Hungarian Post–World War II Hyperinflation

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From July 1945 until August 1946 hyperinflation raged in Hungary on a scale more spectacular than Germany’s hyperinflation experience following World War I. When the German hyperinflation was stabilized in 1923 the government issued a new mark equivalent to 1 trillion of the depreciated marks. On 1 August 1946 Hungary replaced its depreciated pengo with the florint at a rate of 1 florint to 400 octillion pengos. Although Germany’s hyperinflation crisis lasted a bit short of two years, Hungary’s post–World War II hyperinflation crisis ran its course in slightly less than a year.

Hyperinflation was not new to Hungary, which had shared in the hyperinflation frenzy that had afflicted Germany, Poland, and Austria at the end of World War I. Like its post–World War I experience, Hungary’s post–World War II hyperinflation episode fit a familiar pattern in the history of hyperinflation. Episodes of hyperinflation usually occur during or immediately after a war, when the government is financing huge budget deficits, and supplies of goods have been disrupted. During Hungary’s second hyperinflation experience, government revenue covered only 15 percent of government expenditures. The following schedule shows the increase of bank notes by the National Bank of Hungary that fueled the hyperinflation:

31 December 1945 765,400
1 January 1946 1,646,000
28 February 1946 5,238,000
31 March 1946 34,002,000
30 April 1946 434,304,000
31 May 1946 65,589,000,000
30 June 1946 6,277,000,000,000,000
31 July 1946 17,300,000,000,000,000,000

Hungary’s first effort to tame the inflation came in December 1945 when the government announced that notes of 1,000 or more pengos were banned unless special stamps were affixed to them. The stamps had to be purchased from the government at a cost of three times the face value of the notes. The owner of four 1,000-pengo notes had to give up three notes to buy a stamp to make the one note valid. The stamp requirement effectively reduced the number of notes in circulation by three-fourths. Inflation halted, and prices even fell for a few days, but by the end of December prices were rising so fast that employees hardly received their pay before they rushed to spend it.

On 1 January 1946 the government took an innovative approach to the inflation problem and created a new money of account, called the tax pengo, ostensibly to protect the government’s tax revenue from an inflation loss between the time taxes were levied and the time of collection. The tax pengo equaled the regular pengo multiplied by a daily price index that measured the ratio of current prices to prices on 1 January 1946. Soon business transactions were paid in tax pengos, and on 10 January commercial banks began offering tax pengo deposits. With tax pengo deposits a customer deposited regular pengos in a bank. When the deposit was withdrawn the customer received the amount of regular pengos multiplied by the ratio of prices on the withdrawal date to prices on the date of deposit. Multiplication by a price index ratio adjusted the pengo for loss in purchasing power. On 1 June 1946 the government issued tax pengo notes that circulated as paper money with values depending upon daily price ratio calculations. At this point the tax pengo had become a new indexed currency—indexed to the rate of inflation. The regular pengo rapidly depreciated in value relative to the tax pengo, but prices quoted in tax pengo remained stable until mid-April 1946.

In April prices began to escalate in tax pengo, and beginning on 20 June the depreciation accelerated rapidly. On 1 August 1946 the government issued the new florint, the convertibility into dollars of which was assured with reserves of gold, foreign currencies, and foreign securities. At that point Hungary’s hyperinflation crisis ended. Hungary’s official documents do not make it clear where these reserves originated.

The Soviet Union contributed to Hungary’s hyperinflation crisis, probably in an effort to destroy Hungary’s economy. In 1945 the Soviet army issued in Hungary the highest denomination bank note ever printed, a 100 quadrillion pengo note.

Hungary’s second hyperinflation experience suggests that the only remedy for inflation is monetary discipline, restraint of monetary growth. Hungary’s indexed currency failed because bank note circulation continued to race ahead.