign exchange market and allowed to make the zloty convertible according to international standards.
Important changes occurred after 1997. The new Constitution gave Narodowy Bank Polski a strong position among public institutions and made monetary policy the responsibility of a new NBP body – the Monetary Policy Council. Supervising the banks was entrusted to the Commission for Banking Supervision, and the General Inspectorate of Banking Supervision, an organisationally autonomous body within the structure of NBP, was made the executive body in this regard. Thus looking after the zloty and guarding the stability of the financial system became the primary objectives of the Polish central bank.
After many years, Narodowy Bank Polski Narodowy Bank Polski became a central bank based on the best models.