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Tom Pattantyus: My life as a 12-year-old billionaire, Part 1 of 2

A World View

Posted: August 22, 2009 7:30 p.m.
Updated: August 23, 2009 12:42 p.m.

The worst economic downturn since the Great Depression and the ballooning deficit we face have heightened the risk of hyper-inflation to levels not seen since post-World War II Europe, when many bank notes weren’t worth the paper on which they were printed virtually overnight.

“Economists use the term ‘inflation’ to denote an ongoing rise in general level of prices quoted in units of money,” according to the Concise Encyclopedia of Economics.

Hyper-inflation is characterized by prices increasing at least 50 percent monthly, which means an item costing $1 would cost $130 in a year.

Could hyper-inflation happen here in America, as it did in the late 1940s in Europe?

I remember that time vividly, though I am very much living in this time.

Today, I see disturbing signs I might become a multi-billionaire, all over again.

My first time as a multi-billionaire came in July 1946, when I was a 12-year-old boy in Hungary.

The country was suffering the last month of the record-breaking hyper-inflation that had started a year earlier, a few months after the end of World War II.

The bank notes were worthless; only mathematicians and astronomers were able to name the numbers with so many zeroes.

At that time, 2.2 pounds (1 kilogram) of bread cost 5 billion, 850 million Pengő (which was the name of the old currency).

A year earlier the same loaf of bread was 6 Pengő, meaning the average rate of inflation was 461.16 percent per month.

Actually the inflation had started at a much lower rate and it accelerated to 200 percent per day at the end.

In the last days of hyper-inflation in Hungary, prices tripled from one day to the next. That is still the gold medal-holder in the Guinness Book of World Records.

I wasn’t alone. All the other 9.5 million Hungarians were multi-billionaires, too.

How could such an insane rate of inflation develop in the first place?

Here’s the backstory. After the war, larger cities were in ruin, larger manufacturing plants destroyed or badly damaged, and the machinery was either shipped to the West by the retreating German army or to the East by the new Soviet occupiers.

All major bridges were dynamited, most of the locomotives damaged or destroyed, the rolling stock of the Hungarian railway scattered all over Europe and most of the motor vehicles appropriated by the different armies.

The No. 1 post-war business was to demolish the dangerous ruins, clear the rubble and restore the public services (water, gas, electricity and so on). Next, bridges and factories had to be rebuilt and restarted and the most essential shops reopened.

However, the gold reserves of the Hungarian National Bank were somewhere in Germany or Austria, so Hungary’s new government had to resort to printing money to restart the economy.

In general, inflation begins when a government has large budget deficits and pays for them with printed money. Hungarian leaders had no other choice.

Reconstruction demanded a lot of funds while income from taxes was low and most of the state administration had to be restored or revamped.

The government had a central role in causing the inflation, and in many ways it was a defensible course of action because they were doing what was absolutely necessary to rebuild a war-torn country. The policy of printing money was clearly affecting everything.

With so much power concentrated into so few hands, the stage was set for political mischief.

The first free election was won by the center-right Small Holders Party in early November 1945 with some 51 percent of the votes.

The Communist Party got about 17 percent, the Social Democrats 20 percent, the Peasants Party 8 percent and two small parties the remainder of the votes.

Under Soviet pressure, a coalition government was formed and the head of the ministries was divided between the four main parties according to their share of the votes. The prime minister was selected from the winning party and there were two deputy prime ministers, one Communist and one Socialist.

Again at Soviet insistence, Communist Party members became the minister of interior, and the “Economic Czar” who was in charge of the financial affairs, industry and agriculture.

The Ministry of Interior was the main forum of oppression and intimidation in the Soviet Union, and the appropriate “establishments” and internal security forces were created following the Soviet models. The other, much less important ministries were proportionately shared by the other parties.

With the key czars properly seated, it was now time to manipulate the levers of economics to achieve a shift in the balance of power.

Hungary’s first postwar free election, in November 1945, resulted in a coalition government assembled under Soviet pressure and controlled by members of the Communist Party, which had won only 17 percent of the popular votes.

At this point, politics and economics were purposely intertwined to achieve certain results.

Under Hungary’s economic czar, the rate of inflation increased, but prior to the election was not excessive or unmanageable in spite of all the postwar difficulties.

Post-election, the rate of inflation accelerated, and soon cleaned out savings, paralyzed private investments, and made all life insurance policies and bond holdings worthless.

In short, it destroyed the wealth of the middle and affluent classes.  

By late spring of 1946, normal commerce was practically replaced by barter. Gold, silver, jewelry, hard currencies (U.S. dollars, British pounds and Swiss francs), cigarettes, wine and spirits, matches, soap and other hygienic items were bartered for food and other essentials.  

Employees were paid daily, first thing in the morning, and spouses or the employees themselves rushed out to spend the money while it bought anything.

In fact, the country worked practically for free because the money was worthless and payments for goods and services were paid from the remaining personal wealth in barter trade.

Thus the huge government outlays for the reconstruction required much less real payment than under normal conditions.  

This destruction of private wealth paved the way for the subsequent and complete Communist takeover.

Hungary’s gold reserves were returned early summer of 1946 by U.S. armed forces. The Communist economic czar and the deputy prime minister promised new and stable money by Aug. 1 that year.

By the time the period of hyper-inflation ended in late summer 1946, the Hungarian money supply, based on the Pengő, was:

11,900,000,000,000,000,000,000,000 Pengő (1.19x10ˆ25).

Hungary’s new currency, the Forint, was introduced as promised on Aug. 1 and pegged to the U.S. dollar at $1 to 11.70 Forints. The Forint was instantly stable and stayed that way until early December 1951, when food prices were increased, but inflation nonetheless remained quite modest afterward.

So what can we learn from this horrific story?  

Monday, in Part 2, I will outline the lesson of history and connect the dots between economics and politics in Hungary then, and in the United States now.

Tom Pattantyus is a retired electrical engineer and independent contractor. E-mail him at His column reflects his own views and not necessarily those of The Signal.


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