The Dissolution of the Austro-Hungarian Empire: Lessons for Currency Reform

IMF Working Papers, July 1, 1992

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Investigates the currency reforms undertaken subsequent to the dissolution of the Austro-Hungarian Empire in 1918.
The reforms were motivated by the lack of coordination of monetary policy and the absence of a rule for sharing seigniorage.
Because the Successor States’ reforms were not carried out simultaneously, individuals could choose where to convert their crowns based on where their real value was greatest.
The cross-border flows of notes was substantial, to the detriment of Hungary which was last to reform.
The Austrian and Hungarian currencies were stabilized only with the help of League of Nations financial programs.

Lack of coordinated monetary policy among Successor States created arbitrage opportunities for holders of crowns.
Absence of a rule for sharing seigniorage contributed to competitive and destabilizing cross-border note flows.
Timing of reforms mattered: the Successor State that reformed last (Hungary) suffered net detriment from cross-border conversions.
External financial assistance played a decisive role: stabilization of Austrian and Hungarian currencies required League of Nations financial programs.

Coordination of monetary policy among states emerging from a common currency area is critical to prevent destabilizing cross-border flows of notes.
Establishing clear rules for sharing seigniorage can reduce incentives for competitive conversion and related arbitrage.
Sequencing and simultaneity of reform actions influence distributional outcomes across successor states; last-mover disadvantages can be significant.
International financial support can be essential to stabilize currencies in the aftermath of political dissolution and uncoordinated reforms.