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Dinar Inflation

April 29, 1999

Steve Hanke is 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 (April 28, 1999), he tells the remarkable story of the Yugoslavian hyper inflation.

Professor Hanke will also be speaking at the Mises Institute conference on "Austrian Economics and the Financial Markets".

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."

Also read (in PDF) Paul Cantor's remarkable essay on the great German inflation: Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics from the Review of Austrian Economics.

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