27 May 1924
International impetus for the creation of a bank of issue
When the law on a joint-stock bank of issue was announced, it seemed that the koruna’s value had stabilised and its sharpest decline, recorded in January 1920, had been averted. However, this period of stability was very short-lived and the koruna soon began to depreciate again. Paradoxically, the fall in the exchange rate boosted industrial production and exports, and the koruna eventually strengthened again.
Progress was also made in building the gold reserve, but not at the pace required for rapid stabilisation of the koruna. As a result, all plans to establish a bank of issue were temporarily shelved.
On the domestic political scene, the topic was barely discussed, whereas internationally the opposite was true. It became increasingly clear to Vilém Pospíšil, Deputy Chairman of the Banking Office of the Ministry of Finance, that the existence of an independent bank of issue was a key prerequisite for international economic cooperation and, in particular, for securing foreign loans. Although he emphasised the Banking Office’s independence from the state in all negotiations with foreign partners, this argument failed, and he repeatedly encountered demands for the early establishment of a bank of issue.
The situation became critical when Czechoslovakia began negotiating an international loan, later known as the Czecholoan. On 27 May 1924, a Czechoslovak delegation led by Vilém Pospíšil and the Banking Office’s Chief Executive Director Augustin Novák met in London with the most influential figure in bank-of-issue policy at the time, the powerful Bank of England governor, Montagu Norman.
The discussion on the international loan soon turned to the establishment of a bank of issue, and Montagu Norman sharply rebuked Vilém Pospíšil with the remark: “Here is Mr Pospíšil travelling all over the globe telling everyone that unless you have a bank of issue, no one will talk to you – and where’s the one in his country?” Although the Czechoslovak delegation tried to explain that they were waiting for the right moment to introduce gold backing for the currency and then the bank, Norman “stood his ground”.
In an effort to accommodate the governor of the Bank of England, Pospíšil and Novák proposed a possible solution: to create a bank of issue whose banknotes would, for the time being, not be backed by gold. Although they had not anticipated such a response, Norman not only welcomed the idea but insisted on its rapid implementation.
The meeting had such a profound – and perhaps even shocking – effect on Vilém Pospíšil that, upon his return to Prague, he immediately visited Prime Minister Antonín Švehla and Finance Minister Bohdan Bečka and informed them of the need to establish the National Bank of Czechoslovakia without delay, as otherwise Czechoslovakia might not be able to secure foreign loans in the future.