Using the Post Keynesian approach, this study investigates the evolution of money and banks in transition economies in general, and in Uzbekistan in particular. By emphasising the role and importance of institutions in the economic process, the study argues that the evolution of money and banks during transition is a necessarily complex and time-consuming process. By analysing functional differences of money and banks and their evolutionary path in a market economy and in a centrally planned economy, the study suggests that, to reach necessary maturity and to become effective financial intermediaries and creators of new credit, transition banks have to go through several evolutionary phases. This is explained by the historical distinction between cash money and non-cash money, underdeveloped banking habits of the general public, slow and inefficient payments system inherited from the past, and more importantly hyperinflation during the early years of transition.
Taking Uzbekistan as a case study, we also argue that the speed of this evolution can vary from country to country depending upon a number of important factors such as the number of years spent under central planning, the degree of centralisation of the economy, the starting date of reforms and their consistency, proximity to large and dynamically functioning market economies, and more importantly entry of foreign banks. Uzbekistan was very slow in reforming its economy and therefore is still far from developing into a market economy. In spite of some positive changes undertaken during the transition period such as establishment of a two-tier banking sector, formal abolition of the distinction between cash money and non-cash money, modernisation of the payments system, controlling inflation, and the establishment of the deposit insurance fund, the banking sector failed to regain the general public’s confidence. We argue that weak development of money and banking in Uzbekistan is largely explained by the current structural organisation of the economy and some sector-specific issues associated with it. The implication of these arguments is that, in order to capture the objective reality of the situation, theories must be developed in particular ways in the context of history, institutional factors, and policy frameworks.