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Grexit and learning from Czecho-Slovak currency split

The Prague Post has published an interesting interview with the guy who was in charge of the Czech side of the Czechoslovak currency split:

Lessons for Greece from Czech-Slovak split
The man was Mr Pavel Kysilka, now the chief economist of Česká spořitelna [chess-car spaw-rzih-tel-nuh], a commercial bank. See the historical list of the Czechoslovak and Czech national bank governors.



A 1993-Slovak-stamped 1,000-Czechoslovak-crown banknote (printed in 1985) with Czech composer Bedřich Smetana.

His main message to Greece – which may drive itself out of the eurozone after the looming Sunday elections (and the world's central banks are already coordinating their intervention to compensate the collapses that may result from the polls) – is that the scenario is simple in principle but it is not very difficult to botch it. If you leave it to professionals, they won't; if you leave it to politicians, they will.




The dynamical history of the territory of Czechoslovakia in the 20th century has made currency unions and splits a part of the daily routine, if I exaggerate just a little bit. So there's really a lot of stuff that the candidates for new currency splits may want to learn from us.

Monetary Velvet Divorce

On January 1st, 1993, Czechoslovakia was split to Czechia and Slovakia, after a few years of various Hyphen Wars (on whether or not a hyphen should be written in the word Czechoslovakia). There was a plan to maintain a currency union for some time. However, it couldn't work for long: many Slovaks were afraid that the currencies could split at the end and the Slovak crown would devalue as a result. So they were moving their savings to Czechia where they would remain more valuable in order to protect their full savings.

(This situation is 100 times worse in Greece today, of course.)

It's an example of a self-fulfilling prophecy and due to the unstable outflows, the currencies had to be split as early as in February 1993 i.e. one month later. If you want to know the outcome, the Slovak crown, originally arising from the Czechoslovak one in a 1:1:1 ratio, did get weaker but after some initial swings, it turned out to be just 20-30 percent weaker than the Czech counterpart, i.e. the gap was arguably much smaller than many people expected. There has never been a good reason for the gap to be astronomical but let me admit that this is a postdiction, not a prediction.

Slovakia joined the euro at the rate SKK 30.126 per euro; the current rate of the Czech currency which hasn't joined the euro and has no plans to do so (although it's vaguely obliged to join "sometime in the future" by the EU treaties) is CZK 25.5 per euro. The first number is just 18% greater than the second one.

But Kysilka recalls some fun stories about the logistics; he was the first governor of the Czech National Bank, peacefully separating from his federal ancestor Mr Josef Tošovský. On February 2nd, 1993, we were told that the currency union would be abolished in 6 days. From the next day, payments in between the countries were stopped, capital controls and border controls tightened, and the goal was to prevent any transfer of cash in between the two newborn countries.

Those 6 days were needed to switch to new currencies that became official on February 8th. You didn't need to worry about your money in the banks – they were destined to be "localized". You were encouraged to deposit your cash in the banks and transfer up to CSK/CZK/SKK 4,000 in cash. About 40,000 people with helicopters, thousands of cars, and a 24/7 dispatching center were available for the process of stamping of hundreds of millions of banknotes – by different Czech and/or Slovak stamps. The army was assisting, too. It turned out that 4 days were actually enough for this operation to have taken place without any problem whatsoever that we would remember. It was so smooth that most of us don't remember any stories from the event today.

A cutely exotic behind-the-scenes detail recalled by Kysilka was that the stamps were actually printed in Latin America. ;-) To make things even cooler, they were transported by sea in boxes and prepared in the national banks (not sure how long time before the split they were printed). All employees were told that it was just gold so it wasn't interesting. Except for Ron Paul, who would care about some boxes full of gold? ;-)

We tend to say that things (e.g. formats in which savings are held) are much more complicated in today's Greece than they were in Czechia and Slovakia of 1993. I have often said the same thing but I am actually not sure about it. In many respects, Greece is less sophisticated than we were 20 years ago. Unfortunately, they could also be less competent to make the transition.

