1919: the year another European currency union died

Austria-Hungary was a sprawling central European power. It comprised parts of the modern-day Czech Republic, Slovakia, Poland, Ukraine, Romania, Hungary, Serbia, Montenegro, Bosnia and Herzegovina, Croatia, Slovenia, Italy and Austria. Its currency, the krone, was formed in 1892 and managed by the central bank in Vienna and Budapest.

After World War I, the empire was broken into four parts by the Allies, who blamed Austria-Hungary for starting the war. By 1919, it had split into Czechoslovakia, Austria, Hungary and Yugoslavia. The empire had financed its war effort almost entirely by financing from the central bank (ie, money printing). It continued to fund itself in this way after the war.

As you might expect, the policy was highly inflationary. Between 1914 and 1918, the cost of living rose by 1,226%. Economists Peter Garber and Michael Spencer wrote: “The new states shared a greatly devalued, hyper-inflating currency, a collapsed trade and payment system, and large external debts.”

By 1919, Yugoslavia decided it had had enough. It decided to leave the krone. And that’s when events started to spin out of control.

Yugoslavia’s ad hoc plan to escape the krone was simple: all krone in the country would be stamped with a two-headed eagle, the national symbol. So all krone in Yugoslavia would be turned into the new currency.

There was just one problem. The Yugoslavs were leaving the krone because they were sick of high inflation. That suggested to other krone users that the Yugoslavs would do a better job of defending the value of their currency than the existing guardians of the krone.

As a result, money flooded into Yugoslavia from all across the old empire. The economy of 1919 was mainly cash-based, so people literally pushed wheelbarrows of cash across the open fields in order to have them stamped. The Yugoslavs were left with no choice but to physically seal their borders to stop the flood and prevent massive inflation.

This cross-border flood of money forced the other countries’ hands too. One by one, the new countries of the old Austro-Hungarian Empire began to stamp their own currencies too. And as each country decided to break off and form their own currency, the flood got bigger, with savers desperately moving from country to country, seeking the best place to have their krone stamped.

By the time the flood washed over the last country to leave the krone, Hungary, there were railway wagons full of cash left in the country.

What happened?

The breakup of the krone was chaotic. The new countries made up the rules as they went along.

When ink-stamped currency resulted in widespread fraud, they used sticker stamps. When authorities started to confiscate some of the cash as they converted it into the new currency (in the form of forced loans paying low interest rates), there were bizarre reverse bank runs as savers stuffed money into banks to evade expected levies on cash. Austria even created separate currencies for natives and foreigners.

All the while, the flood of capital across borders created havoc wherever it washed up. The equivalent to the entire money supply of Hungary was transferred out of Czechoslovakia and Austria alone. Most of it ended up in Hungary.

As a result, in the six years after the war, Hungary and Austria both suffered from dreadful hyperinflations. The League of Nations was ultimately called in to manage Austria’s money supply, and Hungary was forced to introduce yet another new currency.

However, Yugoslavia, the country that instigated the panic, was able to keep a fairly even keel throughout. It was better able to maintain its currency’s stability because it was less indebted than the others, and it suffered less from destabilising capital flows.

Could better co-operation have avoided the collapse?

After the old Austro-Hungarian Empire dissolved into smaller states, it was thought that the old patterns of trade and co-reliance would continue. But under pressure, fraternity gave way to factionalism.

Trust between nations disappeared and they stopped trading with one another. Austrian farmers even stopped supplying their own capital city of Vienna, fearing food shortages. The stock of trains and coal was unevenly distributed among the new countries, so they resorted to confiscating whatever crossed their borders.

National self-interest ultimately undid the krone too, writes economist Eduard Marz. The Austrians and Hungarians held most of the war debt, while the Czechoslovaks and the Yugoslavians held relatively more cash. The trouble is, the Austrians and Hungarians also controlled the printing press, and so they were happy to erode the value of their own debt at the others’ expense.

Does 2012 look like 1919?

The krone warns of what happens when politics is out of sync with money. There is no neutral monetary policy – there are always, necessarily, winners and losers. So fraternity between the two groups is essential.

When the losers and winners line up along national lines, there’s a danger the currency will fragment. In other words – it’s not good when nine different languages appear on your bank notes, as was the case with the krone.

In 1919, the dominant powers in Austria and Hungary used the money to benefit themselves at the expense of Yugoslavia and Czechoslovakia, and the Yugoslavs were cohesive enough to fight back.

