Polish Hyperinflation

Polish Hyperinflation

In January 1921 the Polish wholesale price index stood at 25,139, indicating that prices were over 251 times their level in 1914, the base year in which the index equaled 100. By February 1924 the index had risen to 248,429,600, an increase of 988,223 percent in a bit over three years. That growth rate in prices is equivalent to a 50-cent newspaper rising in price to nearly $5,000. In the aftermath of World War I Poland was a country newly formed from territories formerly belonging to Germany, Austro-Hungary, and Russia.

The Polish episode of hyperinflation was born of large government deficits incurred by the fledgling Polish government freshly constituted following World War I. Germany’s economic rape of Polish machinery and raw materials would have put even the most foresighted economic policy to the test. Furthermore, the armistice of 1918 left Poland locked in a costly war with the Soviet Union, a struggle that continued until the fall of 1920. Aside from heavy claims on scarce Polish resources, the Polish government fell heir to a grab bag of currencies—Russian rubles, crowns of the Austro-Hungarian bank, German marks, and Polish marks issued by the Polish State Loan Bank, an institution Germany established to regulate Poland’s monetary affairs. Under these circumstances, hardly any government could turn away from the temptation to run the printing presses.

Between October 1918 and February 1924 circulating bank notes grew 60,090,040 percent, and the Polish mark steadily decreased on foreign exchange markets. The Polish government took command of the Polish State Loan Bank, which financed the government’s budget deficits by issuing bank notes.

Unlike Austria and Hungary, Poland reformed its finances without help from an international loan, although an international loan was granted in 1927 to prop up the Polish mark in foreign exchange markets. In January 1924 the government invested the minister of finance with broad power to balance the government’s budget. The minister of finance established the Bank of Poland, replacing the Poland State Loan Bank, as an independent central bank issuing notes secured with reserves in gold or foreign assets denominated in stable currencies that equaled 30 percent of the value of the notes. Whereas the government budget deficit in 1923 accounted for over 50 percent of government expenditures, in 1924 the government reported a balanced budget. The government also created a new currency, the gold zloty, worth 1.8 million paper marks.

The Polish wholesale price index stabilized early in 1924 and the Polish mark stabilized in foreign exchange markets about the same time. The rather quick adjustment of inflation to responsible monetary and fiscal policies affirms the power that expectations wield over monetary affairs. Late in 1925 a lax central bank policy led to another spurt of inflation and currency depreciation that lasted a year before the central bank pulled in the monetary reins.