If you were to ask most people which country has experienced the worst inflation in history, they will respond to Germany, because possibly the most popular is Germany’s post-World War I hyperinflation. It took 1 trillion old Marks to get 1 new Rentenmark by 1923 when Germany eventually put an end to its hyperinflation. There were three hyperinflations that made the German case seem amateurish, as disastrous as German inflation was: Hungary in 1946, Yugoslavia in 1992-1993 and Zimbabwe from 2004 to 2009. Hungary’s was the worst of any of these three.
In terms of hyperinflation, Hungary was no stranger. In World War I, the Austro-Hungarian Empire was on the losing side and was broken up after the war. Hungary’s new nation lacked the proper systems of government, so it resorted to printing money to plug the void in its budget. There were 5 crowns to the US dollar before World War I, but by 1924 there were 70,000 crowns to the US dollar. So, Hungary, at the cost of 12,500 Pengö to the Kronen in 1926, replaced the Kronen with Pengö.
Until 1944, when it became a battlefield between Russia and Germany, Hungary was spared much of the devastation of World War II, and half of Hungary’s industrial potential was lost and 90% damaged. Transportation was complicated because it damaged much of the rail lines and locomotives. What left was either taken back to Germany by the Nazis or confiscated by Russians as reparation.
After the war, prices in Hungary were still increasing because production capacity dropped due to destruction. With no tax base to depend upon, by printing currency, the Hungarian government wanted to stimulate the economy. It lent money at low rates to banks that then loaned the money to businesses. The government employed employees directly, supplied customers with loans, and gave citizens money. To get the economy going again, the government literally flooded the country with the capital. Money may not have flourished on trees, but the printing presses definitely flowed away from it.
Consider the fact that the currency in circulation stood at 25 billion pengö in July 1945, increased to 1,646 trillion by January 1946, to 65 quadrillions (million) pengö by May 1946 and to 47 septillions (trillion) pengö by July 1946, to see how rapidly the availability of money increased.
How bad has inflation been?
Things that cost 379 pengö by September 1945, cost 72,330 pengö by January 1946, cost 453,886 pengö by February, cost 1,872,910 pengö by March, cost 35,790,276 pengö by April, cost 11,267 billion pengö by May 31, cost 862 billion pengö by June 15, cost 954 trillion pengö by June 30, cost 3 billion pengö by July 7, cost 11 trillion pengö by July 15, cost 1 trillion pengö by July 22, 1946. To the mathematically challenged, clearly, inflation was crippling.
Prices grew at the rate of 150,000 per cent PER DAY at the height of inflation. By then, the government had fully stopped collecting taxes and the value of the money raised by the government was wiped out even by a single day of delay in collecting taxes.
There were 5 Pengö to the US Dollar before the war in March 1941, 33 Pengö to the US Dollar by June 1944, and in August 1945, when real hyperinflation began, there were already 1320 Pengö to the US Dollar. The Pengö then collapsed. By November 1945, there were 100,000 Pengö in the USD, 1.75 million by March 1946, 59 billion by April 1946, 42 trillion by May 1946 and 460 trillion by July 1946.
Hungary, of course, has taken some ineffective steps to curb inflation. In December 1945, by having individuals turn in 400 Pengö and receive 100 Pengö back with a stamp on the banknotes to signify they were legal tender, the government levied a 75 per cent capital levy. However, they didn’t stop printing currency. Hyperinflation made the collection of taxes much more complicated for the government, so they implemented Adopengö, which was supposedly indexed to inflation, but even Adopengö, which was indexed, succumbed to inflation. In July 1946, 2 million trillion Adopengö were added to the Pengö.
But how have people coped with this money assault? How did so many zeroes get treated by the government that printed the money?
The answer was simple: change the currency’s name. The Pengö was replaced by the Milpengö, which in turn was replaced by the Bilpengö, which was replaced by the inflation-indexed Adopengö (1,000,000,000,000 Pengö).
There would be the same photo on the banknotes, but it would be a different hue. The Pengö billion was lavender, the Milpengö billion was blue and the Bilpengö billion was grey, but the notes looked the same except for the colour. Someone who lived through hyperinflation said that they gave up looking at the denominations and the cashier would say that their bread cost them two blues and a green when someone bought something. The Bilpengö billion, shown here, is the highest denomination note ever printed since it was equivalent to the Pengö Billion Trillion. Unfortunately, it was only worth around 12 cents US dollar, at the end of the stagnation period.
On August 1, 1946, the Forint replaced the Pengö with the Forint at the rate of 400,000 Quadrillion Pengö; however, stabilisation worked, and prices in Hungary remained relatively constant until the 1960s. As for all the old Pengö, since they were useless, they were thrown away.
Who paid the inflation price?
The Staff did, first off. As a result of inflation, real salaries dropped by over 80 per cent, and even though workers had jobs, hyperinflation plunged them into poverty. They wiped out creditors. But demand recovered, and the Pengö was replaced by the Forint, which Hungary still uses today, in August 1946.
So, did inflation accomplish the objective of stimulating output? Hyperinflation expanded the manufacturing potential of Hungary, got the railroads running again, and replaced much of the capital stock. Staff lost 80% of their salaries, however, and creditors were wiped out.
Politically, however, the fate of Hungary was sealed by the Communists, who finally seized power and in 1949 transformed the Republic of Hungary into the People’s Republic of Hungary with a new constitution based on that of the Soviet Union.