Similarly today, the winners and losers from eurozone monetary policy in 2012 are clearly lined up along national lines. Money in Europe is tight. That suits Germany, but it is strangling the periphery.

What’s different now – and not in a good way – is that in 1919, Yugoslavia, the first nation to leave the currency union, did so because it wanted a stronger rather than a weaker currency. As a result, money flooded in.

That’s a better problem to have than the inverse, which is what afflicts Greece and peripheral Europe. Greece needs a weaker currency than the euro, but if it talks about leaving then euros will flood out of the country in anticipation of being ‘stamped’ as drachmas. Greek banks would collapse and there would be a terrible crash.

1919 also tells us something about how ordinary people, not elites, drive the breakup of a currency. If savers believe the value of their wealth is in danger of being destroyed, they won’t wait for their politicians to catch up – they’ll take matters into their own hands.

If Greece fell out of the euro, its savers would be wiped out. Savers across the periphery would be right to take fright and move their euros to safety in Germany. That would be enough to drive those countries out of the currency.

There’s another end-of-euro scenario that looks more like the 1919 story. If Germany refuses to pay the price for keeping the euro together (via either higher inflation or explicit transfers to the peripheral countries), it might decide to walk away like Yugoslavia.

It could do so without collapsing its financial system. The main cost would be the devastation it would leave behind in its neighbours and trading partners. It’s a terrible price – but it may be the only one Germany is willing to pay.

  • Ciaran Dunphy

    In 1919 my grandad was born.

  • Boris MacDonut

    On the eve of the Great War Austria-Hungary was the 4th biggest manufacturer in the World. However, it relied on Germany for over half it’s imports and exports. Germany was a basket case by 1919 and Austria -Hungary was dragged down with it. The EU tends to trade mainly with itself and exists in a globalized market that is vastly bigger than the protectionist colonial era of a century ago. There are few parallels that can be drawn, especially as we have not just undergone a massive blood-letting in a World war and natablt because we are no longer run by Emperors.

  • drotar

    Very interesting example, people didn’t change over last 1oo yrs.
    The main reason for disruption was rising nationalism (turning over minor nations) mainly in Hungary and other nations had realized that money printers machines are only in Budapest and Vienna…

  • NeutronWarp9

    Not a convincing thread to this series of points in Sean’s piece. I think most historians would blame Germany for starting WW1; although some form of Anglo-French ‘encirclement’ might have justified a degree of paranoia. Plus c.1900, war was seen by the powers as an opportunity to settle scores or gain at others expense. Solely in economic terms, didn’t the US do very well out of both world wars?
    National ambitions apart, the Austro-Hungarian analogy is pretty tosh to explain the EU turmoil. The only constant is if the Euro breaks up it is dog eat dog – as when all power vacuums arise.
    If Germany leaves, where will it go to and who will buy its pricier goods? Austria might tag along as per and no doubt Switzerland will find some friendly neutral angle to pursue. Perhaps one reason the EU will not kick Germany out and re-boot the system is because they are scared of a standalone Germany? And history again suggests, not without good reason.

  • Noneleft

    Europe is still run by Emporers – they are called European Commissioners. They get their subjects to agree to their demands by a pretend democracy called the EU parliament, which usurps legitimate power from nationally elected parliaments and in doing so rides rough shod over the established constitutions of sovereign nation states.

  • Elvis Presley

    So, having the ability to print your own currency is not good?

  • Boris MacDonut

    #5 . Except the EU is not a sovereign Imperial territory nor is sole autocratic power vested in one man. The EU is a noble attempt to remove borders, for it is borders (and in the past Emperors) that start wars.

  • Noneleft

    Borders do not start wars, but the exact opposite: violation of national borders – a key aim of this European project.

    The EU *is* becoming a sovereign Imperial territory with sole autocratic power – this is exactly what the architects of the EU are striving for, open your eyes!

    As to whether power is invested in one man, there is already a small group of unelected elites ruling against democratic mandate, what difference does it make?
    One man will easily end up in power given the right conditions, as history shows.
    These conditions are being created now. This is the very intention of the European elites. The direction of EU structure, identity, institutions and constitution makes it clear.
    The EU turns a whole continent into one state, putting many times more people and resources under one power. Far less likely other nations can challenge or balance it. It took the world to stop Hitler, and his power base was one small country. Who will stop the EU dictator?

