"Rentenbank" for Serbia

We had hyperinflation some two years ago, but reminiscing about it will not help us much this time. We must turn to the experience of others. At present, we are widely discussing the role of Germany in the Yugoslav crisis, so it might be useful to remind both ourselves and them of the German hyperinflation of 1923.

The similarities speak for themselves. Germany was defeated in the war, it lost a part of its territories, the fragile democracy was under constant threat of financial instability and economic prejudice, the internal and foreign debt (war reparations) were enormous, culminating with the allies' ultimatum to pay for the war damages.

Our inflation was on the mark of 47% in February. Is that an introduction to hyperinflation of a German kind? Will we have this time a long-lasting hyperinflation until the monetary system is utterly destroyed? Politicians can give better answers to these questions than economists.

Serbia is now facing the "blue helmets" and obligations to cover the costs of war. Naturally, recipes differ, for many similarities with the post-WW I Germany end here.

A single similarity, however, remains and is fundamentally concerned with public trust in the stabilization program - a new monetary authority must be established, entirely independent from the president, the government and the parliament, and with a legal obligation to prevent the covering of government expenditures by money issuance. In Germany, it was the then newly founded "Rentenbank", in Serbia it must be the National Bank, but a new one. At the same time, an internationally renowned expert must be invited to assume the office of its first governor, and necessary foreign trade reserves must be obtained by international arrangements. Our impression is not that the world hopes for the economic downfall of Serbia in order to make the analogy with Germany complete.

Reforming a state is not frontier drawing (although it cannot be avoided this time), but the establishing of new institutions and reforming of the already extant, which would induce the public to trust the stabilization program. Nationalization, government aid for loss-making firms, government control over foreign trade etc. are suggesting that Serbia is relying on its pre-Yugoslavia international status, while its current position is such that neither its borders are defined, nor is it internationally recognized. In such conditions, the much needed public trust in the stabilization program is hard to get, because the public must show that it is not anticipating a new inflationary shock.

Establishing of new and genuine institutions is more efficient in inducing the public to put its trust in the stabilization program than political pacts within the existent institutional framework. Nevertheless, this also should not be overlooked, because the price of economic stabilization must be paid and an agreement between the (leading) political parties and (all) the trade unions can decisively influence the establishing of a climate of confidence and general belief that the stabilization costs will be evenly distributed over all members of the society.

The preceding anti-inflation program failed, because there was no political consensus. The governments of the republics neutralized each other, so they could not individually influence the shaping of the program. When it was adopted, the economic costs of price decreasing began to exert pressure on their legitimacy, and that eventually provoked an unanimous negative reaction from all the republics.

The fragile political balance based on conflicting interests ceased to exist, and the political system was not able to establish a new one. It happened long before disintegration of the Yugoslav state began to take place.

Not a single anti-inflation program can succeed if the budget policy is not clear-cut, i.e. to stop financing the budget by money issuance. Mutually compatible fiscal and monetary policies, as was the case with the last anti-inflation program, are not enough. There must be an independent monetary authority pursuing a precisely defined monetary policy as well.

That was not the case in the summer of 1990, when overissuance undermined the exchange rate of the dinar, virtually abolishing its internal convertibility and pulling up the fundamental monetary anchor of the anti-inflation package. In August of 1990, the anti-inflation program was practically dead. The confidence in financial and foreign exchange systems was lost, while the growing political intolerance speeded up the flight of (state-owned and private) capital from the country.

The present-day government is busy drawing borderlines, maintaining that no anti-inflation policy can be adopted if the state that should carry it out is not precisely defined. Therefore it is trying to muffle hyperinflation with individual measures and to postpone the collapse of the monetary system, until the borders are established. As far as the "survival" of the government is concerned, this is all right.

At the same time, everyone living on money issuance (the army, civil servants, farmers, workers with minimum wages) supports such an explanation.

Therefore, the already announced anti-inflation program should not be expected within the next two or three months. The monetary system can hold until autumn.