1 of 9 One hundred trillion pengős banknote issued in Hungary in 1946, the largest ever — Photo: Getty Images One hundred trillion pengős banknote issued in Hungary in 1946, the largest ever — Photo: Getty Images
When the poet and novelist György Faludy returned to Hungary in 1946 after an eightyear absence, he found a country completely torn apart by war.
Budapest, the capital where he was born and raised, was a city of rubble, littered with partially buried bodies and the skeletons of buildings.
But there were other, less visible changes.
Shortly after his return, his publisher paid him 300 billion pengos, the currency of the day, for a reprint of one of his books.
It seems like a huge amount, but all he could buy was a chicken, two quarts of oil and some vegetables. And if he had waited until the afternoon, it wouldn’t have been long enough even for that.
Hungary has been hit by its worst inflation ever. At its peak, it reached 41,900,000,000,000%.
On a daytoday basis, this meant that average prices doubled about every 15 hours.
Given that hyperinflation is defined by economists as a 50% increase in average monthly prices, this is included in the surplus classification.
Millions of Hungarians saw their real wages and living standards plummet, plunging many into a new struggle for survival.
When the price spiral was brought under control, the total value of money in circulation in the country was a fraction of a US cent.
With many now concerned about inflation in many parts of the world, it might be appropriate to ask what caused the worst hyperinflation in history and what lessons it left behind.
as it was before
2 of 9 Admiral von Horthy, the official regent of the Kingdom of Hungary, and his wife at the Berlin Opera House during a performance of Richard Wagner’s “Lohengrin” with Adolf Hitler on August 25, 1938 in Berlin, Germany — Photo: Getty Images Admiral von Horthy, the official regent of the Kingdom of Hungary, and his wife at the Berlin Opera House during a performance of Richard Wagner’s “Lohengrin” with Adolf Hitler on August 25, 1938 in Berlin, Germany — Photo: Getty Images
Like other European countries, Hungary suffered the aftermath of World War II, during which it initially sided strongly with the Axis powers, including participating in the attack on the Soviet Union in 1941.
In 1942, expecting that Germany would lose the war, its leaders entered into secret negotiations with the Allies. However, the result was that Adolf Hitler discovered the contacts and in March 1944 invaded the country and set up a Nazi administration.
“The terrible consequence of this was that 437,000 Hungarian Jews were deported to Auschwitz,” says László Borhi, President of Peter A. Kadas and Professor at the HamiltonLugar School of Indiana University, USA.
“After that, Hungary became a battlefield between the USSR and Germany.”
And Budapest experienced one of the biggest sieges of the war.
The result
By the end of the conflict, the country’s economy was in shambles.
The Germans exported goods and merchandise worth around one billion US dollars.
Half of its industrial capacity was destroyed and of what remained, 90% was damaged.
Most railways and locomotives were destroyed. What was usable was taken by the Nazis or the Soviets. All bridges over the Danube in Budapest were out of order, as were most of the roads.
70% of the buildings in Budapest were partially or completely reduced to rubble.
3 of 9 Ruins of Grand Hotel Hungaria in Budapest — Photo: Getty Images Ruins of Grand Hotel Hungaria in Budapest — Photo: Getty Images
Agricultural production fell by almost 60%.
“Basically, the country was on the brink of famine,” stresses Borhi. “Even so, Hungary had to feed the 1 million Soviets that the Red Army had in the country.”
In addition, at the signing of the armistice, Hungary agreed to pay reparations to the Soviets, Yugoslavs, and Czechoslovaks totaling $300 million (over $4 billion in today’s value).
And there were no loans to help the Hungarians recover.
“Sovietcontrolled countries were barred from participating in the lavish Marshall Plan, which essentially fueled Western Europe’s economic recovery,” Borhi explains.
how to solve
“The finances of the Hungarian government were in an absolutely precarious state and services had to be provided to the population, but there was no infrastructure to generate income in a conventional way,” says Pierre Siklos, professor of economics at Wilfred Laurier University in Waterloo, Canada.
