Editor’s Note: This is one in a five-part series about the impact of hyperinflation around the world. Follow the series in the related content section.
The central banks of Germany and Hungary* both made disastrous monetary policy decisions that caused or exacerbated inflation. After largely depleting their national coffers to pay for multiple wars, they would turn on the printing presses a few too many times during the 20th century.
Hungary suffered through many bouts of heavy inflation and holds the record for worst hyperinflation ever. At its nadir, in July 1946, monthly inflation hit a whopping 41,900,000,000,000,000 (or 41.9 quadrillion) per cent and prices doubled every 15 hours. Hungary also has the dubious distinction of being the only nation that participated in both world wars to experience hyperinflation after both.
Germany also experienced hyperinflation, but only after World War I. The infamous bout began in 1921 and reached a monthly rate of 29,500 per cent in October 1923. Germans had to contend with prices doubling every 3.7 days, which isn’t as bad as Hungary’s daily spikes, but certainly devastating.
Hungary: World War I and beyond
Hungary was closely allied with Austria going into the war, but after suffering repeated defeats, the Austria-Hungary Empire was dissolved when the war ended. Wars are expensive, and there are still costs to be borne at home as well. So, Hungary fired up the presses to print more currency and backstop large budget deficits, with inflation as the inevitable result.
Inflation then became hyperinflation, as the exchange rate moved from roughly US$1 to five Hungarian korona prior to the war in 1914, to 70,000 korona per U.S. dollar by 1924.
Hungary wanted to get rid of hyperinflation and took steps to get it under control, which included replacing the korona with a new currency, called the pengo, in 1927. A new currency was viewed as the only means to stabilize the country’s economy and do away with rampant inflation. This currency was backed by gold reserves stored in Budapest – until they were confiscated during World War II.
Germany: World War I and beyond
Germany abandoned gold-backed currency in 1914 and introduced the papiermark; exchangeable with the U.S. dollar at a 4.2 to 1 ratio. The goal was to finance military operations with war bonds instead of taxes.
When Germany later surrendered in November 1918, it was at a cost of many men and even more marks. Reparations under the Treaty of Versailles had to be paid in gold or foreign currency, so they couldn’t just inflate away their debt. The use of government debt-backed papiermarks to purchase foreign currencies only accelerated the mark’s devaluation.
By 1919, prices had doubled, and with no action to tame inflation, the situation continued to worsen. By August 1923, the exchange rate stood at one million papiermarks per dollar and by November, had surged to 238 million papiermarks per U.S. dollar. In 1922, a loaf of bread in Germany cost 163 marks. That same loaf cost 1.5 billion marks in September 1923 and 200 billion marks by November.
This led to the November 1923 introduction of the rentenmark, replacing the papiermark at an exchange rate of 4.2 new marks per U.S. dollar, which cut 12 zeros off the papiermark’s face value. The new mark was available in limited quantities and backed by a mortgage on the country’s industrial and agricultural resources. The process of stabilization was led by Hjalmar Schacht, who became president of the Reichsbank the following month.
There is debate to this day about what exactly caused hyperinflation in Germany, but it’s said to have created a disorder Germans called “Zero Stroke,” which was the mental effect of transacting in hundreds of billions for everyday expenses. “Cipher Stroke” was the unconscious urge to write many zeros.
From bad to worse: The Great Depression (1929-39)
Hungary got its hyperinflation under control not long before the Great Depression hit and decimated the agricultural sector. This led to rapidly-mounting national debt that forced a devaluation of the pengo to cover rising government costs, via looser fiscal and monetary policy.
Later in the 1930s, the Vienna Awards returned some Hungarian territories lost during World War I, but these lands were under or undeveloped. Attempts to cultivate them ended up causing a strain on the national economy and yielded no food.
Economists estimate that in the aftermath of World War I, the postwar Weimar Republic was established with debt that amounted to 175% of GDP. Beyond enormous reparations, Germany had to relinquish control of colonies and territories, and limit the size of the army, which further destabilized the economy.
The 1929 stock market crash caused Germany more suffering than any other European nation, as all of its U.S. loans were recalled, causing the economy to collapse. On top of this, as the Great Depression wore on, by January 1933, one in three Germans were out of work and industrial production had been cut in half.
World War II
Hungary fought alongside Germany again, but their economy was weak when the war got underway. Meanwhile, the German economy was on pretty solid footing after growing their exports, several years (1923-29) of large bank loans from New York, and the plundering of Jewish assets that commenced under Nazi rule, in 1933. Both would suffer considerable losses, with millions left homeless after bombing campaigns levelled entire cities, and many military and civilian lives lost.
In exchange for joining the Axis Alliance, Hungary owed reparation payments (to Russia, Yugoslavia, and Czechoslovakia) that amounted to more than one-third of their budget. And production capabilities were decimated after 40 per cent of fixed capital was destroyed, and still more badly damaged.
