1. Post-war reconstruction
2. Establishing and operating a command economy

1. Post-war reconstruction

The fact that Hungary became a battlefield in the Second World War had serious economic and social consequences. The cost of the physical damage done has been put at 40 per cent of annual national income, calculated at 1938 prices. A lesser proportion of the damage was done by the retreating German forces and collaborating Arrow-Cross administration, following their orders to evacuate completely. Part of the rest resulted directly from the fighting, while a third part was the cost of supplies for the arriving Soviet forces and the ‘spontaneous reparations’ they exacted. The biggest losses were suffered by agriculture, transport and manufacturing industry.

The direct losses from the destruction of production systems and installations gave rise to indirect losses of a similar order of magnitude. The destruction of produce stocks affected not only supplies, but the seed requirements for some years to come. The devastation of the transport system slowed the recovery of the country’s economic potentials. The disruption of traditional trading ties prevented or impeded essential deliveries of raw materials and fuels.

On top of all those problems, Hungary was obliged originally to pay a sum of $300 million to the Soviet Union, Czechoslovakia and Yugoslavia in six years. In practice, the cost of these reparations doubled through the surge in world-market prices, so that the effort required acted as an economic curb on the country for several years. The armistice agreement had obliged Hungary to supply the Soviet forces stationed there. Another consequence of the war was that factories, plants and real estate formerly owned wholly or partly by German interests passed into Soviet ownership. It then became possible at the end of the 1940s for these to be bought back by the Hungarian government, but many such assets operated for many years as Soviet-Hungarian joint ventures. One such company was MASZOVLET airline and another the MASZOLAJ oil company. Because responsibility had to be taken for damage to the hitherto German-owned assets, there was a further charge of $150–180 million on the Hungarian economy. All these obligations together meant that the Hungarian state had to devote more than a third of its spending to its international obligations in the 1945–8 period.

The Hungarian economy was at a low point in its performance. Its situation and prospects were worsened further by accelerating inflation, behind which lay disorganization in the economy, low levels of productivity, imbalances of supply and demand, and excessive state spending associated with post-war reconstruction. By October 1945, the currency was depreciating at a rate of 18 per cent a day. After a temporary respite, inflation speeded up again, so that by the summer of 1946, the currency, the pengo, had lost its function as money to precious metals, gold, foreign currency and staple goods. Black-marketeering assumed enormous proportions. The spate of inflation suffered by the Hungarian economy in 1945-6 was in fact the greatest the world had ever seen. It was curbed and the country’s finances stabilized by the introduction on August 1, 1946 of a new currency, the forint (financial stabilization). Its success was boosted by the build-up of substantial commodity stocks, rescheduling of the reparations obligations to the Soviet Union, and the West’s return to the National Bank of the gold stocks taken abroad at the end of the war. The stabilization relied largely on domestic resources, without foreign borrowing by the government. Average pay rates fell to about half their level in 1938, while the gap between manufacturing and agricultural prices was artificially widened, and the exchange rate between the forint and the pengo conversion rate set at an economically irrational level, so that it did not occur. By the end of 1946, it was clear that the stabilization policy had succeeded and the new currency was more or less able to retain its value.

The ownership structure of the Hungarian economy, immediately after the Second World War, was dominated by the private sector, but economic policy and the system of economic management were defined by market forces restricted by strong state intervention. The proportion of the state-owned sector then grew continually. The coalmines were nationalized on June 26, 1946, even before the stabilization occurred. This could still be defended economically as a rational measure, but the surges of nationalization in the next few years were designed to produce a complete change in power relations, not serve the purposes of a Hungarian economy struggling with reconstruction. The four biggest heavy industrial concerns were nationalized on December 1, 1946, followed by banks and firms they controlled in September 1947, so that the two-tier system of banking ceased. On March 25, 1948, a mere government order was issued to nationalize all factories or works employing a hundred or more workers, without any compensation for the former owners, of course. This turned about four-fifths of the industrial workforce into state employees. The dissolution or restriction of the private sector continued in December 1949 with the nationalization of all workshops and businesses employing more than ten people. The process was completed in 1950 by prescribing that the self-employed could employ a maximum of three employees. These campaigns of nationalization were accompanied by illegalities and show trials. One such trial involved the Hungarian and foreign executives of MAORT, the Hungarian-American Oil Company.

