Hyperinflation: Hungarys Nightmare - Essay Example

Hyperinflation in Hungary Inflation is a common occurrence in the world today especially as developed nations like United States is currently experiencing recession. Politicians and economists alike study the cause as well as the solutions that would bring a country’s economy into recovery. However, a more severe type of inflation can also happen especially when recession turns into depression – that is hyperinflation. This happens when the inflation rate rises to more than 50%. For this reason, the government intervenes so as to arrest a situation ( recession) that could turn for the worst. Inflation that comes with recession is normal but hyperinflation is a nightmare. Hyperinflation: Hungary’s Nightmare Hyperinflation occurs when inflation is out-of-hand making a currency lose its value while prices soar at an alarming rate ( Sheffrin, 341). Inflation is actually a normal part of an economic cycle which occurs at certain times in a year, but when inflation is not headed towards equilibrium, hyperinflation happens. Among the world’s worst case of inflation, Hungary stands out due to the phenomenal nose-dive of its currency – the pengo. This happened to Hungary between the last quarter of 1945 towards July 1946. In order to fully understand the magnitude of this hyperinflation, it must be pointed out that a year before the hyperinflation ( 1944 ), the pengo’s highest denomination was only 1,000. A year later, the highest denomination was already a staggering 10,000,000 pengo. It meant that one needs an awful lot of money to purchase an item due to the low value of currency. This instance did not end the cycle , it even got worse when the pengo reached its highest denomination in 1946 – a shocking 100,000,000,000,000,000,000 pengő. The rate of the pengo was fluctuating faster than the weather as radio announcements were made daily to adjust its rate. Even when the pengo was replaced by the forint ( new currency ) in 1946, still the value of the circulating Hungarian amounted to “ one-thousandth of one US dollar” ( Judt 87). In fact, some pictures from old Hungarian newspapers depict people sweeping the almost useless banknotes. In contemporary times, this can be compared to the hyperinflation that occurred in Zimbabwe; however, the Hungarian incident is more severe as “ the inflation reached a peak of 1.3 x 11016 percent per month (prices double every 15 hours)” according to the report of Zimbabwe Situation in 2008. Cause of hyperinflation in Hungary There are many reasons why hyperinflation occurs in an economy. Among the prevalent factors are economic depression, aftermath of a war, as well as political turmoil and social upheavals. Nevertheless, hyperinflation’s symptom is apparent when money supply is excessive and remains unchecked thereby causing an imbalance. The situation is compounded when people immediately get into a state of panic-buying due to speculations that prices would change and the value of money would go down. In the case of Hungary, it is important to understand its political background to be able to grasp the factors that caused hyperinflation. When Hungary came out of WWI, it was still semi-feudal. According to Weber, Hungary it lost as much as 75% of its territories and around two-thirds of its population in the 1920s as a consequence of its signing the treaty of Trianon ( 962 ). Later on, it was devastated by uprisings, war and finally plundered by Romanians plus lost its savings in the vanished Empire when the republic was abolished. At this time ( 1922-1924) inflation rose up to 98% and Ragan attributed this to the Russian Marxists who purposely started it as a way of destroying the Hungarian middle-class ( 645). Supposedly, Hungary was back in business when it reacquired certain territories such as Ruthenia and Transylvania in 1941 after regaining it from Hitler. However, its unfortunate cooperation with Germany led to its collapse in 1944 which made Russian troops occupy the whole country. In 1948, Communists took over the whole system and “Sovietized” the country ( Weber 963). As a consequence of this political upheaval, hyperinflation occurred which was even mitigated by the printing of 100 quintillion pengo by the Hungarian National Bank in 1946. Confidence Model of Hyperinflation There are different models of hyperinflation that can be used to trace the hyperinflation that happened in Hungary. Nevertheless, whatever model used to possibly trace the cause of inflation, the important thing for economists to see is the velocity of money as well as the increase of money supply. Although inflation commonly happens during Christmas season when people have spare cash and do some shopping at a brisk rate, the trend stops after the holidays for money runs out. In the case of hyperinflation, the cycle keeps on repeating until it is out-of-control compelling the government to print banknotes or change a currency. One of the most plausible model that will be used in explaining Hungary’s case is the confidence model which attributes the hyperinflation to some series of events such as war, defeat in battle, or even a bank run that diminishes the confidence of the people on the bank or the government. When there is political unrest, people lose faith in the currency that they have and prefer to spend the money which may become useless later on. People would usually do a “ capital flight” wherein they would convert their currency to a more stable one such as U.S. dollars which was cited in the first part of the paper by Judt. Consequently, sellers would demand a higher value than that of the original value knowing that there is a greater risk in holding the currency. Indeed, war is the major contributory factor to this kind of hyperinflation since people have lost their confidence in the government. Aside from war, the government’s attitude towards arresting the situation plays a key part in inflation. When the Hungarian National Bank decided to print volumes of pengo, this worsened the crisis. In conclusion, Hungary’s case is a testimony that hyperinflation must be prevented at all costs since hyperinflation is indeed a vicious cycle and a complicated process. In our world today, hyperinflation still exists despite the absence of war. Sound fiscal reforms can perhaps prevent hyperinflation from happening since macroeconomic variables such as income, consumption , stock market, imports /exports, and investments have a role to play in contributing to a sound economy especially in a world of free trade. Works Cited Judt, Tony (2006). Postwar: A History of Europe Since 1945. Penguin. pp. 87. Ragan, Christopher; Lipsey, Richard (2008). Macroeconomics. Toronto, Ontario, Canada: Pearson Education Canada. pp. 645. Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 341. Zimbabwe hyperinflation will set record within six weeks. Zimbabwe Situation .2008-11-14 October 20,2009 . Weber, E ( 1971). A Modern History of Europe. Norton and Company: New York. P.962-963. Read More