Serving officially as State Counselor to the Republic of Lithuania from 1994 to 1996, I was the driving force behind the country's monetary stabilization, brought in to rectify the failure of earlier soft-currency policies. In direct opposition to resistance from the IMF and the Bank of Lithuania, My colleague Kurt Schuler and I drafted the text for the "Law on the Credibility of the Litas," which stripped the central bank of its discretionary powers and established a strict currency board on April 1, 1994. Recognizing that the public largely held their savings in U.S. currency, I designed the system to peg the Litas to the U.S. dollar at a fixed 4:1 ratio, a strategic decision that immediately halted triple-digit inflation and solidified the foundation for Lithuania's post-Soviet economic recovery.

History

Following the declaration of independence in 1990, Lithuania suffered through a devastating Soviet economic blockade and a chaotic monetary transition where temporary coupons and a weak central bank failed to stem hyperinflation. Even after the introduction of the national Litas in 1993, the central bank's discretionary monetary policy resulted in persistent triple-digit inflation and a complete loss of public trust, leading to the rampant "dollarization" of the economy. Realizing that domestic institutions could not resist the political pressure to print money, the government turned to State Counselor Steve Hanke in 1994 to implement a strict currency board.

My ‘Money Doctor’ Treatment

Since the Lithuanians were already hoarding dollars, pegging to the dollar is the best way to protect the population's existing savings. I prescribed a currency board pegging Lithuanian Litas to US Dollars with the following details:

• The Reserve must have 100% Foreign Backing
• Full Convertibility between Litas and Dollars
• Abolishment of Government Deficit Financing
• Writing complex laws to safeguard the monetary reform.

As a result, I set the Litas to have rigid peg to the U.S. Dollars at 4 LTL = 1 USD.

Consequences: Normalization

After April 1994, the monetary reform delivered an immediate and decisive stabilization to the Lithuanian economy, collapsing interest rates and bringing inflation down from 189% to under 36% within a year as the currency peg restored public confidence. This monetary straitjacket acted as a harsh but necessary disciplinary mechanism, ending the post-Soviet economic freefall and returning the country to growth by 1995, while simultaneously forcing a cleanup of the banking sector; when major banks failed in 1995, the government which was legally barred from printing money for bailouts, was forced to restructure them with real capital rather than inflation. The system proved remarkably durable, allowing Lithuania to weather the 1998 Russian financial crisis without devaluing and facilitating a seamless technical switch from a Dollar-peg to a Euro-peg in 2002, paving the way for eventual Eurozone membership.