On paper, managing the economy in the short coalition period was the task of the specialist industrial ministry and the Finance Ministry, but the actual decision-making passed to the Hungarian Communist Party , the communist-led Supreme Economic Council and the National Planning Office founded in 1947. These organizations devised the principles and norms for the Three-Year Plan for 1947–9. After the communist take-over, the economic decision-making and direction passed institutionally to the People’s Economic Council.

Hungarian agriculture after the Second World War was in a grave state indeed. The organization of production had fallen apart. Most of the beasts of burden had perished in the war. (Only 41 per cent of the 1942 horse population remained in 1945.) The peasants had suffered serious equipment losses (half having no plough, harrow or roller), as wartime requisitions had further reduced an already low level of mechanization. The war damage and losses by Hungarian agriculture, at 1938 prices, were put at 3.8 billion pengos. Coupling those conditions with the difficulties of public supply, it was understandable that state intervention, production and labour obligations and compulsory produce deliveries should have come to dominate the normal market mechanisms. The economic difficulties and problems began when the state of emergency became permanent at a time when the development and financing of the various sectors in an already capital-starved Hungarian economy could take place only at each other’s expense. It can be shown that budget support for agriculture and its share of investment were disproportionately low in 1945–7, in the coalition period, but at that time, the restoration of industry, to some extent at the expense of agriculture, had not yet brought the irrevocable disproportions of later years. Peasants were certainly troubled greatly by the absence of credit, the low buying prices, the high taxes and the obligations to meet public supplies. The system devised by the [?& wartime official Béla] Jurcsek had been set aside, but new delivery regulations soon ensued, which gave minimal scope for selling on the free market and naturally encouraged the spread of black marketeering.

. In agriculture, it was essential to give producers personal incentives, which was done mainly through land reform. Although this was far from full or comprehensive, it confirmed Hungarian peasants in the belief that farming based on private ownership had a future. Without increasing their willingness to make sacrifices in that way, it would probably have taken much longer to restore the level of food production.

The 1945 land reform produced a significant change in the land-ownership structure, of course. Almost 400,000 people received private property for the first time and began farming on their own account, in most cases without the tools to do so and with scanty financial resources and experience behind them. The other important structural consequence was that it produced a big increase in the number of small-scale farmers. The average area of land received was only 5.1 cadastral hold (2.9 hectares). The newcomers and others with smallholdings found it disappointingly hard to earn a livelihood without the state assistance they needed and expected, in the presence of market controls and strictly imposed levies on their produce. Characteristically, agricultural prices after the 1946 stabilization only amounted to 45–50 per cent of what they had been before the war, which shows the extent to which agricultural policy and farming was subordinated in every respect to the stabilization process. Agricultural output in 1949 was still only 84 per cent of the 1938 output, which also meant that productivity levels in most branches of agriculture were significantly lower than in 1938. The stamina of the sector was very limited, but the country’s economic policymakers took no more account of that than they did of natural conditions.

The first three-year plan, which was designed to complete the post-war reconstruction, ran from August 1, 1947 until the end of 1949, when it ended in a surge of Stakhanovite work contests . The rise of industrial output exceeded the plan, so that it was more than 40 per cent higher in 1949 than it had been in the last year of peace. Behind the expansion lay industrial capacity that had been increased over the decade by a very high investment ratio and wartime expansion, coupled with a generally rapid rate of growth fuelled by the domestic economic factors of the reconstruction period. Early signs of the war hysteria of subsequent years were the fact that heavy industry grew fastest (by 66 per cent) and light industry slowest (by 20 per cent). Another sector whose strategic character earned it preference was transport, where most of the war damage had been repaired by 1949 and the level of equipment in some areas exceeded the pre-war level. The private sector remained dominant in retail and wholesale trading until it was overtaken by the nationalization. The new geopolitical coordinates caused foreign trade to undergo a complete change of direction, with the Soviet Union replacing Germany as the main trading partner. Hungary’s external economic scope narrowed sharply with the Cold War and the economic relations built up with the countries of Comecon, established in 1949, became dominant.