A longer history of stamping

I found a cool web page (orig. in CZ) about all the stamping episodes that occurred in the lands of Czechoslovakia during the 20th century (and about all the banknotes in our history, for that matter). There have been many, indeed. The page contains the picture of all the stamps that had ever been used as well as all the banknotes with the stamps attached to them (as well as all the regular banknotes without stamps).

When Czechoslovakia was born on October 28th, 1918, Mr Alois Rašín became the first Czechoslovak finance minister and he has pretty much managed every single detail of the currency split with Austria-Hungary, too. He authored the relevant laws, too. The monetary reform was codified on a secret night session of the Parliament on February 25th, 1919, after a week when the issue was discussed by a committee.



Husz (20) korona banknote with a Czechoslovak 1919 stamp, featuring our double-tailed lion

I just mentioned a night session. During the very same night, the Czechoslovak army already occupied all the borders to guarantee no mouse and no envelope would penetrate them. The stamps, posters with the rules were distributed all over the republic. The public was told about the reform at schools, churches, and in the villages – with the help of drums in the latter case. Just like in 1993, they needed a week – March 3rd to 9th (and to 12th in Slovakia), 1919, for the full transition. 244 million stamps were needed. One half of the cash you gave to the authorities was returned in the form of new Czechoslovak bonds. About 15,000 people in 410 district offices worked on the reform. The stamps were printed by two firms in Prague.

Just to be sure, what they were stamping were Austrian-Hungarian "crowns" banknotes. The crown just happened to be the latest name of the Austrian currency although many other names have been tried throughout the centuries. To make things paradoxical and to reinforce our conservative image, Czechoslovakia was the only successor country of Austria-Hungary that actually kept the name of the latest Austrian-Hungarian currency, the "crown". The Austrians didn't keep the Kronen; the Hungarians have forgotten about the Korona, too. You must wonder why our monarchy was named after them if they didn't even dare to name their currencies after "their" imperial ones.

Of course, the name of Austria-Hungary was a bit of an anachronism in the last decades of the monarchy. It was pretty much a democracy and the rights of ethnic groups were pretty much respected. And the Czech lands were the most industrially advanced area of the monarchy which was kind of more important than some feudal habits and names.

As things were stabilized after March 1919, the stamped banknotes were replaced by new Czechoslovak banknotes. The left column on that web page shows you all the historical banknotes in Czechoslovakia.

A new stamping arrived with the German occupation – and the "formally opposite" Slovak independence – in 1939. It seems there were no paper stamps in Böhmen und Mähren; ink stamping was probably enough. The likely reason is that whoever would try to counterfeit it could have been easily executed so the need for a very safe technology was limited. So for example, here is a fun (well, today it's fun, not so much in 1939) Czechoslovak 5-crown banknote with Josef Jungmann, a hero of the Czech National Revival 100-200 years ago (despite his German sounding name), and with the stamp of the Protektorat Böhmen und Mähren. ;-)



The Nazis imposed an artificial exchange rate of 10 protectorate crowns per 1 Third Reich Mark which made the mark much stronger than how it would be  at the actual market rate of 6-7 crowns per 1 mark. This meant that the work was being sucked out of the Czech lands.

The website above has all the banknotes used at any moment in the history, including those for the Slovak Fascist State that had to stamp the Czechoslovak banknotes, too: "Slovak State" was glued to the usual Czechoslovak themed banknotes. Again, the protectorate and the Slovak State managed to print their own banknotes to replace the stamped ones after some months.

As you may expect, the German occupation and the Slovak fascist independence didn't last indefinitely. What does it mean? Well, another stamping after the war. So here you have some 1939 Slovak fascist banknotes with a yellow stamp of Czechoslovak daddy Masaryk to show who is in charge again:



Now, this was a reunification. I don't know whether the Slovak fascist crown was converted to the new post-war Czechoslovak crown in a 1-to-1 ratio. My understanding of that history is that there was no stamping of the protectorate crowns in Czechia. They had to do the transition smoother in the Czech lands but I don't understand how it was done. It had to be a huge mess because after the war, Czechoslovakia was covered by lots of Reich Marks, protectorate crowns, Slovak crowns, Hungarian currency, Polish currency, and various military vouchers, not to speak about the fact that many things had to be rationed.

