Indexation, Inflationary Finance, and Hyperinflation: The 1945-1946 Hungarian Experience

Bomberger, William A.; Makinen, Gail E.

doi:10.1086/260886

Cited by 20 publications

(16 citation statements)

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“…With the coming of 1946, the inflationary crisis, already underway, saw double-exponential growth (Mizuno et al 2002). Part of the reason for the acceleration was due to the government's policy (again) of protecting the financial sector, indexing bank deposits (the so-called the Tax Pengő) to inflation and thus making seignorage gains lower than they would be while concurrently raising inflationary levels (Bomberger and Makinen 1980). In fact, as inflation grew, the popularity of the inflation-indexed accounts grew as a hedge against the rampant inflation, exacerbating the lack of seignorage obtained by the government and pushing inflation rates higher by design (Bomberger and Makinen 1983).…”

Section: A Tale Of Two Hyperinflationsmentioning

confidence: 99%

“…Part of the reason for the acceleration was due to the government's policy (again) of protecting the financial sector, indexing bank deposits (the so-called the Tax Pengő) to inflation and thus making seignorage gains lower than they would be while concurrently raising inflationary levels (Bomberger and Makinen 1980). In fact, as inflation grew, the popularity of the inflation-indexed accounts grew as a hedge against the rampant inflation, exacerbating the lack of seignorage obtained by the government and pushing inflation rates higher by design (Bomberger and Makinen 1983). As Paal (2000b) noted, there was unilateral Granger causality in the data from inflation to money growth, a fact which can be explained by the demand for indexed deposits and subsequent monetary policy; Paal also notes that this creation of an alternative liability by the same issuing authorities effectively created parallel currencies within the economy, one with higher rates of return and the other constantly depreciating.…”

Section: A Tale Of Two Hyperinflationsmentioning

confidence: 99%

“…The stabilization itself was comprised of a large number of measures, including the introduction of (another) new currency, the forint, the reintroduction of Article 50 of the Hungarian Central Bank charter (guaranteeing central bank independence), temporary imposition of a 100 percent reserve requirements for commercial banks, a sweeping reform of the tax system, and a reduction in the number of civil servants (Bomberger and Makinen 1983). Even after the stabilization, the money supply grew by 221 percent from August 31, 1946to December 31, 1946, but price increases were much more muted, mainly because the Hungarian government had a strict limit on debt issuance until August 1947 (Siklos 1991a).…”

Section: A Tale Of Two Hyperinflationsmentioning

confidence: 99%

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Short Waves in Hungary, 1923 and 1946: Persistence, Chaos, and (Lack of) Control

Hartwell

2018

SSRN Journal

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Monetary policies follow a complex and chaotic process, one that is enhanced when monetary growth is taken to the extreme, as in hyperinflation. While we have a basic understanding of the complex dynamics of hyperinflation, a less-explored phenomenon accompanying hyperinflationary episodes is the effect that they have on institutional development. Building on recent advances in economic history examining monetary policy and institutions, this analysis uses more explicit recourse to complexity theory and in particular complex adaptive systems to examine two separate hyperinflationary episodes in Hungary, 1923 and1946. Delving into the institutional and cultural roots of the inflationary policies of the Hungarian government and detailing the institutional effects which succeeded hyperinflation, this paper shows that the twin experiences of Hungary were both chaotic and created a chaotic and complex aftermath, the results of which are still being felt. Indeed, Hungary's 1923 and especially its 1946 hyperinflation shows that some economic chaos cannot be restrained by political institutions and in fact the institutions themselves were changed. When staring into the abyss, Hungary also found that the abyss stared back.

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Section: A Tale Of Two Hyperinflationsmentioning

confidence: 99%

Section: A Tale Of Two Hyperinflationsmentioning

confidence: 99%

Section: A Tale Of Two Hyperinflationsmentioning

confidence: 99%

See 1 more Smart Citation

Short Waves in Hungary, 1923 and 1946: Persistence, Chaos, and (Lack of) Control

Hartwell

2018

SSRN Journal

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“…2Tc see this approach applied to the Hungarian experience, see Bomberger and Makinen (1980) and I money. The excess supply of currency increases the inflation rate as people try to reduce their holdings of currency.…”

Section: Introductionmentioning

confidence: 99%

Hyperinflation with Currency Substitution: Introducing an Indexed Currency

Sturzenegger¹

1992

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Currency substitution (CS) and financial adaptation are in general believed to increase the equilibrium rate of inflation. This result derives from a setup in which the government finances a certain amount of real resources through money printing and where CS reduces the base of the inflation tax. This paper shows this intuition wrong for those situations where the hyperinflation is expectations-driven. Incorporating CS in an Obstfeld-Rogoff (1983) framework I show reduces the inflation rates along the hyperinflationary equilibrium. The intuition is simple: if agents have an easy way of substituting away from domestic currency then the required inflation rates to sustain a path where real balances disappears is necessarily lower. The implications of the model are then tested empirically.

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“…19 19 There are ample historical examples of political leaders more experienced with paper money who devised seigniorage limiting monetary provisions with unexpected and disastrous results. Bomberger and Makinen (1980, 1983) report that during the Hungarian hyperinflation of 1945–1946, the government introduced indexed deposits and indexed currency, whose effects were to return the seigniorage from money creation to the public resulting in the highest rate of hyperinflation ever recorded. …”

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confidence: 99%

Seigniorage, Legal Tender, and the Demand Notes of 1861

Bomberger

Makinen

2010

Economic Inquiry

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"In the summer of 1861, the United States embarked on its first widespread use of paper money: the Demand Notes of 1861. Although their convertibility into gold ended at the end of that year, they remained acceptable for tariff payment at a par with gold coin while they were gradually replaced with paper money that did not share this provision, the Greenbacks. We present daily observations of exchange rates between the Notes, Greenbacks, and gold for the extended period during which they simultaneously circulated. These exchange rates substantiate our revisionist notion that the Notes were replaced because the tariff provision prevented them from generating sufficient seigniorage for wartime needs. "("JEL "E42, N12, N22) Copyright (c) 2009 Western Economic Association International.

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Indexation, Inflationary Finance, and Hyperinflation: The 1945-1946 Hungarian Experience

Cited by 20 publications

References 6 publications

Short Waves in Hungary, 1923 and 1946: Persistence, Chaos, and (Lack of) Control

Short Waves in Hungary, 1923 and 1946: Persistence, Chaos, and (Lack of) Control

Hyperinflation with Currency Substitution: Introducing an Indexed Currency

Seigniorage, Legal Tender, and the Demand Notes of 1861

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