The economic changes affected the public in various ways. It has to be said in parentheses that the rapid reconstruction had much to do with the mechanism of social psychology known as the ‘liberation effect’. In other words, Hungarian society became convinced that there was a chance of creating a different world of new social and economic relations and was prepared to make major sacrifices to that end. One such sacrifice was the low rate of improvement in the standard of living. The high rate of investment meant that living standards at the end of 1949 were at least 15–20 per cent lower than in the last year of peace. Income levels were set very low during the stabilization, as can be seen in the consumption, real-income and living-standard trends. One essential change largely governed by the political sphere was a radical alteration in income distribution and wage relativities among the various social and occupational groups, with the traditional inequalities easing.

Establishing and operating a command economy

The starting point for the socialist economic system was a radical alteration in property relations. Radical restrictions were imposed on owning assets that could be used for production or obtaining an income and in general on private, individual ownership. All the production capacity was placed in state ownership, through state-owned enterprises and budgetary institutions, and the firms that they controlled in turn. A milder form of state ownership was the ostensibly cooperative ownership prevalent in agriculture and small-scale industry. However, the state played the decisive role in organizing such cooperatives, as the case of agricultural collectivization showed.

One general feature of the socialist system in the early 1950s was centralization and redistribution of the goods produced. This ambition was one reason for eliminating private ownership, the other being the desire to ensure state control. Self-evidently according to communist logic, a socialist state unable to control production would be unable to ensure ‘equal’ distribution of the goods. One of the main political and social motives behind eliminating private ownership was to confine and eliminate autonomous organizations in society and place all individuals and social groups in a position of dependency on the regime.

The economic system created after market coordination had been eliminated was known as a ‘strictly centralized, plan-directed economic system’ (central planning). The main attributes of such a system are an utterly centralized structure, and an assemblage of economic institutions operated through detailed, central-planning directives and often descending into ‘plan anarchy’. Rationalism in the processes of the economy often gave way to acts motivated by political wishful thinking (voluntaristic behaviour), which obstructed the self-regulating mechanisms of the economy. Once production had ceased to be driven by real demands and economic conditions, chronic shortages of goods, raw materials and labour naturally set in and dogged the operation of the socialist economy.

The industrialization ceaselessly promoted by the communist politicians of Hungary amounted in practice to a forced rate of development of heavy industry (forced industrialization), behind which lay development of the arms industry. Annual direct and indirect defence spending in the 1950–52 period was amounting to a quarter of budget expenditure. Between 1949 and 1954, almost 67 million forints were invested in production, of which half went into the raw-material production and engineering. Hungary became a ‘land of iron and steel’. An extensive approach to the use of resources meant that everything from consumption to income distribution and employment policy as subordinated to the goals of industrialization and industrial production.

The forced pace of development indeed brought very rapid increases in industrial capacity and output, so that growth reached 20 per cent in 1953—ten times the average growth rate between the wars. By 1954, the contribution of industry to the production of national income exceeded 50 per cent.

The sectoral structure of national income in 1950–56 was as follows:

Source: Peto, Iván, and Sándor Szakács (1985): A hazai gazdaság négy évtizedének története 1945–1985 (Four Decades of the Hungarian Economy). I. Budapest: KJK, 202. pp.

It has to be said in passing that the question of the cost of growth did not arise, because the criteria of economic rationality had been suppressed. Cost factors hardly played any role in planning. The verdict on an investment depended on political will, not economic considerations, even if little economic nous was needed to see that the outlay would never be recovered. The aggregate value of investments still incomplete in 1954 was 14 billion forints. The smelting and steel-making capacity that had been built required constant imports of raw materials and energy. It would have paid better, under normal political and economic conditions, to import the finished products.

Among the memorials to this economic policy were the iron and steel combine at Dunapentele (Sztálinváros, now Dunaújváros), the many units of the Diósgyor ironworks, and several ‘socialist new towns’ based on heavy industrial development, such as Komló, Tatabánya and Várpalota.

Industrial production became extremely hectic and uncertain. The annual and five-year economic plans (central planning) were laid down by law, although in some periods, the targets were changing every month. A particularly drastic and unrealistic change was made to the first five-year plan in 1951, when some of the original figures were raised by 60–80 per cent. Workers were encouraged to keep increasing their output not with pay, but with psychological and even legal pressures. Industries were divided into segments and units, but there was little or no coordination among them. Except in priorities industries, there were wide fluctuations in performance, while the quality of production was extremely low throughout the economy, as quality targets were made subordinate to quantitative ones. Often the real costs of production were not covered by the wholesale or retail price.

