Money and War in Yugoslavia

>From the Mises Institute:

Steve Hanke, a member of the
Editorial Board of the Quarterly Journal of Austrian Economics and
professor
of economics at Johns Hopkins.

Writing in the Wall Street Journal today (April 28, 1999), he tells the
remarkable story of the Yugoslavian hyper inflation. Understanding the
extent of suffering that the people have endured at the hands of central
bankers and politicians, the bombing campaign looks all the more cruel
and pointless.

Excerpts follow:

"In 1945 Yugoslavia was accepted as a charter member of the
International
Monetary Fund. By Dec. 16, 1992, when Yugoslavia was unceremoniously
given
the boot by the IMF, the wily boys in Belgrade had made hash out of the
bumbling bureaucrats in Washington. Perhaps that explains why the
fantastic
tale about Yugoslavia's monetary mischief remains untold.

"Yugoslavia got off to a fast start in its race with the IMF. By the
mid-1950s, it had created the world's most complicated multiple
exchange-rate system. That Rube Goldberg setup imposed some 200 exchange
rates for different traded products and was administered under a
licensed
trading system. With an abundant supply of IMF advice, oversight and
credits, things deteriorated. From 1971 to 1991, the year Yugoslavia
broke
apart, its annualized inflation rate was 76%; only Zaire and Brazil had
higher inflation.

"All that proved to be nothing but an appetizer. The main course was
dished
up by Slobodan Milosevic. The first of his many monetary shenanigans was
uncovered on Jan. 7, 1991. That is when the Yugoslav government of Ante
Markovic discovered that on Dec. 28, 1990, the Milosevic-controlled
Serbian
Parliament had secretly ordered the Serbian National Bank (a regional
central bank) to issue some $1.4 billion in credits to friends of Mr.
Milosevic. That illegal plunder equaled more than half of all the new
money
the National Bank of Yugoslavia had planned to emit in 1991. The heist
sabotaged the Markovic government's teetering plans for economic reform
and
hardened the resolve of the leaders in Croatia and Slovenia to break
away
from Belgrade.

"Without the Croats and Slovenes to fleece, Mr. Milosevic turned on his
own
people with a vengeance. Starting in January 1992, what was left of
Yugoslavia endured the second-highest and second-longest hyperinflation
in
world history. It peaked in January 1994, when the official monthly
inflation rate was 313 million percent. Only Hungary, in July 1946, ever
recorded a higher monthly rate. The Yugoslav hyperinflation lasted 24
months, only two months shorter than the Soviet hyperinflation in the
early
1920s. Yugoslavia's hyperinflation was far more virulent than the much
touted 1922-23 hyperinflation in Weimar Germany.

"The results were devastating. Long before NATO struck Yugoslavia, Mr.
Milosevic's monetary madness had destroyed the economy. Wreck an
economy,
then start a war: It's an age-old power-preservation ploy.

"During the 24-month hyperinflation period, per capita income plunged by
more than 50%. Ordinary people were forced to deplete their
hard-currency
savings. People couldn't afford to buy food in the free market; they
kept
from starving by either waiting in long lines at state stores for
irregularly supplied rations of low-quality staples, or by relying on
relatives who lived in the countryside. For long periods, all of
Belgrade's
gas stations were closed, with the exception of one that catered to
foreigners and embassy personnel. People also spent an inordinate amount
of
time at the foreign-exchange black markets, where they exchanged huge
piles
of near-worthless dinars into a single German mark or U.S. dollar
note....

"Nothing tells this horrendous story better than the devastating
devaluations that repeatedly decimated the dinar.... Since 1991, the
dinar
has been officially devalued 18 times, and 22 zeros were lopped off that
unit of account. The five devaluations in 1992 were too much even for
the
IMF, which showed Belgrade the door shortly after November's 73.3%
devaluation.

"In each of the past three climactic months of the hyperinflation, the
dinar
completely lost its value, with monthly devaluations of more than
99.99%. By
December 1993, the end was in sight. The Topcider mint was working at
full
capacity, turning out 900,000 bank notes a month, but they were
worthless
before the ink had dried. On Dec. 23, 500-billion-dinar bills rolled off
the
press, worth 4.15 German marks when printed. But by the time they could
be
stuffed into pay packets, they were hardly worth spare change.

"The dinar was redenominated on Dec. 29; nine zeros were lopped off in
the
third redenomination since July 1992. Finally, the mint's physical
capacity
began constraining inflation. The authorities could not print enough
cash to
keep up. On Jan. 6, 1994, the dinar officially collapsed. The government
declared the German mark legal tender for payment of all financial
transactions, including taxes... [But] the superdinar 'currency board'
was
as phony as a three-dollar bill....

"The bogus superdinar system did end the hyperinflation. Monthly
inflation
plummeted from 312 million percent in January to only 2,143% in
February,
and negative 6.2% in March. But by late 1995, the flaws in the phony
currency-board system were there for all to see. Measured against the
dollar, the superdinar was devalued by 62.6% on Nov. 26 and by 57.9% in
April 1998. Today the dinar is trading on the black market at less than
half
its official value of six dinars to one deutsche mark."


-- 
Pat Gunning, Sultan Qaboos University, Oman
Web pages on Subjectivism, Democracy, Taiwan, Ludwig von Mises,
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