In 1923, the exchange rate caused the prices of goods and services to spike rapidly. The inflation tax that was intended to increase government revenue and reduce expenditure backfired and led to hyperinflation. It was finally resolved by introducing a new currency and bank while simultaneously getting rid of the inflation tax. However, the effects of hyperinflation on the Polish economy and people would linger in the decades to come.
Years of rising inflation rates finally culminated in the Polish hyperinflation of 1989. Although the inflation of the 1920s was more acute, it is estimated that its monthly inflation rate peaked at 79.41% in 1989 and 1990. The economy was eventually stabilized by the implementation of the Balcerowicz Plan in 1989. In both 1923 and 1989-1990, new currencies were reintroduced.
In short, we can see that the main cause of hyperinflation in Poland was its failure to cover the ever-growing budget deficit. The rapid price inflation in the years leading up to the period of hyperinflation was also due to increased demand and resulting shortages. We find that a slashing of government expenditures (reducing subsidies) and altering the currency basis (using a foreign currency as a national unit of currency) as seen in the case of Ecuador in 2000 can end hyperinflation.
The Balcerowicz Plan or “Shock Therapy”
The Balcerowicz Plan was the brainchild of Leszek Balcerowicz which helped curb the rise of hyperinflation in Poland. The plan was structured in such a way as to induce: a) demand and supply equilibrium in the commodity market i.e. market-clearing prices; b) inflation rate reduction; c) equilibration of the current account balance (Kolodko, 1991). To achieve this: the following was introduced:
- Fiscal adjustment. The new policy’s aim was to balance the budget.
- Price liberalization.
- Tough monetary policy. This was done by strict control of the money supply and using positive interest rates to regulate its growth rate.
- Wage increases. Nominal wage rises were monitored strictly by way of indexation.
The plan was considered a success when its economic growth in terms of GDP per capita outpaced other countries such as Ukraine (Kupfer, 2018). Although output dropped in the beginning, slow growth was achieved by 1992. It also resulted in decreased budget deficit and inflation rates. However, due to the sudden transition away from a centrally-planned economy, the unemployment rate in Poland worsened.
Causes, effects and solutions of hyperinflation in Poland 1989
According to Kolodko (1991), the late 1980s saw a great intensification of inflation in Poland. A feature of the inflationary processes in this period was the combination of both shortages and price inflation which lead to hyperinflation in 1989. Kolodko also states that the economic situation was in disarray, a recession was in effect, and the budget deficit was increasing. In that year, the unofficial talks at Magdalenka and then the Polish Round Table talks allowed for a peaceful transition of leadership to the democratically elected government. This paved the way for the development of an economic plan based on two approaches: (1) accelerating institutional changes and (2) changing economic policy fundamentally with focus on monetary and fiscal instruments. With these approaches, a shock therapy programme was drafted and then approved by the International Monetary Fund with its implementation commencing at the beginning of 1990.
Grabski’s Plan
Inflation continued to grow in 1923, and the national debt increased for five consecutive years. The so-called inflation tax paid by all citizens makes the budget income three times more than normal economic activity, so the mechanism that promotes prosperity stops working. Strikes are becoming more frequent and there are widespread chaos in the country. On December 18, 1923, Grabski was appointed prime minister; he chose a professional government (the former government minister appointed according to political priorities did not receive the portfolio). Grabski also received six months of legislative power from Sejm.
In a short time, he replaced the Polish brand with a new currency called Polish Zloty. He also dissolved the Polish National Loan Fund (founded by the German occupation in 1916) as a bank issuer for Polish brands and replaced the Polish bank (the predecessor of the Polish National Bank). The Polish zloty exchange rate is equal to the Swiss franc exchange rate. Previous inflation taxes were replaced by special property taxes and “ordinary” taxes, such as income tax. The measures taken by the Grabski government in 1924 effectively curbed hyperinflation and the stability of the Polish economy.
Causes of hyperinflation in Poland 1923
Wolf (2005) pointed out that after becoming an independent republic, in between the first and second world wars, Poland has been plagued into economic turmoil. These difficulties roots from the destruction of the First World War, the economic exploitation of the German and Russian occupations, the systematic destruction of the retreating army, and the unification of the unified economic region. In addition to the destruction of the First World War, the Posso War also left a heavy mark on the economy of the Republic. There are also economic differences between the two halves of the country: Poland B in the east and Poland A in the west. In particular, Poland A is much better economically due to German occupation. The customs confrontation with Germany and the closure of the border have also had a negative impact on the economy.
The 1988 Polish Strikes
The 1988 Polish strikes were a massive wave of workers’ strikes which broke out in the Polish People’s Republic. The strikes, as well as street demonstrations, continued throughout spring and summer, ending in early September 1988. The strikes came as a result of living in an economy near hyperinflation.
