Creation of the national monetary system


Today, 1 October, marks 29 years since the creation of the national monetary system in Lithuania for the second time in the 20th century (it was first created on 2 October 1922 with the adoption of the litas). It was on 1 October 1992 that the Soviet Union’s treasury tickets of the new design, released in 1961, were completely removed from circulation. For this reason, the Bank of Lithuania had been established a few years before (on 1 March 1990). It provided an opportunity to start implementing the monetary policy independently, to sever long-lasting ties with foreign currencies and to break free from political and economic dependency on other countries. How was the national monetary system created?

While Lithuania was still a part of the Soviet Union’s single monetary system, there was no hope for economic stability, let alone its recovery and breakthrough. Rising prices and the shortage of goods had become ubiquitous. To purchase basic food products or household goods, residents were given out coupons based on their place of residence and these coupons were essentially vouchers. 

With inflation rates soaring, on 17 July 1991, the Government of the Republic of Lithuania, led by Prime Minister Gediminas Vagnorius, passed the Resolution on Adopting General Coupons for the Purchase of Goods. As of 5 August 1991, goods were available for purchase with general coupons. The Government’s motivation for this decision was to ensure better supply of the most sought-after goods for the residents and to protect Lithuania’s market. 

At first, general coupons were not money, they were universal vouchers for goods and had nothing in common with money or its functions. Soviet roubles were still used for payment. In the beginning of 1992, the economic situation was still complicated. The price growth of imported energy resources and other raw materials as well as the decrease in the production of industry and agriculture resulted in rapidly increasing inflation rates. In a year, prices grew by as much as 600% and the rouble was quickly depreciating. The Government was constantly urged to adopt national currency but kept delaying it because of the political and economic situation. It was simply too early to adopt the litas. Lithuania started facing difficulties in procuring enough cash because the Gosbank ceased the sale of the rouble monetary tokens. The Bank of Lithuania’s vaults were emptied out, all the banknotes were released into circulation. Taking into account the fact that Russia’s central bank refused to provide Lithuania with enough rouble monetary tokens, the Government of the Republic of Lithuania decided that from 1 May 1992, general coupons of 200 and 500 denominations could be used as a substitute for 200 and 500 rouble banknotes. This was the beginning of having national cash in circulation because the coupons became legal tender and had to be accepted as a means of payment “for all sorts of payments under the same conditions as the rouble that is currently in circulation.” 

Other republics of the USSR also issued substitutes for the rouble. As was the case with the Lithuanian coupons (talonas), they were only valid in the countries that issued them, however, after collecting them at banks to companies’ accounts, they were inscribed as the rouble. 

A dual monetary system of the rouble and its substitute talonas was not sustainable in the long run. Lithuania had to distance itself from the rouble and quickly adopt its own currency. Especially because starting from 1 July 1992, Russia blocked the payments in roubles of all the rouble-area countries, including Lithuania, that were made through former correspondent accounts. Based on new rules that all payments had to be made through one correspondent account in Moscow, payment sums sent from Lithuania were only paid out for an amount equal to what was received for the exports of Lithuanian entities. This resulted in stuck payment transfers from many Lithuanian companies to Russian ones. In the summer of 1992, the Bank of Lithuania submitted requests to the Supreme Council for an urgent money circulation reform in the Republic and a draft resolution which detailed specific actions to be taken. It was suggested “not to remove the rouble from circulation as it was done in Estonia but to push it out with rouble substitutes being emitted”, just like “it was done in 1940-1941 when the litas was replaced by the rouble by temporarily employing parallel circulation.” All that would be left to do afterwards was to perform a technical operation by replacing the rouble substitutes with the litas. To do that, all the cash inflows in roubles to banks in the Republic of Lithuania had to be exchanged to the rouble substitute talonas and so roubles would not return into circulation. Gradually, only talonas would be left in circulation. 

In the autumn of 1992, the inflation rate reached 1,400% in Lithuania. To improve the Bank of Lithuania’s monetary policy enforcement, its commercial functions were abolished. On 8 September 1992, pursuant to the Government’s resolution, it was decided to establish the State Commercial Bank of Lithuania by reorganising the Bank of Lithuania’s section that carried out commercial functions. These functions were handed over to the new bank which was governed by the state. There were constant discussions on what to release next, litas or talonas. Finally, on 16 September 1992, the Litas Committee (Vytautas Landsbergis, Vilius Baldišis and Aleksandras Abišala) passed the Resolution on the Adoption of the Republic of Lithuania’s Temporary Money-Talonas and the Removal of the Rouble from Circulation. The decision was as follows: “Starting from 1 October 1992, only the temporary money talonas remains in circulation in the Republic of Lithuania. Roubles are removed from circulation and from 1 October 1992 they are no longer used in the Republic of Lithuania as legal tender.” The exchange rate of the rouble to temporary money talonas was set as 1 to 1 until the end of 30 September 1992.

The resolution set out that from 1 October 1992 the only money in circulation in Lithuania would be 10, 50, 100, 200 and 500 denomination talonas issued in 1992 and 1, 3, 5, 10, 25, 50 and 100 denomination general coupons issued in 1991. Pursuant to the resolution of the Litas Committee, on 23 September 1992, the Government and the Bank of Lithuania approved the procedure and conditions for removing roubles from circulation in the Republic of Lithuania. Until midnight on 30 September 1992, residents were still allowed to make payments in roubles and to deposit them in their current or newly opened accounts in banks. Residents’ deposits in roubles that were held in their personal accounts in banks were changed to talonas. There was no cash exchange of the rouble to talonas. After the set date, the rouble became foreign currency and all subsequent exchange operations were made at market rate. 

When Lithuania adopted temporary money talonas on 1 October 1992, it created its monetary system. Talonas became national currency and legal tender. The Bank of Lithuania finally got the opportunity to perform the main function of the central bank - to regulate currency in circulation and apply monetary policy measures. Amongst the Baltic States, Lithuania was the last to renounce the Soviet rouble - the Estonian kroon was adopted on 20 June 1992 and the Latvian rouble on 20 July 1992. Estonia chose to adopt the kroon at once, whereas Latvia and Lithuania chose a gradual, two-step transition to historic currency by introducing temporary money first.

This system was in place until 25 June 1993 when the litas was adopted.