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The Worst Episode of Hyperinflation in History: Yugoslavia 1993-94
Thayer Watkins, Ph.D.
Between
October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion
percent. That’s a 5 with 15 zeroes after it.
Thayer Watkins is an instructor and graduate advisor in the Economics Department of SAN JOSÉ STATE UNIVERSITY.
Under
Tito, Yugoslavia ran a budget deficit that was financed by printing
money. This led to a rate of inflation of 15 to 25 percent per
year. After Tito, the Communist Party pursued progressively more
irrational economic policies. These policies and the breakup of
Yugoslavia (Yugoslavia now consists of only Serbia and Montenegro) led
to heavier reliance upon printing or otherwise creating money to
finance the operation of the government and the socialist
economy. This created the hyperinflation.
By
the early 1990s the government used up all of its own hard currency
reserves and proceded to loot the hard currency savings of private
citizens. It did this by imposing more and more difficult
restrictions on private citizens' access to their hard currency savings
in government banks.
The
government operated a network of stores at which goods were supposed to
be available at artificially low prices. In practice these store
seldom had anything to sell and goods were only available at free
markets where the prices were far above the official prices that goods
were supposed to sell at in government stores. All of the
government gasoline stations eventually were closed and gasoline was
available only from roadside dealers whose operation consisted of a car
parked with a plastic can of gasoline sitting on the hood. The
market price was the equivalent of $8 per gallon. Most car owners gave
up driving and relied upon public transportation. But the
Belgrade transit authority (GSP) did not have the funds necessary for
keeping its fleet of 1200 buses operating. Instead it ran fewer
than 500 buses. These buses were overcrowded and the ticket
collectors could not get aboard to collect fares. Thus GSP could
not collect fares even though it was desperately short of funds.
Delivery
trucks, ambulances, fire trucks and garbage trucks were also short of
fuel. The government announced that gasoline would not be sold to
farmers for fall harvests and planting.
Despite
the government desperate printing of money it still did not have the
funds to keep the infrastructure in operation. Pot holes
developed in the streets, elevators stopped functioning, and
construction projects were closed down. The unemployment rate
exceeded 30 percent.
The
government tried to counter the inflation by imposing price
controls. But when inflation continued, the government price
controls made the price producers were getting so ridiculous low that
they simply stopped producing. In October of 1993 the bakers
stopped making bread and Belgrade was without bread for a week.
The slaughter houses refused to sell meat to the state stores and this
meant meat became unvailable for many sectors of the population.
Other stores closed down for inventory rather than sell their goods at
the government mandated prices. When farmers refused to sell to
the government at the artificially low prices the government dictated,
government irrationally used hard currency to buy food from foreign
sources rather than remove the price controls. The Ministry of
Agriculture also risked creating a famine by selling farmers only 30
percent of the fuel they needed for planting and harvesting.
Later
the government tried to curb inflation by requiring stores to file
paperwork every time they raised a price. This meant that many
store employees had to devote their time to filling out these
government forms. Instead of curbing inflation this policy
actually increased inflation because the stores tended to increase
prices by larger increments so they would not have file forms for
another price increase so soon.
In October of 1993 they created a new currency unit. One new
dinar was worth one million of the "old" dinars. In effect, the
government simply removed six zeroes from the paper money. This, of
course, did not stop the inflation.
In
November of 1993 the government postponed turning on the heat in the
state apartment buildings in which most of the population lived.
The residents reacted to this by using electrical space heaters which
were inefficient and overloaded the electrical system. The
government power company then had to order blackouts to conserve
electricity.
In
a large psychiatric hospital 87 patients died in November of
1994. The hospital had no heat, there was no food or medicine and
the patients were wandering around naked.
Between
October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion
percent. This number is a 5 with 15 zeroes after it. The
social structure began to collapse. Thieves robbed hospitals and
clinics of scarce pharmaceuticals and then sold them in front of the
same places they robbed. The railway workers went on strike and
closed down Yugoslavia's rail system.
The
government set the level of pensions. The pensions were to be
paid at the post office but the government did not give the post
offices enough funds to pay these pensions. The pensioners lined
up in long lines outside the post office. When the post office
ran out of state funds to pay the pensions the employees would pay the
next pensioner in line whatever money they received when someone came
in to mail a letter or package. With inflation being what it was,
the value of the pension would decrease drastically if the pensioners
went home and came back the next day. So they waited in line
knowing that the value of their pension payment was decreasing with
each minute they had to wait.
Many
Yugoslavian businesses refused to take the Yugoslavian currency, and
the German Deutsche Mark effectively became the currency of
Yugoslavia. But government organizations, government employees
and pensioners still got paid in Yugoslavian dinars so there was still
an active exchange in dinars. On November 12, 1993 the exchange
rate was 1 DM = 1 million new dinars. Thirteen days later the
exchange rate was 1 DM = 6.5 million new dinars and by the end of
November it was 1 DM = 37 million new dinars.
At
the beginning of December the bus workers went on strike because their
pay for two weeks was equivalent to only 4 DM when it cost a family of
four 230 DM per month to live. By December 11th the exchange rate
was 1 DM = 800 million and on December 15th it was 1 DM = 3.7 billion
new dinars. The average daily rate of inflation was nearly 100 percent.
When farmers selling in the free markets refused to sell food for
Yugoslavian dinars the government closed down the free markets.
On December 29 the exchange rate was 1 DM = 950 billion new
dinars.
About
this time there occurred a tragic incident. As usual, pensioners
were waiting in line. Someone passed by the line carrying bags of
groceries from the free market. Two pensioners got so upset at
their situation and the sight of someone else with groceries that they
had heart attacks and died right there.
At
the end of December the exchange rate was 1 DM = 3 trillion dinars and
on January 4, 1994 it was 1 DM = 6 trillion dinars. On January
6th the government declared that the German Deutsche was an official
currency of Yugoslavia. About this time the government announced
a NEW "new" Dinar which was equal to 1 billion of the old "new"
dinars. This meant that the exchange rate was 1 DM = 6,000 new
new Dinars. By January 11 the exchange rate had reached a level of 1 DM
= 80,000 new new Dinars. On January 13th the rate was 1 DM =
700,000 new new Dinars and six days later it was 1 DM = 10 million new
new Dinars.
The
telephone bills for the government operated phone system were collected
by the postmen. People postponed paying these bills as much as
possible and inflation reduced their real value to next to
nothing. One postman found that after trying to collect on 780
phone bills he got nothing so the next day he stayed home and paid all
of the phone bills himself for the equivalent of a few American
pennies.
Here
is another illustration of the irrationality of the government's
policies: James Lyon, a journalist, made twenty hours of
international telephone calls from Belgrade in December of 1993.
The bill for these calls was 1000 new new dinars and it arrived on
January 11th. At the exchange rate for January 11th of 1 DM =
150,000 dinars it would have cost less than one German pfennig to pay
the bill. But the bill was not due until January 17th and by that
time the exchange rate reached 1 DM = 30 million dinars. Yet the
free market value of those twenty hours of international telephone
calls was about $5,000. So despite being strapped for hard
currency, the government gave James Lyon $5,000 worth of phone calls
essentially for nothing.
It
was against the law to refuse to accept personal checks. Some
people wrote personal checks knowing that in the few days it took for
the checks to clear, inflation would wipe out as much as 90 percent of
the cost of covering those checks.
On
January 24, 1994 the government introduced the "super" Dinar equal to
10 million of the new new Dinars. The Yugoslav government's
official position was that the hyperinflation occurred "because of the
unjustly implemented sanctions against the Serbian people and state."
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