The late 1980s were a time of deep economic crisis of Poland. The average inflation rate climbed to 60% by 1988, and Poland’s hard-currency debt to the Western countries grew from $25 billion in 1981 to $43 billion in 1989. In those circumstances, anger and frustration of the nation grew, deepened by economic malaise and declining living standards. More than 60% of population lived in poverty, and inflation, measured by black-market rate of the U.S. dollar, was 1,500% in the period 1982 – 1987.
On November 29, 1987, the Communists decided to seek popular support for a 110% price increase. The government lost the referendum, but officially, it was announced that 63.8% voters participated in it, and so, the deputy prime minister decided to go on with the price increase. The policy was introduced on February 1, 1988. It was the biggest hike since 1982. The operation was a failure, as the massive price increases were followed by 40% increase in wages, meant to offset the price increases. As a result, inflation rose at alarming speed, and by late 1989, hyperinflation was reached.
Analysis of Poland Economic – Part 2
In the late 1980s, Poland began to move towards a market economy. Democracy has also resumed, and the country’s economic recovery follows a clear path of EU protection. Poland has also become a member of the NATO and Paris military alliances. Organization for Economic Cooperation and Development (OECD).
Poland’s geographical advantage in the heart of Europe has also contributed to the rapid transformation of the country’s economy. As we all know, EU funds help to develop Poland’s infrastructure and promote per capita gross domestic product (GDP) growth of nearly 100%.
Poland’s market economy has gradually taken root, foreign investment has begun to flow in, and Germany has become the country’s largest trading partner. In the years after joining the European Union, Poland’s economic growth accelerated.
Analysis of Poland Economic – Part 1
After the Second World War in Poland, the new communist rulers reorganized the economy according to the national socialist model established by Joseph Stalin in the Soviet Union. Economic management has become a centralized bureaucracy. They will increase the pricing and production levels of the market and improve the overall planning of the ruling party.
Through the internationalization of foreign trade after the war, the Polish economy also broke away from the international economy. Reforms in the 1970s and 1980s gradually led companies to directly control their foreign trade activities and bypass most national planning mechanisms.
The failure of the central state to achieve economic growth led to social unrest and official policy reforms in the 1970s and early 1980s, but it was not until 1989 when the non-communist government was established. With the strong support of the public, the first non-communist government implemented a shock therapy reform program in 1990. However, the momentum of early reforms will be presented in the next two years. In 1992, the signs of economic progress were very uneven. There are more and more consumer goods, but the continued existence of inefficient state-owned enterprises has greatly reduced productivity, unemployment has risen, and inflation has become a serious threat because it initially fell to almost zero.
Poland’s efforts to westernize its economy after 1989 depend to a large extent on the expertise and financial support of international financial institutions. Although some large-scale hard currency debts were forgiven in 1991, the willingness of the Communist Party’s management system hindered the effective use of foreign capital and hindered foreign investment that Poland actively sought. Therefore, by 1992, the initial plan for a period of short-term painful economic adjustment had become a long-term test, and the results were mixed.
The Introduction of Hyperinflation in Poland
After the Soviet rule and World War II, Poland experienced many changes in industrialization and urbanization and living standards, but it was affected by social unrest, political disputes and serious economic difficulties.
The inflation process intensified during the second half of the 1980s. It is characterized by the simultaneous existence of price inflation and shortages. In the case of an extremely unbalanced economic situation, the economy fell into recession and external debt increased, eventually achieving hyperinflation at the end of 1989.
To balance the economy, the government has developed two economic plans with the main goal of accelerating previously initiated market-oriented institutional changes and including fundamental changes in economic policies that benefit financial and monetary instruments.
What is Hyperinflation?
Hyperinflation is a rapid and uncontrollable currency devaluation. It causes the prices of goods and services to skyrocket in a short period of time. Hyperinflation has no precise threshold, normally it describes an inflation rate that exceeds 50%. Usually, hyperinflation is considered to be rare around the globe, it has been estimated that it has occurred about 55 times in the 20th century in countries such as Germany, Russia, China, Greece, Yugoslavia, Hungary, Argentina and so on.
For example, a cup of coffee could cost one dollar in the morning and two dollars in the afternoon. The severity of cost increases by more than 50%, causing it to be different from normal inflation.
Causes
Fiscal Problems – Fiscal discipline is defined as the capacity of a government to maintain smooth financial operation for long-term fiscal health. It branches into multi-year perspective on budgeting, mechanisms to maintain fiscal health and stability over business cycles.
Monetary Problems – Monetary policy is the plan of action undertaken by the monetary authority, especially the central banks, to regulate and control the demand for and supply of money to the public and the flow of credit so as to achieve the macroeconomic goals.
The Exchange Rate – The exchange rate regime is the system that a country’s monetary authority adopts to establish the exchange rate of its own currency against other currencies.
Hyperinflation of Poland 