  • Roly

    If history does repeat itself, or rhymes, with the events post World War One, then the lesson has to be to hold hard assets. That is, gold, silver, property, farming land, or blue chips that will survive the financial turmoil.

  • r

    @Noneleft: I couldn’t agree more; the sooner that we have a referendum to see what the population really needs, the better. The EU is a non-democratic organisation which has never had its books signed off by the auditors (unlike the EEC). The waste is terrific and terrible. The population of the UK has never had a chance to air its views on whether the UK Parliament should be over-ruled in the way it is.

    @ Boris MacDonut: That definition of “noble” is not in my dictionary! It’s politicians that start wars, not borders.


  • Ed Dixon

    …and property prices in London keep rising. I wonder what could be causing it?

  • Theo Conspiritus

    others can claim there are differing economic/social circumstances but this is a very good analogy /history lesson on how humans react to economic mis information and countries return to national interest when put under pressure. Humans find it difficult to learn from history but too often history repeats itself. The parallels here are uncanny and the powers of the vested interests comparable . Any share trading position today has to be a balance of optimism v pessimisms on the European debacle. This is firm evidence for the pessimists.

  • Roly

    If history does repeat itself, or rhymes, with the events post World War One, then the lesson has to be to hold hard assets. That is, gold, silver, property, farming land, or blue chips that will survive the financial turmoil.

  • Boris MacDonut

    #8 Noneleft and #10 r. you are both wrong. It has been shown statistically by Lewis Richardson the Quaker academic and Steven Pinker among others, that the existence of borders correlates with the frequency and deadliness of wars. People on opposite sides of a state boundary are more likely to go to war.
    Removing borders removes the chances for them to be violated.
    Read some Parrag Khanna, the EU along with democracy and trade are the greatest forces for good. No two states with a MacDonalads have ever gone to war! Welcome to the Long Peace. Welcome to a World that looks to Europe to set an example.

  • DickyJim

    @14 Boris. It may be a statistical truth that the frequency and deadliness of wars correlates with the existence of borders but that does not mean that where borders are forcibly removed the population lives happily ever after.

    Consider the many countries in the Middle East and Africa where ancient tribal borders have been removed and replaced with politically imposed national borders that are fewer in number and how these countries subsequently fare. All of them only continue to exist under effective dictatorship, whether it be a royal family, revolutionary military officer or psychopath, and the people are cowed into submission. Such countries may or may not descend into civil war or cross border tribal war or international war with their neighbours.

    Borders are a function of human nature, as I’m sure Steven Pinker would readily acknowledge, and getting rid of them on paper does not actually mean they cease to exist in the minds of people.

  • Boris MacDonut

    #15 DickyJim. No they do cease to exist in peoples minds. Only Governments can project really deadly power. Civil conflicts within boundaries are far less bloody affairs. They are less violent.
    Note I qualified my borders comment with the addition of democracy and trade. You cite dictatorships, which are basically uncivilised and waiting to modernise. A gangd of kids with Kalashnikovs is threatening and grim , but it is not quite up to the carpet bombing of Dresden.

  • DickyJim

    @ 16 Boris. There is no way that one can say that in general civil wars are less bloody than national wars. Individual examples of either may be selected to suit the argument but in general I think it is acknowledged that civil wars tend to be worse because the combatants (civilians) cannot get away from one another and are as near as damn it engaged in trench warfare.

    Rarely are borders changed with democracy and free trade in mind. The kids with the Kalashnikovs is nearer the truth. Come on Boris, you know that. Let’s call a spade a spade.

  • Noneleft

    #14 Donut- your little knowledge is dangerous. Richardson and Pinker prove nothing. Correlation (if actually real) does not equal cause. Borders do not cause war, politicians *violating* them do.
    If you remove borders do you imagine a peaceful utopia results (ask the Greeks right now, or the Soviet satellite states citizenry).
    All you have done is created a bigger territory with a bigger border and more power harnessed by fewer people who now have the potential to wreak even greater war outside their bigger border.
    This says nothing of the economic misery their power wielding can cause for their own citizens (think EU) or the loss of freedoms they can impose – you create a worse problem inside harder to solve until it blows – you have civil war or oppression on a massive scale, a police state unchallengable (think Soviet: they had no war because citizens were oppressed by dictorship too powerful: ask Soviet citizens if they agree with you). Your argument is pure folly.

