Government Bankruptcy of Balkan Nations and their Consequences for Money and Inflation Before 1914 : A Comparative Analysis

Government bankruptcies in the countries of the so-called periphery during the period of the gold standard were no rare events. They were also not limited to the Ottoman Empire and the Balkan countries. Prominent examples outside this region were Peru, Brazil, Argentina and Portugal.In this paper a difference is made between open and hidden or veiled government bankruptcies. The latter are happening if budget deficits are covered by substantial money creation leading to inflation. In this case non-indexed government debt loses its value and is inflated away. This path is not open, if the debt is not denominated in the national but in a stable foreign currency or in units of gold or silver. This is usually the case for debt owed to foreigners. But sometimes both kinds of government bankruptcies are occurring together.In the present paper several general qualitative hypotheses are tested for the Balkan countries and the Ottoman Empire: First, that the abolishment of fixed exchange rates is usually the consequence of budgetary deficits leading to inflation. Second, that in this case an undervaluation of the national currencies develops. Third that by contrast an overvaluation arises if only a mild inflation is caused in this way, so that the fixed exchange rate can be maintained.And fourth, that with an open bankruptcy relative to foreign owed debt a kind of crisis develops which finally leads to an international agreement reducing the amount of the debt, or of the interest rate paid on it. Another feature of this agreement may be the institution of more or less far-reaching foreign control of the fiscal and monetary policies of the debtor country