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

No-name money 155consultants, who favored a currency board (Pleskovic and Sachs 1993, 1994),Slovenian authorities insisted on creating their own national currency as the onlyway to insure an independent monetary policy and successfully isolate the newcountry from Yugoslavia. Isolation had to be achieved in order to prevent theYugoslavian inflation from spreading to the new currency and to strengthen thecredibility of the new government.Breaking the inflationary catch: the introduction of thenew currencyIn late June 1991, before reaching complete independence, Slovenia adopted theLaw of the Bank of Slovenia, which created and empowered the central bank. TheBank of Slovenia replaced the National Bank of Yugoslavia as the lender of lastresort. Immediately, all bank claims and liabilities were transferred to its balancesheet, new and lower reserve requirements were applied, and the use of the discountfacility was reduced.In the mean time, reports had circulated that the Yugoslavian government wasattempting to undermine the newly independent country by using economicterrorism. Thus, rumors that Yugoslavia was planning to flood Slovenia withdinars in order to destabilize the country accelerated further changes. On October7, 1991, three months after creating the central bank, parliament called for theintroduction of the Slovene tolar. One day later, on October 8, 1991, the Republicof Slovenia passed two additional and very specific laws. The first one, theRepublic of Slovenia Monetary Unit Act, declared the Slovene tolar as the newlegal tender of the country and the adoption of a flexible exchange rate regime. Thesecond law, the Monetary Unit Application Act, provided for the introduction ofcurrency tokens as legal tender until tolar banknotes and coins could be issued.These provisional notes had been printed secretly during the last months of 1990.They were intended for use in case the central bank in Belgrade stopped supplyingSlovenia with dinars but, contrary to initial expectations, instead of preventing ashortage, they were put in circulation to neutralize a possible surplus of Yugoslavcurrency in Slovenia. Because of the initial uncertainty about their use, the noteshad no printed designation and, until the very last night before the currency switchtook place, remained nameless. 13In practice, the conversion process required a well-organized implementationthat would not disrupt daily economic activity. On October 8, 1991, the same dayof the official introduction of the tolar, all banks were closed. In addition, the centralbank instructed all banks, post offices, and Social Accounting Offices regardingthe terms and methods of conversion. The idea was simple: bank accounts, wages,and prices were to be converted automatically from dinars into the new currency,the tolar. Dinars in circulation, instead, were to be physically exchanged during ashort conversion period articulated in a main phase of three days, from October 9to October 11, and a second phase which lasted from October 12 to October 31.Ninety-nine percent of all dinar banknotes were replaced by new currency tokensduring the first phase, with most of the exchanges taking place through routinepurchases, while only a few customers exchanged currency at banks. 14