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What Happens When A Paper Currency Fails?
The Worst Episode of Hyperinflation in History: Yugoslavia 1993-94Thayer 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's 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
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