The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Summary of WP/92/66

“The Dissolution of the Austro-Hungarian Empire: Lessons for Currency Reform” by Michael G. Spencer and Peter M. Garber

The dissolution of the Austro-Hungarian Empire in 1918 provides a salient historical example of a currency union whose breakup was not forced by occupation authorities or civil war or orchestrated by a colonial power. This example is particularly instructive now, because the changes in the economic and political landscape 74 years ago closely parallel current developments in Eastern Europe.

Beginning in March 1919, the Kingdom of Serbs, Croats, and Slovenes, Czechoslovakia, Austria, Romania, and Hungary successively undertook currency reforms designed to create identifiable domestic currencies over which their own institutions had control. This episode provides the best historical example of the transition from a breakaway reform-- that is, a currency reform undertaken unilaterally by one of a group of states in a currency union--to a successor state reform, in which all states in the currency union introduce reforms.

This paper investigates the currency reforms instituted by the Austro-Hungarian successor states. Of particular interest is the sequence of events and the consequent incentives and opportunities for individuals to choose where to convert their currency based on where the Austro-Hungarian crown notes that were being replaced had their highest real value. The paper also includes a discussion of the liquidation of the Austro-Hungarian Bank.

This historical episode suggests the following observations. First, currency separation can be accomplished relatively quickly. Second, if currency separation is not undertaken simultaneously in each region, differential tax-inclusive conversion rates will create incentives for individuals to spend or exchange their old notes in the region where they are most valuable. Third, states that are late in breaking away from the currency union may ultimately convert more than their previous shares of the old notes. An agreement among authorities to liquidate central bank assets prorated on the amount of currency collected, and to return these notes to the bank of issue, will only partially compensate for the lost goods. Fourth, the existence of such incentives, created by the withdrawal of one significant region from the currency union, will lead to defensive currency reforms in the remaining regions. Hence, a breakaway reform introduced by one region is likely to lead to reforms being introduced in all regions. Finally, currency reform will succeed in creating a stable medium of exchange only if it is accompanied by sound fiscal and monetary policies. It is not necessary, however, for fiscal restraint to precede currency reform if the new monetary authorities are constrained in their ability to extend credit to the state.

Working Paper Summaries (WP/92/49 - WP/92/112)
Author: International Monetary Fund