Let me post a one-crown protectorate banknote, anyway.



Cute, the banknote clearly represented our lands as a civilized component of the Third Reich with attractive (German-compatible) babes and "almost" as many rights as everyone else. Note that the Czech description is capitalized and the German one above it is not! How generous. ;-)

However, there were some speedy postwar currency reforms in 1945, anyway. So new stamps were needed in the 1940s. In 1953, a huge monetary reform was made, destroying all the larger savings (due to a nonlinearity in the number of new crowns you would get for the older ones); I think that no stamps were used at that time. The sophisticated workers in my town of Pilsen staged the most impressive uprising (in the whole history of the Soviet bloc) against the communists' assaults on the (relatively) rich people.

In 1962, Czechoslovakia prepared lots of additional new stamps for special events – such as the Cuban Crisis. Up to exceptions picked by numismatics, these stamps were officially destroyed after 1993 when the Velvet Divorce of countries and currencies took place.



This article began with a Czech-composed-based Czechoslovak banknote with a Slovak stamp so it's natural to end with a 1973 Slovak-language-based Czechoslovak banknote featuring the 1944 Slovak National Uprising and improved by a 1993 Czech stamp. ;-)

We've seen lots of such stamps, banknotes, mergers, and splits, and if you leave this huge logistical exercise to professionals and not politicians, you shouldn't be afraid of it too much. When people start to be afraid of a possible event and make certain things unsustainable, it's better to make the events happen.

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snail feedback (29) :


reader anna v said...

Feel free to erase this post, but I unearthed the relevant to fayum poem and here it is:

Fayum

Ancestral faces

gaze intently

as one slowly walks

in the manner of museums

through the exhibits.

Here is an uncle

Here is an aunt

Here is mother

at a tender young age,

caught in the lense of time

by artists long dead

preparing them

for the return of the soul.

This curly haired neighbour

cut down in his youth

and mummified

covered

with a vibrant portrait

of life,

the girl

ready to speak

and walk away

from the sepulchre,

they call me,

and my genes respond

to these faces,

clamoring for recognition

of the only true

reincarnation,

on the crest

of Now.


reader anna v said...

here is the relevant poem:

Fayum



Ancestral faces

gaze intently

as one slowly walks

in the manner of museums

through the exhibits.

Here is an uncle

Here is an aunt

Here is mother

at a tender young age,

caught in the lense of time

by artists long dead

preparing them

for the return of the soul.

This curly haired neighbour

cut down in his youth

and mummified

covered

with a vibrant portrait

of life,

the girl

ready to speak

and walk away

from the sepulchre,

they call me,

and my genes respond

to these faces,

clamoring for recognition

of the only true

reincarnation,

on the crest

of Now.


reader Luboš Motl said...

Fayum
Ancestral faces


reader Shannon said...

Very nice Anna. Did you write this poem yourself ?


reader anna v said...

OK, here is the first solid estimate of the election results:

New Democracy 29.5 +/- 0.5
Syriza 27.1 +/-0.5


reader anna v said...

I thought I had replied to you Shannon: thanks, and yes, I wrote it in one of my poetic phases.


reader Luboš Motl said...

The results are a partial relief, Anna... Savas Dimopoulos would always tell me that he was right-wing in Greece - ND - but left-wing in the U.S. ;-)


So while I am not excited about ND, at least Savas' preferred party has a chance to create a government, instead of the teenage Maoist bastard.


reader Mikael said...

You know what the true tragedy is, Lubos? An end of the Euro may not be the end of the world at this point. But our politicians (I mean in particular our German ones) will deny this until much more is lost. God bless the Czech Republic which is not part of the Euro zone. Couldn't you borrow us your Vaclav Klaus for a couple of years?


reader Luboš Motl said...

