coins of the month - June 2015

The end of the Austro-Hungarian monetary union in the long term

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During the last few weeks of World War I, the Austro-Hungarian Empire started to collapse with the declaration of independence of most of its constituent national groups. The new frontiers were settled for a time after the Trianon and Saint-Germain Peace Treaties had spread the territories of the empire through 7 nation states: the republics of Austria, Hungary, Poland and Czechoslovakia, and the Kingdoms of Italy, Rumania and Yugoslavia. Within a few years each successor state had a separate and independent currency and central bank, replacing the Austro-Hungarian Koruna and the Austro-Hungarian Bank, whose liquidation was completed only in 1924.

The transition was long, difficult and very painful, accompanied by conflicts on the distribution between States of the stock of existing bank accounts, banknotes and of government debt. Hyperinflation developed in part of the area (Austria, Hungary and Poland) due to the monetization of war debt, government deficits and economic dislocation produced by the consequences of war, and the creation of new barriers to trade between what had been a fully integrated market.

Once independence had been declared by the various governments, it was rapidly clear that separate currencies would emerge, despite some calls for a common economic area within the former imperial territories. Italy could immediately introduce its existing monetary system in the newly acquired territories (an inconvertible paper currency in lire, expected to return soon on the gold standard). Austria, Hungary, Czechoslovakia and Yugoslavia instead had to do for the time being with the Koruna paper currency minted in Vienna and limited amounts of Serbian notes, without other national facilities at hand to print new pap money.

The name of the game rapidly became to gain as much seigniorage income as possible, nationalizing some of the former common currency and dumping all the rest on the other States, in order to free space for new domestic issues of money in support of the national budget. First Yugoslavia in February 1919 and then Czechoslovakia the following month introduced mandatory stamping of the old banknotes with a new national symbol, and excluded unstamped notes from circulation. By doing so they prevented inflows of money from the rest of the former empire and levied a wealth tax through the process of stamping/conversion of old banknotes.

Czechoslovakia released only half of the banknotes handed in for stamping and repaid the second half in a forced irredeemable government loan at 1%. Yugoslavia levied a 20% wealth tax in the form of 10 year government debt at 4% during the second stamping operation in November, made necessary by the extensive forgery of the early crude emergency stamping procedure.

The same banknote could have a very different value if it was stamped by one country or the other or not stamped at all. Theoretically unstamped banknotes had the lowest value and possibility of circulating, but in fact they were the best, because they could acquire the highest of the possible values through the apposition when needed of the adequately forged stamp. During those operations bank accounts were blocked, imports of currency prohibited, and frontiers were closed to goods and persons. The slowest countries to stamp the old currency risked that all the unstamped notes would be dumped on them and therefore prohibited destabilizing monetary inflows.

Only later the new denomination currencies were printed and distributed in exchange for the depreciated stamped Koruna banknotes. After a few years, new small change coinage appeared (see the illustrated 1 Koruna issued in 1922 by Czechoslovakia) and gold coins were minted later, after hyperinflation had been defeated. Only in the second half of the 1920s were all the currencies stabilized, for a brief time before the new turmoil of the Great Depression. Austria returned to the convertibility of banknotes in gold and in dollars in 1925. The shilling was introduced as a new monetary unit, to replace at a rate of 1 to 10,000 the old Koruna, whose value had been liquefied by inflation (see the 25 shillings gold coin of 1928, here illustrated with the Austrian eagle which had lost its second head, the imperial crown, scepter and globe, to replace them with the republican hammer of workers and the sickle of peasants -- all without any form of communist government).

For Austria and Hungary, the stabilization of the 1920s passed through the external control of the League of Nations. A program was agreed, mandating independent central banks, which were barred from financing governments, and required the elimination of budget deficits, in exchange for new foreign loans and delays in repaying war indemnities. A Committee of Control of the Guaranteeing Powers was established to monitor Austrian compliance and progress in implementing the protocols, but Austria completed them ahead of schedule.
Currency proliferation and disaggregation of States in the former Austro-Hungarian Empire continued in the decades afterwards, well into the twenty-first century. World War Two briefly produced separate Croatian and Slovak states under fascist and national socialist protectorates, with new separate currencies (the Slovak 20 Koruna silver coin of 1939 is here illustrated with the portrait of the collaborationist President Josef Tiso). Post war reunification brought back a unified Koruna in Czechoslovakia and Dinar in Yugoslavia, but only as long as the communist regimes kept those two countries together.

In 1991 Yugoslavia started a long phase of disintegration, with declarations of independence by its various nationalities and regions, followed in most cases by wars (Montenegro and Macedonia avoided war, Slovenia had only a 10 days' military conflict) and hyperinflation. The area was changed beyond recognition, leading to eight separate states, not all recognized by each other, using five different currencies and the Euro (Slovenia is the only member of the Euro area but Montenegro and Kosovo use Euros as well, without being part of the European Central Bank and of the European Union).

The Czech Republic and the Slovak Republic parted company in 1993 after peaceful negotiations and introduced new national currencies with a 1 to 1 exchange rate with their old common currency. Slovakia adopted the euro in 2007.

Overall, almost a century after the dislocation of the Austro-Hungarian State, the Koruna today has eight national currencies as its successors (Hungarian Forint, Czech Koruna, Croatian Kuna, Bosnian Convertible Mark, Serbian Dinar for Vojvodina, Romanian Leu for Transylvania, Polish Zloty for Galicia, Ukranian Hrynia for Rutenia). The Euro is, however, its main inheritance, through the former Austro-Hungarian territories of Austria, Italy, Slovenia and Slovakia. The forces of monetary unification and those of disintegration keep working in parallel in a never-ending confrontation between the search for stability, peace, simplification and market expansion on the one side and on the other side the reassertion of national sovereignty, freedom to pursue specific national goals and policies and the freedom to use devaluation, debt monetization and seigniorage as ultimate policy tools against hard times.

Luca Einaudi, Centre for History and Economics