Without relying on taxpayers’ money, the Hungarian government decided to boost the economy by printing money although it had to take out a loan to pay for the imported ink used to print the banknotes.
4 of 9 1,000 pengő from 1943, the highest banknote until the onset of hyperinflation — Photo: BBC 1,000 pengő from 1943, the highest banknote until the onset of hyperinflation — Photo: BBC
With them, the government hired workers directly, made loans to consumers, and gave money to the people.
It made loans at low interest rates to banks, which in turn made loans to companies in the country.
The country was flooded with money.
And it turned out that money drowns in zeros.
Kaleidoscope by Pengős
The pengő, the currency introduced as one of the measures to control the first hyperinflation suffered by Hungary in the 20th century after World War I, went into free fall.
Inflation was so excessive that the zeros piled up to the point of absurdity.
In 1944, the highest denomination was 1,000 pengs. At the end of 1945 there were 10 million Pengs.
To simplify, Milpengő appeared, which equals 1 million pengő.
Out of this came bizarre denominations like…
Therefore, it was necessary to issue the B pengő, which equals 1 trillion pengő.
This multiplied by July 11, 1946, when the National Bank of Hungary issued the last pengő banknotes: 100 million B pengős (10²⁰ = 100 trillion), the highest denomination used in history.
The bank also printed notes for 1 billion B pengős (10²¹ = 1,000,000,000,000,000,000,000), but these never came into circulation.
Along the way, a special currency, the adópengő (or fiscal pengő), was also created for postal and tax payments. Due to inflation, their value was readjusted daily and announced on the radio.
On January 1, 1946, one adópengő was equivalent to one pengő, but by the end of July there were 2,000,000,000,000,000,000,000 pengős.
And the people, how were they?
As the government tried to keep up with prices by issuing a staggering number of new banknotes, common people began to refer to them by their color rather than their denomination.
But it got to the point where even that didn’t make sense anymore, so “if they wanted, say, a dozen eggs, the seller would weigh them and the buyer would give that weight in cash,” says Béla Tomka, a professor of Modern Social and Economic History at the University of Szeged, Hungary.
5 of 9 A bunch of pengős being weighed in a Budapest shop to pay for goods in January 1946 — Photo: Getty Images A bunch of pengős being weighed in a Budapest shop to pay for goods in January 1946 — Photo: Getty Images
Wages have not kept pace with reality either. So many companies started paying in cash, with what they produced, or with potatoes, sugar, etc.
“Textile factories, for example, developed their own wage system: they paid in centimeters of fabric.
“Employees then traded what they received for other necessities.”
The black market flourished.
“Furthermore, for the first and only time in the history of global inflation, companies were required to supply a specific quantity and quality of food based on the weekly calorie needs of workers and their dependent family members,” says Tomka.
“Although these measures have not solved the problems of food shortages, they have provided a minimal subsidy to the working masses for a time.”
On one occasion, employees were even able to request payment before 2 p.m. Otherwise, they insisted on receiving their inflationadjusted salary the next day.
6 of 9 Woman using pengons for fireplace fuel — Photo: Getty Images Woman using pengons for fireplace fuel — Photo: Getty Images
But there was no help: real wages fell by more than 80% and although workers were employed, hyperinflation impoverished them.
However, it seems that the deprivation was not felt equally.
A New York Times report on Budapest of April 4, 1946, reported that “nowhere else in Europe could one find such a stark contrast between the standard of living of the majority of the population and that of the few who befriended the British Americans or the otherwise have access to expensive restaurants.”
“In the clubs of the occupying powers you will find food like nowhere else in Europe: exotic fruits, goose, chicken, cream and cakes like in the most extravagant prewar hotels.”
But who could enjoy such delicacies?
“Anyone who was rich in jewels, gold or other valuables could sell these goods or exchange them for everyday necessities,” says Tomka.
“Furthermore, anyone who had access to foreign exchange, whether it was because they worked for an embassy or for a foreign company or other institution, would be better off surviving.”
“The rural population producing food was in a more favorable position, so basically the poor in the cities suffered more.”
How did it end?
At the peak of inflation, prices rose by 150,000% a day.