  • drotar

    Normally people don’t care about wars they do care more about their life.
    Today’s biggest problem is that no one competent is able to assertively say the truth…

  • Boris MacDonut

    #17. In general civil wars are less bloody than interstate wars. This is a simple fact that has remained true throughout history. It is largely because no one side commands the full might of the state’s killing power. To say “civil wars tend to be worse” is misinformed/guesswork. Please explain which civil wars have outdone the major world conflicts of history.
    #18 I have explained that fewer borders mean fewer opportunities to violate them. I do not disagree that violating borders causes war, but so often the wars are pre-emptive in anticipation of a feared attack. Bigger territories mean fewer borders not more. How many of the United States have gone to war with each other?

  • Noneleft

    I was waiting for your example of the USA. They have been peaceful so far (not actually a long time in fact) despite no borders, not because of it. The reason for their peace and prosperity within is because of a limited government held in check by a superb constitution which enshrines God given liberties, only now being eroded. EU does the opposite. Plus USA is an immigrant nation developed from scratch, EU contains many centuries old nation states being forced together. Plus USA engages in many wars outside its borders (in line with my last post).

  • Wisdom

    Europe is in decline as is America, The EUs efforts to bring together sovereign states that represent so many different ways of life was flawed from the outset, and none of this will be fixed until it breaks up. It will be broken up either peacefully or with civil unrest.

  • gatecrasher

    in 1919 my german granny was born !

  • Noneleft

    #22 Wisdom indeed, you are spot on.

    So many aspects of Donut’s dangerous ideas to refute in just 1000 chars, on a blackberry keyboard, it was difficult to squeeze it all into one post and do justice.

    Giving up sovereignty, diluting govt. accountability to national electorate, removing borders is not necessary for peaceful trade and cooperation between (ex-) nations.
    It doesn’t remove national interests, promote peace, liberty for citizens, fair democracy, or economic prosperity – Soviets and EU are perfect examples of failure in all areas.

    Donut would do well to study the constitution of the USA, the thinking and motivations of it’s founding fathers, and the principles they enshrined. Their peace and prosperity exists because it’s founders were *opposed* to the things embodied and pursued by the EU elite. USA success has nothing to do with removing borders.

    I don’t have space left to begin with whats wrong with the moronic MacDonalds theory.

  • Boris MacDonut

    #24 Poor old Noneleft has resorted to insults like moronic again. What a shame he can’t put toghether a coherent argument for his little englander dogma.
    To hold the USA up as some sort of World leading civilisation is pitiful. It is among the most unequal,uncivilised and least respected nations on Earth…..but somehow the redneck gun-totting states have not been to war with each other. They eradicated borders a long time ago,just after they leapt three centuries by abolishing slavery 80 years after we did.

  • Boris MacDonut

    #22 Wisdom. Hey, i’m loving the modest name. Just hate the ill-informed anti- Europe garbage. The EU is setting an example to the World. It is a political example, not economic. Man’s reach has always outstretched his grasp, but that is no reason not to try. If it upsets a few of you timid little englanders, it is a small price to pay for breaking new ground.

  • John

    With reference to the article, I have previously read elsewhere that euro notes are already effectively stamped with their country of origin. The 11 digit serial number on every note begins with a prefix which identifies which country issued it. German notes begin with an X, Greek notes start with a Y, Spain’s have a V, France a U, Ireland T, Portugal M and Italy S etc. Perhaps if these euro notes start trading at different exchange rates according to the country of origin, that will be a sign that the history mentioned in the article is repeating itself.

  • Ancientkarma

    Someone ,not so long ago,suggested ,with back up info ,that a spike in the numbers of young men in a countries population co- related to riots and violence.the u.s.a. Uses their violent young men to wage wars all over the world.

  • Jim

    28. Ancientkarma

    Good point, suspect that’s how the British Empire was founded.

  • Noneleft

    #25 Donut read your own posts and see who tends to insults. Shame you can’t respond substantively to any of the points I made in #21 and #24, should I leave it there to save you further embarrassment?

    You see the current mess in Europe is “breaking new ground” ? And only a few English people are against what is going on? I don’t mean to be rude but you are deluded.

    The saddest part is that it is going to get a lot worse and involve a lot more suffering. This EU experiment has broken such new ground that it has crashed in only a few short years, but the USA which you scoff at has lasted a lot longer and been a much more successful nation on every measure.

    One cannot argue with a person who flies in the face of reason and facts.

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