The Historical Background of Hungar

The Historical Background of Hungary's Hyperinflation
Although Hungary was a German ally during World War II, it tried,
with a measure of success until 1944, to remain at some remove from
407 Peter Z. Grossman -Janos Homath
the fighting that was ravaging Europe. As the war neared its end, the
Hungarian government, led by Admiral Miklos Horthy, could see that
Germany would lose and it sought to make a separate peace with the
Allies. The result was not peace. In fact, in 1944, the Germans occupied
Hungary, forced out Horthy's government, and installed Hungarian
fascists in power. This turn of events assured that Hungary would play
a much more active role in the war and that it would face the full force
of the Soviet Army (and the might of United States air power) as the
defeat of Germany neared.
The destruction that ensued was massive. After four years of
relatively light damage from the war, Hungary became a battle
ground. Over a period of about six months, from late 1944 through
early 1945 when the Germans and their Hungarian allies were
defeated in Hungary by the Red Army, the country was ravaged.
Half of all industrial capacity was completely destroyed, and an
estimated 90 percent was damaged. 4 production of key raw materials
also fell dramatically; coal production fell to about 40 percent, and
bauxite production to barely one percent, of their pre-war levels
by the spring of 1945." Transportation could not function. Rail lines
had been bombed and locomotives that were not destroyed were
. simply taken by the retreating Nazis and the advancing Russians
alike. Infrastructure throughout the country was in shambles. All
of the bridges over the Danube in Budapest were bombed and
disabled.
Hungary had witnessed a notable increase in the cost of living
even before the fighting became severe. Primarily due to the reduced
availability of consumer goods, the cost of living more than doubled
from January 1943 to late 1944. However, with the escalation of the
violence, monetary policy became nearly meaningless. By the time
the fighting ended, the Hungarian authorities found themselves not
only scrambling for funds to pay reparations and conduct some
minimal government functions, they found themselves without an immediate ability to create money, Retreating Hungarian fascists had
taken the plates to print currency with them to Germany,6
By the time one can again sensibly measure the cost of living,
April 1945, consumer prices had increased about fourteen and a half
times over the level in late 1944.7 In other words, the new government,
even before it had the equipment to print money, had inherited a
hyperinflation.
Most historians, however, choose to date the start of the
hyperinflation to later in the summer, when prices began rising steadily
at 50 percent or more per month, the typical definition of
hyperinflation. In fact, after the explosion in prices in early 1945, there
was a lull during which time the price level appears to have been
relatively stable. But this relative stability in prices did nothing to
alleviate the problems in the economy, which was still reeling from
the shock of war. Indeed, stability, which coincided with a nearly
constant stock of money,S suggests a static (and thus depressed) supply
of goods. Price stability without an increase in output was undesirable
and probably not sustainable. In any case, some government officials
believed that if nothing were done to improve the functioning of the
economy, economic turmoil would only increase. The supply shock,
with the destruction of a large portion of the nation's capital stock
and the inflation that accompanied it, presented the government with
a problem that temporary price stability could not solve.