Money and Markets: Essays in Honor of Leland B. Yeager

No-name money 153many political leaders were successful in gaining popularity by circumventing thestabilization plan. In particular, some politicians created regulatory loopholes,weakened the popular perception of the desirability of the plan, and triggered newinflationary expectations. As a result, fiscal pressure prevented monetary disciplineand, in spite of the temporary improvement, the federal government experienced asharp loss of credibility and the inflationary spiral resumed.After the failure of this attempt, it became evident that the Yugoslavian federalgovernment did not possess the political leverage necessary for a successfultransition from a socialist to a market economy. The situation worsened toward theend of 1990, when exports fell sharply. 6 On December 28, 1990, in an attempt tosupport exports, the federal government of Yugoslavia devalued the currency,from seven to nine dinars per Deutschemark. Because of the combined effect of theincrease in monetary base and of the depreciation, the inflationary spiral gainedfurther strength. In addition, the branch of the central bank located in Serbia issueda large quantity of additional currency without the approval of the main office ofthe Central Bank of Yugoslavia. 7 By the end of 1990, the annual inflation rate inYugoslavia exceeded 500 percent. Crippled by monetary instability, and in light ofthe uncertain nature of the anticipated political restructuring, many of the republicsceased to comply with federal regulations, refused to pay taxes to the federalgovernment, and precipitated the dissolution of the federation.The events in Yugoslavia triggered an inflationary momentum of significantstrength. History shows that hyperinflation may be caused by unsound monetaryand fiscal policies (e.g., the Weimar Republic in the 1920s) sometimes coupled withpolitical disintegration. Yugoslavia in the late 1980s clearly combined both elements.In addition to a change in monetary policy, the elimination of this type ofinflationary momentum requires the establishment of a new political order.Clearly, the Slovenian authorities (e.g., central bank and Ministry of Finance)understood this problem and exhibited remarkable technical competence in tacklingthe issue. From the beginning, the stabilization program was based on isolatingthe Slovenian economy from Yugoslavia by creating an independent central bank,sound monetary policy, and a freely convertible new currency. Nevertheless,although it is important to recognize its technical merit, it is also crucial to understandthe public choice aspects that contributed significantly to the success of thestabilization program.The declaration of independence and the return ofcredibilityAcross the republics, the climate of distrust for the Yugoslavian governmentprovided a fertile ground for politicians to offer independence as an alternative. 8 Inthis climate, the Slovenian Assembly began nurturing the idea of independenceand national sovereignty. Slovenian voters (as well as voters in Croatia) historicallysaw themselves as belonging to the West and were very susceptible to argumentsmade by a number of Slovenian politicians that the Yugoslav government wasresponsible for Slovenia’s lagging behind Western Europe. Since Slovenia was the