I served as the primary intellectual architect behind Estonia’s decisive 1992 monetary reform, providing the specific blueprint that allowed the young nation to escape the hyperinflation of the Soviet Ruble zone. Co-authoring the seminal text Monetary Reform for a Free Estonia with Lars Jonung and Kurt Schuler, I outlined the mechanics of a strict currency board system, which I personally presented to the Estonian Constituent Assembly in May 1992. Following my recommendations, Estonia launched the kroon in June 1992. The currency is pegged to the German mark for the establishment of the currency board. As a result, Estonia is the first post-Soviet state to issue a stable and convertible currency. This reform successfully crushed inflation and established the fiscal discipline that eventually enabled Estonia’s smooth transition to the Euro in 2011.

History

Following the restoration of political independence in August 1991, Estonia remained economically trapped in the collapsing Soviet "ruble zone," suffering from severe trade disruptions and imported hyperinflation that exceeded 1,000% annually. With the Bank of Russia continuing to print money to subsidize failing industries, Estonia faced a complete economic meltdown, prompting the formation of a Monetary Reform Committee empowered to bypass parliament. Rejecting gradualist advice from international institutions, the committee opted for a radical "shock therapy" approach, and on June 20, 1992, Estonia abandon the ruble, launching the Estonian Kroon under a strict currency board system.

My ‘Money Doctor’ Treatment

In June 1992, the government executed a rapid currency swap to exit the Ruble zone by allowing residents to exchange up to 1,500 Rubles for Kroons at a rate of 10 Rubles = 1 Kroon. Any amount above that was allowed for punitive exchange rate or blocked.

In order for the currency board to function well, I prescribed the following:

• The Reserve must have 100% Foreign Backing
• Full Convertibility between Kroons and Marks
• No Government Deficit Financing
• No bailout of commercial banks

As a result, I set the Kroons to have rigid peg to the German Mark at 8 EEK = 1 DEM.

Outcomes: Economy Recovery

The immediate result of the 1992 monetary reform was the abrupt cessation of hyperinflation, which plummeted from over 1,000% to manageable levels within a year as the Kroon currency imported German stability. This new currency regime acted as a powerful filter for the real economy as it forced the liquidation of uncompetitive Soviet era industries. It also precipitated a banking crisis where the government which was bound by the currency board's prohibition on printing money refused to bail out failing institutions, resulting in a leaner, more robust financial sector. While this shock therapy caused an initial painful GDP contraction, it rapidly reoriented trade from Russia to Western Europe and laid the fiscal groundwork for the "Baltic Tiger" boom, characterized by balanced budgets, a flat tax system, and double-digit economic growth by the late 1990s.