• The Invisible Hand

Will Venezuela’s hyperinflation reach the record levels of 1940s Hungary?

Updated: Feb 26, 2019

Venezuela’s hyperinflation has made headlines recently, but how does it compare to history’s worst case of hyperinflation; Hungary 1946?

In Somaliland customers use a wheelbarrow to transport their money

Although we are constantly being showered by stories of the humanitarian crisis in Venezuela, compared to Hungary in 1946, their inflation rate is quite mild. In the aftermath of WW2, an annihilated Hungary, burdened by debts, saw the rate of inflation rise above 41,900,000,000,000,000%. Prices were doubling every 15 hours. Inflation was so high that the Soviet government had to introduce a 100 quintillion pengo note.

Meanwhile, in Venezuela inflation in 2019 is predicted to be 10,000,000% by the IMF. The problems in Venezuela should not be overstated, instead this highlights just how catastrophic the economic situation was in 1946 Hungary. However, when inflation is so high a state of catastrophe is reached where it can’t get any worse with more inflation. Empty shop shelves can’t become any emptier so in practice the impact of hyperinflation in Venezuela has been quite similar to the impact in Hungary.

Once inflation starts to exceed a certain level a cycle of further inflation is created. If people expect higher inflation they will spend more to avoid paying higher prices in the future so inflation will increase. With such high inflation money becomes effectively worthless so food producers have no incentive to supply food in supermarkets. Therefore, shelves are empty and a humanitarian crisis as we see today occurs. Hungary’s economy was also brought to the brink, but relative to the crisis of WW2, it would be much less alarming than the crisis in Venezuela is today.


Fundamentally, both crises were caused by a cycle of hyperinflation caused by an initial increase in printing of money by the government.

In Hungary, the printing of money was prompted by the need to pay millions in compensation after the war and to reconstruct. 40% of Hungary’s wealth was erased after WW2 and 80% of Budapest was destroyed.

The situation in Venezuela is more complicated. Government overspending on social welfare programs has played a major part in forcing the government to print money. Hugo Chavez launched the Bolivarian missions, a social program which would increase the size of government to 50% of GDP. Undoubtably, they were initially successful as unemployment fell from 14.5% to 7.8% between 1999 and 2011, in addition extreme poverty fell from 19.9% to 8.6%, however, these programs were also extremely expensive. Venezuela may have not experienced hyperinflation just based on this overspending, but a crash in the oil price ensured it and American sanctions did not help alleviate economic pressure.

To understand the impact of this we must understand the context of Venezuela’s economy. Venezuela’s economy was entirely based on oil which is unsurprising given they have the largest oil reserves in the world. 95% of their exports were in petroleum products. So when oil prices collapsed in 2013 from $100 to $33 in 2016, Venezuela was plunged into recession. It was this, in addition to economic inepitude from the government, which led to the government printing money and sparking hyperinflation.


Both cases of hyperinflation were caused by printing of money by the government but the causes of these varied. They were both born out of crisis yet in Venezuela this crisis was largely manufactured by the government and their exposure to volatile commodity markets. The monetary authority of both countries is to blame, but it is more to blame in Venezuela because the crisis was largely caused by the government.


In response to hyperinflation the usual response of the government is to replace the worthless currency which both countries have effectively done. On the 1st August 1946, the pengo was replaced by the florint which is still used today and was backed by gold reserves and world currencies. They also adopted economic stabilisation plans including tax reforms and the recovery of gold assets from abroad.

Venezuela has not taken as radical reform, but it has attempted to tie the value of their currency to their own cryptocurrency, the petro, which is backed by the price of oil. However, this reform is unlikely to succeed because it does not combat the fundamental causes of the crisis which is excessive government spending and a lack of revenue from oil. While Hungary took decisive steps to eliminate the causes of hyperinflation, Venezuela seems unwilling to accept the steps it needs to make to solve their crisis.


Overall, it seems the effects and causes of both crises are similar. Although, Hungary is statistically more serious, without adequate intervention and aid, hyperinflation in Venezuela could ultimately precipitate an even more severe crisis.




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