Bosnia & Herzegovina: Post-War Monetary Stability (1997)

The Context

Following Bosnia's 1992 declaration of independence, the country descended into a brutal civil war that fractured it into three hostile monetary zones. Each zone used the currency of its political patron:

• The hyperinflating Yugoslav dinar (Serbian-controlled areas)
• The Croatian kuna (Croat-controlled areas)
• The Bosnian dinar (government-controlled areas)

Only the German Mark functioned as a trusted de facto store of value across all zones.

The 1995 Dayton Peace Accords recognized that deep-seated ethnic animosities rendered a traditional, discretionary central bank politically unviable. In a state where every major institution required ethnic consensus, a central bank that could be manipulated by any one ethnic group would be a perpetual source of conflict. The solution was elegant: a currency board that operates on autopilot, free from ethnic vetoes and political interference.

Hanke and Schuler's 1991 book proposing a currency board for Yugoslavia directly influenced this Dayton provision. After the war, Hanke was tasked with ensuring the new institution was as orthodox as possible.

Hanke's Role: The "Leak-Proof" Currency Board

Appointed as Special Adviser to the U.S. government in December 1996, Hanke's specific mission was to close every loophole in the proposed central bank law — to make the currency board genuinely orthodox, not a pseudo-board that preserved discretionary escape hatches.

The currency board he helped design:

• Pegged the new Convertible Mark (KM) 1:1 to the Deutsche Mark
• Required 100% foreign reserve backing plus a margin above 100%
• Strictly prohibited government lending — the central bank could not finance any government entity under any circumstances
• Placed the bank under a foreign governor initially (Serge Robert, a French citizen) to insulate it from ethnic political pressure
• Enshrined the currency board in the national constitution — making it extremely difficult for any government to undo

The Currency Board in Practice

The Convertible Mark (Konvertibilna marka, KM) was introduced on June 22, 1998, replacing all three war-time currencies simultaneously. The 1:1 peg to the Deutsche Mark was unambiguous and easy to communicate to a population that already thought and saved in DM.

The results were immediate:

• Three competing currencies replaced by a single stable unit, economically unifying a fractured state
• Inflation fell to the lowest in the Balkans — consistently in low single digits
• Cross-ethnic commercial transactions became possible for the first time
• Post-war foreign investment became viable as monetary risk disappeared
• The "no printing" rule imposed fiscal discipline on all entity governments

The Long-Term Record

Bosnian monetary history since 1998 is a study in the power of rules-based monetary policy:

• The currency board survived well past its Dayton-mandated six-year minimum — it has now been in operation for over 25 years
• The 2002 switch from a DM peg to a euro peg (when Germany adopted the euro) was technically seamless — the DM and euro were in a fixed relationship, so the KM conversion required no economic adjustment
• Bosnia's inflation performance has consistently outperformed neighboring countries with discretionary central banks
• Successive Bosnian governments — across all ethnic lines — have maintained the currency board, recognizing that monetary credibility is the one economic institution that transcends ethnic politics

Related Pages

• Bulgaria — Currency board established in 1997 on the same template
• Estonia — Currency board established in 1992; the original post-Soviet model
• Lithuania — Currency board implemented in 1994
• Evidence on Currency Boards — The empirical case
• Home: Currency Boards — Return to the Currency Boards overview