B.-Pengő!

Back in the 70's as a freshman in college, I signed up for a course in macroeconomics.  It must have been a mandatory class.  There are few things in life that I find more boring than economics, so a course in macroeconomics could only be one thing: macro-boring.  And it was.  Deadly boring. 

Flash forward 40 years.  As a retiree with time on my hands, I often find myself "going down a rat hole" on the Internet and spending an inordinate amount of time on a random topic that has struck my fancy.  Imagine my surprise last week when that random topic was inflation!  I can't even recall what prompted this particular descent. The last thing I remember was reading an article containing a reference to hyperinflation in Hungary during World War II.  Mildly interested, I clicked on that link and the rest of my day vanished.   

Dissolution of the
Austro-Hungarian Empire

A Little History

Prior to World War I, the Austro-Hungarian Empire (a multi-national state) was the second largest country in Europe and one of the world's great powers.  Unfortunately it was allied with Germany and found itself on the wrong side of the Great War. At the war's conclusion, the Empire was dissolved into a number of independent sovereign states.  Hungary lost two-thirds of its population, over two-thirds of its territory, and was turned into a landlocked country.  The currency of the Empire, the Austro-Hungarian krone, was replaced in Hungary with the korona.  Due to the consequences of the war, the korona suffered a high rate of inflation until, with the assistance of the League of Nations, it was replaced in 1927 with the pengő.   In 1941, the pengő was worth about $0.20 USD.  Remember that exchange rate.  It will change a bit in the five years that follow.

World War I was disastrous to Hungary but World War II was even worse.  Once again, Hungary found itself allied with Germany.  For a few years, though, it managed to avoid the worst of the war's destruction.  This good fortune would not last. 

July 1941:  Pressured by Germany, the Hungarian army participates in the invasion of the Soviet Union, advancing deep into the Soviet Ukraine.

February, 1943:  The Soviet Union retaliates, crushing the Hungarian army in the Battle of Stalingrad.  The Hungarian army suffers more than 100,000 casualties and is effectively eliminated as a fighting force.

March, 1944: Suspecting that the Hungarian Prime Minister is negotiating an independent armistice with the Allies, Hitler orders the occupation of Hungary.

September, 1944:  The Soviet Union invades Hungary and the entire country becomes a battlefield until the end of the war. 

December, 1944:  The remnants of the Hungarian army are destroyed by Soviet troops in the Siege of Budapest.

February, 1946:  The Kingdom of Hungary is abolished and becomes the Second Republic of Hungary, a communist satellite state under the control of the Soviet Union. 

At war's end, Hungary was left in tatters. Almost half of it's national wealth was gone, a quarter of its industrial capacity had been lost, and most of its transportation infrastructure (roads, bridges, railways) had been destroyed.  Reconstruction was also hampered by the fact that Hungary had to pay reparations to the Soviet Union for its participation in the war.  

Hyperinflation Strikes

If I actually understood economics, I might be tempted to explain the concept of inflation at this point.  But I don't so I won't.  Suffice it to say that inflation refers to the decreased purchasing power of a nation's currency over time.  A certain degree of inflation is not necessarily a bad thing.  In the case of the United States, the goods and services that could have been purchased for $100 in 1920 would cost a little over $1,200 today.  That works out to an average annual inflation rate of 2.69% which isn't bad, especially since the average per capita income in the United States in 1920 was about $750 (it's now about $30,000).

Let's compare this to what happened in Hungary.  In 1941, its currency (the pengő) was worth approximately $0.19 USD.  By June of 1944 it was worth about $0.03 USD.  That means that it took over 6 times as many pengős in 1944 to purchase the same amount of goods that could be purchased in 1941.  That's not good but, as shown in the chart below, it got infinitely worse: 

Yep.  You're reading the chart correctly.  On July 31, 1946, $1 USD was equivalent to approximately 460,000,000,000,000,000,000,000,000,000 pengős!  The Hungarian currency was experiencing hyperinflation the likes of which the world had never seen before and has not seen since.  In response, the Hungarian government started printing out banknotes of higher and higher denominations. 

One Thousand Pengő Note:  Issued July of 1945

One Million Pengő Note: Issued February of 1946

One Billion Pengő Note: Issued May of 1946

As inflation continued to skyrocket, the Hungarian government created a new term -- the milpengő, equal to 1 million pengős -- and issued the following banknotes in quick succession:

Ten Thousand Milpengő Note: Issued May of 1946

Ten Million Milpengő Note: Issued June of 1946

One Billion Milpengő Note: Issued June of 1946

Let's take a moment to examine that last banknote.  One billion milpengős is equal to one billion million pengős or 1 x 10¹⁵ pengős.  At the time it was issued, $1 USD was trading for 4.2 x 10¹⁶ pengős, meaning that it still required 42 of these notes to equal $1 USD!  

Sadly for the Hungarian people, the devaluation of the pengő continued at an even faster pace, resulting in another new term: the b.-pengő (pronounced bilpengo).  Now, you might think that a b.-pengő was equal to a billion pengős, but you'd be wrong.  It's actually equal to a trillion (1 x 10¹²) pengős!  And so it was that in July of 1946 -- within the span of a single week -- the Hungarian Treasury responded to this crushing inflation rate by cranking out its final pengő banknotes:

One Million B.-Pengő Note

One Hundred Million B.-Pengő Note

One Billion B.-Pengő Note

That last banknote is the highest denomination note that mankind has ever printed, equal to a billion trillion (1 x 10²¹) pengős.  Since $1 USD was trading for approximately 4.6 x 10²⁹ pengős at that time, it required 4.6 x 10⁸ or 460 million of these notes to equal $1 USD!  

There is an ironic footnote to this story.  The one billion b.-pengő banknote was printed but never issued to the public.  As a result, it has become a collector's item of sorts for numismatists.  It was worth only $0.000000002 when it was printed, but it's now auctioned on eBay for over $500!

 Now that would make a fascinating Economics class!

Sweeping up worthless pengő banknotes

Postscript

In August of 1946, a new regime was installed in Hungary. A new currency, the forint, was introduced and backed by the return of Hungary's gold supply which had been taken by the Nazis during the war.  Hungary's infrastructure -- in particular, its railroads -- were restored and its economy returned quickly to its pre-war level.