1946 Hungary Hyperinflation
Class: IS206 Created Time: August 7, 2020 5:30 PM Database: Evergreen Database Last Edited Time: September 7, 2021 9:16 PM Provided Materials: IS206-G5-Assignment-2.docx Type: Permanent Notes
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Report
Although the case of hyperinflation in Hungary after World War II is not much acknowledged, it is the worst case of hyperinflation of any nation ever. Hungary has had a history with hyperinflation before, in the post-World War I Austro-Hungarian break. In just the period of two years, from 1922 to 1924, the currency at the time, krone, had devalued 263 times over (Allen, 2009). In the case of World War II however, inflation rate was 41.9 quadrillion or 41.9x1015 percent per month of 1946 (R. Glenn Hubbard, 2018). In August 1946, Hungary replaced the devalued currency of Pengo with the Florint, backed by its convertibility to the stable United States Dollars which finally ended Hungary’s hyperinflation (Allen, 2009). This report will look at the cause, impact, and the governmental policies in dealing with Hungary’s hyperinflation.
Hyperinflation in Hungary in 1946 is the worst one among all hyperinflations. This occurred because, during World War II (1944), the Hungarian government which led by Admiral Miklos Horthy could see that Germany would lose the war, so Hungary sought to achieved peace separately with allies. However, the result was not what Hungary had expected as in 1944, Germany occupied Hungary and eliminated Horthy’s government and installed fascists instead. The reason why German did this was that German wanted Hungary to play an active role in the war. Finally, German and its allies, including Hungary, was defeated by the red army. As a result, the destruction in Hungary was massive due to the war (P. Z. Grossman, 2000). Half of Hungary’s industrial capacity was completely destroyed and 90% was damaged. Transportation and infrastructure were difficult to use as most of them were destroyed. Moreover, the production capacity also fell due to the destruction which made the prices rise. Plus, the government couldn’t collect taxes either. In the end, the government decided to print lots of money to keep the economy going again. This made the supply of money increase and prices also rise as well. At its peak, prices were doubling every 15 hours (Taylor, The Worst Case Of Hyperinflation In History, 2014). The worst year was from August 1945 through July 1946 when prices increased an average of 19% per day (McCarthy, 2017). The prices would be three times day to day. A loaf of bread costs a dollar yesterday would be 9 dollars tomorrow and 27 dollars the next day. The workers were affected by this hyperinflation the most. Real wages fell over 80% and pushed workers into poverty and creditors were wiped out (Taylor, Business Insider , 2014). By August 1946, the Pengo was replaced by the Forint to stabilize the currency. There was a reconstruction aiming to revitalize the country. In 1947-48, there was a serious political change in Hungary to control prices, wages, etc. and it started to nationalize the means of production approximately more than 90%. 2 years after the hyperinflation, there was a great food demand and there was only 12-14% of the increasing of prices of industrial products. Moreover, the import of consumer goods and production of light industry were far behind the demand. There was a deficit budget and a shortage on consumer market as well (Marton, n.d.). In 1948-49, however, production and wages increased, and national income reached its old level. Moreover, there was no unemployment, the standard of living reached 1938 level and in 1950 the national income accounted for 25% higher than before. The agricultural and industrial production increased which means the planning system worked well. The standard of living is seen as slightly increasing but there was still an observation on consumer market shortage, so the government realize to implement a new measure. Since the hyperinflation occurred in Hungary. The Hungarian government had tried many ways to tackle this problem. Among all the approaches such as the reduction in government expenditure printing, increase taxation and other resolutions (P. Z. Grossman, 2000). Printing money was one of the most effective solutions that the government decided to do to reestablish the economy again. After that, the government loaned money to the banks at the low rates who then loaned the money to other companies (Taylor, The Worst Case Of Hyperinflation In History, 2014). Moreover, the government started hiring the workers directly, they provided loans to consumers, and they gave money to people (Taylor, The Worst Case Of Hyperinflation In History, 2014). Not to mention, the government tried very hard to carry out this measure that was able to handle so many zeroes by printing too much money with increasing the currency denominations. They changed the name of the currency (Taylor, The Worst Case Of Hyperinflation In History, 2014). First, the Pengö was the currency that had been used since 1926 until after World War II, but since the hyperinflation happened, the rate of it was shot up to 150 percent per day (The Hungarian Forint’s Centuries of History, 2020). Therefore, the Pengo currency was replaced by the Milpengö (1,000,000 Pengö) (The Hungarian Forint’s Centuries of History, 2020). Next it was replaced by the Bilpengö (1,000,000,000,000 Pengö) then it was switched by Adopengö and lastly it was swapped using the Milliard Bilpengö which is the highest denomination note ever printed since it was equal to a Billion Trillion Pengö (The Hungarian Forint’s Centuries of History, 2020). Besides, the banknotes had the same picture on them, but be in different colors. Unfortunately, at the end of the inflation, the value of it worth just about twelve cents USD (Taylor, The Worst Case Of Hyperinflation In History, 2014). Afterward, in 1946 Hungary changed its currency to the Forint which the exchange rate of 1 forint equals 400,000 quadrillions Pengő (Taylor, The Worst Case Of Hyperinflation In History, 2014). Notably, it has confirmed to be much steadier than past currencies. Fortunately, the country’s economic situation stabilized after introducing the new currency and the forint has been using until nowadays.
Overall, the case of hyperinflation in Hungary shows the vital mistake that the forceful injection of money into an economy with no stable backing can do more harm than good. Of course, the uncontrollable inflation rate could have been managed better, but Hungarian government at the time wanted to recover or revive the economy as fast as possible. The drastic measure of flooding the economy with currency could have been replaced with a more gradual injection of gold-backed currency and stimulating the economy. In the end, Hungary was more negatively impacted by the hyperinflation. Although, the country’s industrial capacity increased, it came at the cost of worker’s wages and financial institutions (Taylor, The Worst Case Of Hyperinflation In History, 2014).
Bibliography
Allen, L. (2009). Hyperinflation in Post-World War I Hungary. In The Encyclopedia of Money (pp. 221-223). Santa Babara, California: Greenwood Publishing Group.
Marton, A. (n.d.). Retrieved from Inflation in Hungary after the Second World War : https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.ksh.hu/statszemle_archive/2012/2012_K15/2012_K15_003.pdf&ved=2ahUKEwiOsZ6rhZfqAhURXisKHVCuDCk4ChAWMAB6BAgAEAE&usg=AOvVaw06wDBgsXLCLcskZY0orVU3.
McCarthy, T. (2017, December 5). Around The World In 80 Cerrencies. Retrieved from Hungary (1946) - the day of hyperinflation: https://aroundtheworldin80currencies.com/2017/12/05/hungary-1946-the-days-of-hyperinflation/.
- Z. Grossman, J. H. (2000). The Dynamics of Hungarian Hyperinflation 1945-46’ a New Perspective. Journal of European Economic History.
- Glenn Hubbard, A. M. (2018). Hyperinflation. In Macroeconomics (p. 212). Melbourne: VIC : Pearson Australia.
Taylor, B. (2014, April 17). Business Insider . Retrieved from The worst case of hyperinflation in history: https://www.businessinsider.com/hungarys-hyperinflation-story-2014-4.
Taylor, B. (2014, April 17). The Worst Case Of Hyperinflation In History. Retrieved from Business Insider: https://www.businessinsider.com/hungarys-hyperinflation-story-2014-4.
The Hungarian Forint’s Centuries of History. (2020, January 22). Retrieved from PMG Notes: https://www.pmgnotes.com/news/article/8051/.