Money-based trade morphed into barter, as people exchanged coats, boots or porcelain for food. They also turned to the black market amid worsening scarcity. Although prices on the black market were 20 to 100 times higher, this was sometimes the only way to acquire items. Eventually, Germany announced the possibility of punishment by death for black market transactions.
There was little central bank independence, as the government had de facto control of The National Bank of Hungary (NBH) and was in the habit of printing money to cover budget shortfalls. As the war wound down, the standing government took over currency production without any tangible collateral, and the occupying Soviet army simultaneously began issuing its own military money.
Bills were depreciating before they came off the printing press, pushing down the value of and demand for the pengo, to the point that people used it to light their cigarettes and bills littered the streets. Hungarian coins disappeared from circulation, since the metals they were made from were more valuable than the coins as money.
Both countries emerged from the war in dire straits, but ended up on divergent paths as one went on to log the worst hyperinflation ever recorded while the other became an economic powerhouse.
Going hungry in Hungary
In August 1945, US$1 equalled 1,320 pengos, but two months later it was 8,200, and by year end, it was 128,000. A kilogram of bread went from six pengo to nearly six billion, in the span of a year, by summer 1946.
Until 1944, the highest denomination was the 1,000 pengo note, but soon higher denominations of 100,000, then 1,000,000 and then 10,000,000 were needed. In mid-1946, a 100,000,000,000,000,000,000 (one hundred quintillion) pengo note was issued. The bill was equal to a billion trillion, or sextillion pengo – the largest banknote ever – well higher than the $100 trillion Zimbabwe dollar note.
At the same time, currency in circulation went from 25 billion pengo in July 1945 to 1.6 trillion in January 1946 to 64 quadrillion in May 1946 to 47 septillion by July 1946, when Hungarian hyperinflation reached its peak.
This triggered emergency replacement of the pengo with the adopengo. The adopengo was a special currency created primarily for tax payments and its value was adjusted on a daily basis and announced via radio.
At the time of this currency revaluation, it was estimated that the total of all Hungarian pengo banknotes in circulation roughly equaled one one-thousandth of a U.S. dollar. The adopengo was an unmitigated disaster and was abandoned within months.
Hungary after World War II
The prices of goods rose due to marked production slowdowns of as much as 80 per cent , which were attributable to hyperinflation and destruction of capital equipment used in manufacturing. Wheelbarrows of cash were a common sight and restaurants had to forgo menus because prices changed too fast. Salaries and pensions dropped in value or ceased to have any value at all. Lending activity was non-existent as it was pointless under the prevailing conditions.
The only way out was to replace the pengo, and its replacement had to be convertible into gold. The forint was put into circulation in August 1946, named after the city of Florence, where golden coins known as ‘fiorino d’oro’, had been minted since 1252. Each forint was initially equal to 400 thousand quadrillion pengos or four hundred octillion pengos.
The introduction of a new currency saved the economy and Hungary was able to quickly quell hyperinflation. Industrial production recovered and the economy began growing. The government finally turned off the printing press, and prices in Hungary remained stable, until the 1960s.
The U.S. played a pivotal role in Hungary’s rebound after U.S. President Harry Truman agreed to return $32 million in wartime-expropriated gold reserves. Hyperinflation was brought under control in a year, a stabilization that would not have been impossible otherwise.
Germany after World War II
West Germany rebounded strongly and started down a path to economic prosperity after aligning with the U.S., U.K. and France. East Germany continued to struggle economically under communist rule by the Soviet Union – a situation that persisted until several years after reunification (in 1989).
The German Bundesbank (DBB) is widely-regarded as the most independent, conservative central bank in the world and a model for others. Its record and reputation are inexorably linked to the DBB’s freedom to implement policies that drove steady and low inflation rates in the early years. From the beginning, German monetary policy was more influenced by economic considerations than political ones.
21st century state of affairs
Germany is one of the strongest economies in the world and expected to remain stable. The effects of catastrophic hyperinflation linger to this day and are thought to play a significant role in Germany’s strong aversion to debt.
Hungary’s economic health has ebbed and flowed. Deficit spending in recent years increased the money supply. Productivity declined amid poor investments and capital misallocations, as well as some of the worst corruption in the European Union.
Hungary’s inflation is roughly triple the European Union average as record food and energy prices pushed them into a recession in 2023, and will further delay their ability to meet the Maastricht Treaty requirements to adopt the euro.
Hyperinflation was possible since both nations had fiat or unbacked currencies. They were able to eliminate it by restoring convertibility into U.S. dollars and indirectly into gold – not to be confused with the gold standard. Both are on more solid footing today and maintain adequate gold reserves – and hope hyperinflation never returns.
*Note that while both countries were known by different names during the period covered in this article, for the sake of simplicity, they’re referred to as Hungary and Germany.