Hungarian interwar economy

Following the Treaty of Trianon on June 4, 1920, Hungary, one of the defeated powers, was reduced to nearly 32.6% of its former size. The treaty established which states would replace the former Kingdom of Hungary, with the most dramatic economic consequences of the dismantling affecting Hungary herself. Before the war Hungary depended upon the Austrian and Czech parts of the empire for the import of up to 80% of Hungary's raw materials and a market accepting an equal percentage of Hungarian exports; the end of the Austro-Hungarian Empire left the new Hungarian State with few raw materials, a loss of its markets, and no sea access, all adding to the devastation of Hungary's destroyed economy.

In 1920/21 the Hungarian budget predicted expenditures twice as high as the estimated revenue for the year. At the same time the country was facing unrestrained inflation so that by December 1920 the Minister of Finance, Lóránt Hegedüs, drafted a financial program striving for general deflation, tax reforms, and reduced budget expenditures. The plan failed for various reasons, including strong political opposition and the reparation payments which made it difficult to create a balanced budget for the country. In 1922, the government, which until that time had done nothing more than establish some export embargoes, finally intervened in an attempt to curtail the rapidly rising inflation. Foreign-exchange regulation was established mainly on imported goods, though these controls were only temporary. By the second half of the 1920s state intervention decreased significantly to allow a more liberal economic policy.

The Hungarian economy remained susceptible to escalating inflation and was largely disorganized until March 1924 when the League of Nations agreed to the Financial Reconstruction Plan. Under this plan the League would lend Hungary a sum of about 250 million gold crowns in an attempt to help stabilize Hungarian currency and help balance the budget. The budget was finally balanced in 1924/25 followed by a stabilizing of the economy. On 1 January 1927, the government introduced a new currency, the pengő, which equaled 12,500 paper crowns.

Despite having been greatly reduced in size following the war, Hungary, due to its agricultural efficiency, still exported more wheat than any other State in Europe at the time . The economy did well from the 1924/25 financial year until 1929/30. When the Great Depression hit in 1929, there was a collapse of world wheat prices Hungary who depended on the export of wheat into a deficit. From July 1930- July 1934, the boletta system was put into place, providing price support and tax relief for farms in an attempt to manage the economic crisis caused by the decline in wheat prices. The National Council for Industry was also established to help regulate the industrial sector of the economy.

Between May 1 and July 13, 1931, the Hungarian National Bank paid out 200 million pengős in gold and foreign exchange. At the same time Hungary's foreign debt reached 4,300 million pengős with interests costing 300 million pengős a year. With the gold and foreign exchange reserves virtually depleted, the gold cover of the pengős fell from 40% to 20%. By the summer of 1931, the National Bank no longer maintained enough foreign exchange to continue making interest payments. The government suspended the redemption of bonds and ended the payment of interest in foreign exchange on long-term foreign debts. In response to the economic crisis Hungary faced, foreign creditors agreed to temporarily suspend debt payments.