Break up of monetary unions – A short note (including India-Pakistan in 1947)

Prof JR Varma has a superb post on the topic. Apart from providing short history on previous currency union break-ups, he links to some useful papers on the break-ups as well.

He covers following break-ups:

  • Argentina 2001-02
  • Ruble zone early 1990s
  • Pakistan/Bangladesh 1971
  • India/Pakistan 1947-48
  • Austro Hungarian Empire 1919

Very interesting. For instance Indo-Pak currency union break up in 1947:

The other example from the subcontinent was the partition of undivided British India into India and Pakistan in August 1947. The two countries agreed that the Reserve Bank of India (RBI) would act as the central bank of Pakistan also for over a year (till September 1948). During this period, the government of India agreed to take two nominees of the Pakistan Government on the central board of the RBI. During this transition period, Indian notes were to remain legal tender in Pakistan, and the RBI was to issue notes overprinted with the inscription ‘Government of Pakistan’ in English and Urdu. During the transition period, these overprinted notes were to be the liability of the RBI, but not of the Government of India.

At the end of the transition period, the Government of Pakistan was to exchange the (non overprinted) Indian notes circulating in Pakistan at par and return them to India. The overprinted notes would become the liabilities of Pakistan. The division of assets of the Issue Department of RBI was to take place after the transition period. The division was to be based on the ratio of notes circulating in the two countries at the end of the transition period.

When the Kashmir dispute erupted later, the financial settlement between India and Pakistan broke down, and the RBI’s role as the central bank of Pakistan was terminated three months ahead of time. An excellent account of all these events can be found in Chapter 18 of Volume 1 of the RBI History. Images of Indian rupees overprinted with ‘Government of Pakistan’ in English and Urdu can be found here.

Hmmm.. Did not really know about this. Actually it never even struck me that this Indo-Pak partition will be a superb natural experiment to understand break-up of monetary unions.

The above list is by no means exhaustive. There would be a few more.

What strikes me is how earlier break-ups were because of political factors/wars etc. Now they are being made to break-up because of poor economic fundamentals and financial markets. This clearly was seen in Argentina and now in Europe.

I mean this European case has opened up a fascinating avenue for economic research which was kind of ignored. It sort of points to all economists in their respective countries to understand the monetary and fiscal union of their countries.

Overall, superb stuff from Prof Varma..


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