Part and parcel of the transition to a capitalist, free-market economy in Central and Eastern Europe (CEE) and the former Soviet Union (FSU) was the development of independent currencies and, by extension, the monetary arrangements needed to govern these currencies. Coming off a system where money was merely a unit of accounting and inconvertible, the countries of CEE and FSU for the most part had to implement new central banks from scratch, with little historical memory on the role of such a bank. However, at the same time the monetary system was being built, the rest of the institutional system was in flux. This chapter examines the interlinkages between the creation of central banks and other economic and political institutions in transition, concluding that both central banks – modeled on the Western world – and monetary policies exerted a far stronger influence on institutional development than previously realized. In particular, the push by central banks for financialization had deleterious consequences for many transition economies and their political institutions, even as the early results of inflation abatement helped these economies to grow.

JEL Codes: P26, E58, F55