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

156 Maria Minniti and Lidija PolutnikIn Slovenia, the catch up component implied simply transferring the inflationaryexpectations associated to the dinar onto the tolar. In practice, there were no regulatoryor legal barriers against this risk. In fact, during the Yugoslavian inflation,dinars had ceased to serve as a reliable store of wealth and people had alreadybecome accustomed to keeping large holdings of foreign exchange. The timerequired for this inflationary transfer was also negligible, since to adjust theirbalances Slovenes did not need to change their consumption patterns nor the formin which they held their wealth. And yet, because the Slovenian authoritieshad restored the credibility of the government, the inflationary momentum wasinterrupted.In the earlier 1990s, the political and monetary disorder of Yugoslavia hadbecome so extreme that it created a general agreement that something needed tobe done. In Slovenia, supported by a strong sense of national pride for the newcountry, this awareness nurtured a rapid change of expectations. As previouslyargued, Slovenes were eager for a clear break with past policies. Thus, the adoptionof the new monetary unit strengthened the perception that policy had entirelychanged. Indeed, the introduction of the Slovenian tolar had not only economiccauses but also rested heavily on political and social grounds. “The politiciansopted for our own money for another reason. [The Slovenes] . .. wanted ourmoney, like a flag, as the symbol of national independence and a fulfillment ofdreams” (Ribnikar 1998: 9).The conversion process and the change in popularexpectationsThe conversion process was executed very smoothly and the newly created CentralBank of Slovenia exhibited remarkable competence. Yet, the asymmetric nature ofthe expectations of different groups of dinars’ holders played a crucial role indetermining the positive outcome. On the one side, given the uncertainty of thefuture of this newly formed country and its new currency, speculative inflows ofdinars from the rest of Yugoslavia were negligible. On the other side, the Slovenes’willingness to accept the unknown tokens in exchange for well-known dinarsenabled the conversion process to proceed smoothly.Without a strong popular support, it is likely that the currency conversion wouldnot have been as successful. Because people’s expectations played such an importantrole, the Slovenian example points out the importance of social conditions forthe successful introduction of a new fiat money. Indeed, people’s expectations inSlovenia were not about “how credible the anti-inflationary program was going tobe.” It is also most unlikely that the population was aware of the necessity or desirabilityof controlling the money supply. Instead, popular expectations were formedon the belief that Slovenia would be better off as an independent state than as a partof Yugoslavia. Because of this belief, the Slovenes trusted, and willingly accepted,the new national currency. In fact, they used in exchange, and held positive balancesof, the nameless tokens even before learning what their real purchasingpower was going to be. 15Conscious of the importance of people’s expectations, the Slovenian central