In 1990, Yugoslavia was the 24th largest economy in the world, six places above Saudi Arabia and 10 above Norway.1
Economists examining the causes of the Yugoslavian hyperinflation of 1991 to 1994 were initially puzzled. The Yugoslavian federal budget was running up only small deficits throughout the 1980s. There also seemed to be little problem with external creditors. In 1990, externally held debt totalled only around $21 billion, in an economy with a gross domestic product (GDP) of around $120 billion.1
Hyperinflations are usually associated with profligate governments and external creditors yet, prima facie, Yugoslavia presented neither. On closer inspection, however, three comingled inflationary forces were at play.
First, the central bank was printing dinars. The National Bank of Yugoslavia (NBY) was funding the foreign currency deposits and purchases of state-owned companies, and doing so at fixed exchange rates.
I remember my father reporting this note with 11 zeros was worth "roughly one cabbage"
Between 1978 and 1988, the NBY’s explicit policy was to underwrite the exchange losses on foreign currency deposits that were redeposited by commercial banks with the NBY. This led to the net worth of the central bank plummeting to -$4.5 billion (the trough was probably a lot lower during the period).2 So to the extent that a central bank’s net worth can be regarded as a national debt – and, despite the Yugoslav experience, there are still economists who argue that it shouldn’t be – Yugoslavia’s debt was ballooning. Throughout the 1980s, the NBY was in effect having to print even more money to fund the purchases of foreign goods on which Yugoslav industries and consumers relied.
Second, money was also being issued by regional central banks in a way that was both uncoordinated and illegal. The national central bank was compelled to monetise regional government deficits – the NBY would print money to fund loans that regional central banks had granted to regional government departments.
The third inflationary force involved a form of enterprising ‘carry trade’. As if being milked by com-panies and regional governments wasn’t bad enough, money was also being created at pace by individ-uals and businesses engaged in aggressive carry trades out of the Yugoslav dinar.
For example, people would travel to small banks in rural areas at the other end of the country and cash in completely unfunded cheques. They would then exchange the cash for foreign currency, usually deutschmarks, and wait for the cheque to arrive at the bank’s HQ for settlement. This process could take months – as anyone who has ever tried to drive across rural Bosnia will understand.
The carry traders would convert a part of the foreign currency they acquired and repay their debt, greatly reduced by inflation. They would keep the rest of the new money they had created. Companies, struggling to pay their workforces, adopted similar tactics.3 Expectations of high inflation had become ingrained in the population through the 1970s and 1980s, and a deterioration in the domestic political situation then led households to draw the conclusion that the country and its currency were going to the dogs. This, of course, became a self-fulfilling prophecy.