Exchange controls
Despite the hardships of World War I and the shock of the new borders redrawn by the Trianon Peace Treaty, Hungary’s economy stabilised in the second half of the 1920s. The country’s first independent central bank, Magyar Nemzeti Bank had an important role in the process, as it managed inflation and introduced pengő as the new currency. The economy’s performance reached pre-war levels, partly thanks to internal resources and foreign loans.
The Great Depression which shattered everything into pieces in 1929 had a major impact on Hungary as well. Overproduction led to a general decrease in prices, world trade plunged, and certain countries protected their domestic markets and economies by applying duties and import restrictions.
The crisis also had a detrimental impact on financial and credit transactions: key medium- and short-term credit agreements with Central and Eastern European countries, including Hungary, were terminated, and creditors withdrew their capital from the region. Grain export, which represented 70 % of Hungarian exports, plummeted by more than 50 %, with a radical drop in prices, resulting in heavy losses for Hungarian farmers and a significant deterioration of the country’s external trade and balance of payments.
Hungary was able to meet the reparation burden and debt service imposed on it by the peace treaty of Trianon - which amounted to about 4.3 billion pengő by 1930 – by paying foreign currency worth about 300,000,000 pengő a year, but it could not meet its obligations because of the constantly declining gold reserves, the withdrawal of deposits, and the shrinking external and internal credit sources. Therefore, the Ministry of Finance urgently needed to find a solution for both the short and longer term.
The government imposed a three-day bank closure on 14 July 1931 and restricted the amount of money that could be withdrawn from deposits until the end of August, following the recommendation of the general council of the central bank.
In order to prevent state bankruptcy, the centralisation of the circulation of foreign currencies, i.e. the fixed foreign currency management was ordered on 16 July 1931. The authorisation of the MNB was required to take the pengő abroad, to pay it out to foreigners, to take out and disburse loans in the international money market, and any income from exported products and securities had to be handed over to the MNB under strict sanctions.
Negotiations with international financial market creditors on debt suspension, rescheduling and maturity extension have started and continued for years. The most significant result was that debt was repaid in pengő, which led creditors to make forced purchases and investments in Hungary. However, this was not enough to alleviate exchange controls; even at the end of the 20th century, only every 3 years could our fellow citizens travelling to the West officially request a small amount of “hard currency”. As a result, while the official MNB HUF to USD exchange rate was 17 to 1, people paid up to 120–130 forints for 1 USD.
Eventually, almost 70 years had to pass until our currency, this time forint, became convertible again.
Source: Az Est, Budapesti Hírlap, Népszava, Ludas Matyi, Pesti Hírlap, Pesti Napló, Világgazdaság