Hi Mikael, I tend to agree. On the other hand, it's not too hard to convince Vaclav Klaus to become important in Germany after his job at the Prague Castle is ended by the constitution next March. He would almost certainly agree if you offered him something! ;-) He has said that he surely doesn't want to leave the public life and grow tomatoes or chives on his little garden.


But even though his German may be (even) more authentic than his English, it's plausible that your project would still face some opposition from many of your fellow citizens who have been re-programmed for euro-worshiping and similar rituals...


reader Mikael said...

Hi Lubos, the main problem may not even be my fellow citizens but the political parties in Germany. Around 80% of the Germans agree to leave the Euro zone at this point. Even simple minded people with not much education may often have a very good understanding about economical developments if their own lifes are affected. I also follow the comments on Spiegel.de and similar sites and find pretty good and sharp analyses on these sites. The problem is that if you want to vote against the Euro at this point you have to pretty much vote for NPD and right now this is not an option for anybody. But if my fellow citizens may recognize at some time into the future that the fruit of a life's hard work has been eaten up by a corrupt system this may change. So I think we are heading for a very dangerous development in Europe right now. The bitter thing is that we are not even helping anybody in Greece or Italy with our money but we help to destroy their countries too.
Regarding Vaclav Klaus (also congratulations from my side) maybe you could convince him for now simply to give a phone call to Mrs. Merkel if you have this kind of influence. It would also be good if he could just speak in Germany.
It would help in particular because as a Czech president he is not suspicious of German egoism. On the other hand you can rightly say that Germany has to take his poltical decisions on his own. But I very much feel that peace and stability in all of Europe is at stake right now.


reader Eugene S said...

The NPD (an acronym that stands for "National-Democratic Party of Germany") is effectively the successor organization to Hitler's NSDAP. They are represented in a few regional parliaments but have no seats in the national assembly. Several party officials and representatives have been convicted of crimes ranging from assault to grand larceny and incitement. Anybody who votes for them either has the IQ of a zucchini or is simply beneath contempt.
Germans concerned about the Euro crisis can make their voice heard via their elected representatives or they can vote for the "Freie Wähler" at the next elections. The FW are a loose collection of locally and regionally successful intiatives heavily reliant on small-town notables (entrepreneurs, professionals), and at their recent nationwide meeting they adopted a platform that calls for ending the hemorrhaging of money towards bail-outs of Greece etc.
Moreover, Germany's highest court is still an important constitutional safeguard against "giving away the store" to bail out debtor countries.
Even losing battles are worth fighting, if only to limit the size of losses.


reader Mikael said...

Correct, Eugene. I could not be more far away from voting NPD any time in my life and so far there is only a tinx tiny fractions of absolute idiots in Germany who would do so. Let's hope that is remains like this. So probably I went totally overboard with my comparison. I just wanted to point out that the political correctness around the Euro might create the very hatred between the people in Europe which it should protect us against. In this sense it is a true tragedy.


reader Mikael said...

Dear Lubos,
after watching this video about the ESM I must say the future of the European union is looking more grim than I previously thought.
http://www.youtube.com/watch?v=gNa5k0KCVbw


reader Mikael said...

No comment, Lubos? Did I say something wrong?


reader Luboš Motl said...

Apoologies, Mikael, I just didn't have time. Now I listened to it. A pretty complicated video, slightly formulated as a conspiracy theory. Yes, it's scary. I hope that at least my country is "de facto" outside this non-democratic ESM mess. I've written about the non-constitutionality of such things before.


reader Mikael said...

"De jure" the Czech republic is outside of this mess. But my current view is that this process of self destruction will not stop before we have chaos and anarchy in all of Europe. For me definitely more scary than the climate change lie which has lost its momentum.
Enjoying your new article about the path integral...


reader Mikael said...

The Bundesvefassungsgericht has said that the ESM is illegal and has asked the Bundespräsident to not sign it until it has completed the legal checks. The Bundepräsident has agree to not sign it. There is still some hope!


reader Luboš Motl said...