By then the government had abandoned taxes, as the purchasing power of what it took in had largely evaporated.
Only a new currency could stabilize the country’s financial situation.
On August 1, 1946, Hungary introduced the guilder, taking 29 zeros from the previous currency.
“My parents remember how the street sweepers threw the bills in the trash: people just threw away the pengős because they were worthless,” says Borhi.
“What little was left of the family fortune was destroyed. People lost their savings and had to start from scratch.”
7 of 9 Pengős on the ground on the Danube bank near the destroyed Chain Bridge in Budapest — Photo: Getty Images Pengős on the ground on the Danube bank near the destroyed Chain Bridge in Budapest — Photo: Getty Images
But hyperinflation ended seemingly overnight.
“The preparations took a few months,” says Siklos.
“They have stocked up on groceries to ensure that when the new currency rolls out there will be a semblance of abundance in at least some markets that would make the reform broadly credible.”
“There was also an attempt in the weeks leading up to the reform to convince the public that confidence in the inflation tax was ending, that there would be no more indexation and that they would keep this policy for the foreseeable future. .”
“In this way, they were able to inspire enough public confidence that the guilder would hold its value. And slowly but surely, economic activity began to pick up.”
A key factor in restoring this confidence was the return of the Hungarian National Bank’s gold reserves.
“He was taken out of the country in the final phase of the war so that the Soviet army could not arrest him. He ended up in the USoccupied zone of Austria,” says Tomka.
“In 1946, a Hungarian government delegation traveled to Washington on an official visit, and President Truman, as a gesture to Hungarians, consented to their full return.”
His arrival in the country was a momentous event, the Associated Press reported on August 6 this year.
8 of 9 The return of the gold reserves gave strength to the guilder. — Photo: BBC The return of the gold reserves gave strength to the guilder. — Photo: BBC
“Adolf Hitler’s former private train arrived here today with $33 million in gold, all captured reserves from the Hungarian National Bank to bolster Hungary’s new financial structure.”
“The delivery of 22 tons of gold, bars and coins, brought from Germany under heavy security and military secrecy, was the first mass return of monetary assets to an enemy country.”
“Hungarian officials expressed deep hope that the arrival of 100% intact gold would salvage their country’s ailing economy.”
For the people, this endorsement gave credibility to the new currency.
On the other hand, the central bank became independent and the authority to issue banknotes was restricted. Banks were committed to 100% reserves, taxes were drastically increased, and the number of civil servants was greatly reduced.
The guilder became one of the most stable currencies in the region until the 1960s.
But…
By 1946, Hungary’s political and economic scene was already fully within the Soviet sphere of influence.
“In May, the leader of the Hungarian Communist Party gave the order to partially clone the Stalinist system to facilitate currency stabilization,” says Borhi.
“They began to take measures that eventually led to the nationalization of foreign and domestic private companies.
“At the same time, measures were introduced to centralize the economy, such as an office that set the price of each product and a table that set wages for each industry.
“So everything was very, very controlled and that probably helped curb inflation.”
9 of 9 In 1947, musicians like this violinist, who previously played in orchestras, still had to earn their living on the streets. — Photo: Getty Images In 1947, musicians like this violinist, who previously played in orchestras, still had to earn their living on the streets. — Photo: Getty Images
So can we really read inflation statistics reliably?
“The simple answer is no,” says Siklos.
“But I think the initial success of the reforms can be explained by the incredible set of policies that were put in place at the time. Then, of course, things would change.”
Instruction?
In the end, will there be any lessons on how to deal with the inflationary spiral that many countries have experienced?
“One common thread is, first, when economic conditions deteriorate and governments have no other resources available, it doesn’t take long for hyperinflation to set in,” notes Siklos.
“The second lesson is that inflation can end quickly if a series of measures are introduced that convince the public that the purchasing power of money remains stable,” he adds.
Tomka agrees that “public confidence in political and economic institutions, and thus in money itself, is an important prerequisite for monetary stability.”
“When that trust wanes across much of society, there are huge economic and social costs of restoring it.”