Wow, that's a good surprise...


reader Rogerox said...

(1) Both Austria and Hungary DID keep the crown (Krone & korona in their languages). But inflation led to them both having million-crown notes, and reformed currencies followed in 1925, the Schilling in Austria and the Pengo in Hungary. Czechoslovakia only kept the crown because it had no inflation, not because of imperial loyalty.


(2) The stamping of Czechoslovakian banknotes for Bohemia and Moravia did not really happen. In 1938, the lowest banknote in use was 10 crowns. A 1 crown and 5 crown were printed for use by the Czech army, but instead they were overprinted by the Nazis in 1939. The banknotes already in use were NOT overprinted, but were gradually replaced by completely new ones for Bohemia & Moravia (from 1940). In Slovakia, only the 100 and 500 crowns were overprinted. The others were replaced with completely new issues starting in 1939. Somehow, they managed without a 5 crown until 1945, and with no 1 crown ever.


(3) The first "post-war" notes for Czechoslovakia were issued by the Russians in 1944. However, in 1945, no doubt for subtle economic reasons, these had adhesive stamps applied to them just as the Slovakian notes did (similar stamps, but not identical). Already in 1945 these were being replaced with a completely new Czechoslovakian series.


(4) The distribution of Austro-Hungarian currency in 1919 must have been a very complicated business, because not only was it stamped for Czechoslovakia and overprinted for Hungary and for the reduced Austria (called Deutschosterreich at first), but also for provisional use in part of Romania, and for provisional use in part of Yugoslavia (which adopted the existing Serbian currency of dinars). The currency union in Yugoslavia seems to have been premature, so some of the new 5 dinar notes had to be overprinted 20 crowns, and so on. A large area of Austro-Hungary was also added to Poland, but somehow that was achieved without overprinting Austro-Hungarian notes.


(5) Austria had to change suddenly to normal German Reichsmarks in 1938, and then back again to Schillings. In 1944, the western allies were issuing new notes in Schililngs, but in 1945 the Russians were still issuing them specifically for Austria in Reichsmarks. One imagines, however, that the people had other worse problems to worry about. Things could be much worse than this euro crisis.


reader Rogerox said...

Incidentally, in 1919 the newly independent Poland was also
happy enough to keep to its main imperial currency, Marks, and only changed to
zloty in 1924 following inflation (it got to 100 million Mark notes). The Austrian
currency before the Krone was the Gulden, and the multi-lingual notes showed
this in Polish as zloty (zlaty = golden in Czech), so even for quite a young man in Krakow
it would have been déjà vu !


reader Luboš Motl said...

Very interesting clarifications and additions, Rogerox.


reader Jennifer Rigby said...

Hi Luboš

Jenny Rigby here, I wrote the article in The Prague Post about Pavel Kysilka. I like your piece. I want to do a film about the currency split - do you know if there are any existing stamped Czechoslovak notes from 1993, and where I can find them? I see you have pictures in your blog.
Thanks!
Jenny (jennifer.rigby@itn.co.uk)


reader anna v said...

trial


reader anna v said...

how do I get an avatar?


reader anna v said...

iThanks
t is not a picture of me, it is a fayum. I called her Timarete Theocritos in my poetry writing days :). Have to find a way to fit the portrait.


reader anna v said...

http://en.wikipedia.org/wiki/Fayum_mummy_portraits

I had seen them in the museums of Europe and they reminded me of cousins and relatives. http://users.otenet.gr/~avayaki/fayum.htm


reader Luboš Motl said...

I wanted to say that she reminded me of Monica Guica, a little bit
https://www.google.cz/search?q=monica-guica&um=1&ie=UTF-8&hl=en&tbm=isch&source=og&sa=N&tab=wi&biw=1317&bih=708


reader Luboš Motl said...

It works, Anna. You may also register with DISQUS, assuming you have never done so, and choose an avatar etc.


reader Mi said...

www.Papirovaplatidla.cz