Like agriculture, the infrastructure was neglected during the period, with no development and even sinking levels of provision. Hungarian railways had been up to international standards, but it became obsolescent in several respects. Apart from goods haulage, road transport stagnated and the number of private cars and other vehicles dwindled, so that road improvements were not a priority either.

National income per capita rose by about 30 per cent in the first third of the 1950s, to a level significantly higher than before the war, but still less than two-thirds of the European average, which was the same proportion as it had been before the Great Depression. However, the standard of living was not rising, but falling, because of the huge income deductions and very high rate of investment. The anarchy of the command economy brought chronic shortage and crises in public supplies, so that rationing of bread, sugar, flour and meat had to be reintroduced in 1951. Solvent demand was held down in the early 1950s by continual rises in consumer prices and by the plan and peace-loan issues, subscription being ostensibly voluntary but in fact a compulsory [?& act of political submission]. Such state bonds managed to draw in 6.7 billion forints from the public. Through the various measures, the disposable real income of workers and employees in 1952 was only two-thirds of what it had been in 1938, whereas in 1949, the proportion had been 90 per cent. There was more or less general impoverishment and proletarianization, in line with the political and ideological expectations.

The processes were not changed fundamentally by the events of June 1953 (New Course), but corrections were made in several respects. Imre Nagy’s first term as prime minister brought a substantial drop in the investment rate, especially in heavy industry, accompanied by marked rises in the investment allocations for agriculture, the food industry and light industry. There was also some reduction in the disproportions between prices and wages. But when Nagy fell in the spring of 1955, things more or less continued where they had left off in the summer of 1953. By the first half of 1956, the chronic shortages of raw materials and energy were causing serious difficulties in production, and the foreign-trade deficit was widening to a drastic extent. In September, the leadership called on the Soviet Union for assistance in the form of extra deliveries of energy and raw materials and postponement of the payments it was due to make. The Soviet Union agreed to this, but the policy line remained fundamentally the same. Little more than minor adjustments were proposed in Hungary during the discussions about the 2nd five-year plan.

AAs the communist party gradually opened a monopoly of power, its agricultural policy objectives changed. By the autumn of 1948, the prime purpose was to eliminate private ownership, and the Central Committee of the Hungarian Workers’ Party (MDP), at a meeting in November that year, decided that agricultural collectivization should be completed within three to four years. The increase in the number of agricultural cooperatives accelerated. But despite strong, violent action by the authorities, only a third of the farmland had been collectivized or nationalized as state farms by 1956, while the other two-thirds remained in private hands.

With hindsight, it can only be described as tragic that in a country where agriculture had generated a decisive proportion of national income, the sector should have been burdened by impossible levels of deductions, instead of undergoing the development and receiving the funding and investment it needed. The sums siphoned off from agriculture were initially used to fund necessary rehabilitation of industry, but as the command economy was introduced, it went instead on industrialization at an impossible pace and on a wanton scale, to turn Hungary into a ‘land of iron and steel’. The campaign of collectivization in 1948–9 brought senseless victimization and severe economic losses to the peasantry and the whole country.

Just as economic rationality failed to apply in industry, commerce and transport in the early 1950s, so rational criteria of ensuring production and matching produce to natural conditions were lacking in agriculture as well. The emphasis on cotton was a prime example of introducing an alien crop little suited to the conditions. The drought of 1952 was not elicit any reduction in the compulsory product deliveries the peasants had to make to the state. The normal market forces and mechanisms eliminated in the 1950s were replaced by the organized anarchy of a command economy that followed from the methods of economic direction being applied. In the event, there was no way of maintaining the normal course of production once individual incentives had been abolished and a bureaucratic system of planning commands (central planning) could not take over the market’s role as a gauge of value. The agricultural policy and associated system of compulsory deliveries under the ‘war communism’ of the period embodied a sometimes-tragic degree of irrationality and absurdity. There could be nothing rational or normal about an agricultural (and economic) system that eroded its own capacity to reproduce. The effects of managing the economy solely according to political criteria, through planning directives, became plain when agriculture and the rest of the Hungarian economy came to the brink of collapse in 1952. The levies were not reduced, and as the planning targets were raised, peasants found their own rations and seed grain being confiscated by the state, irrespective of the size of their holdings. Supplies on almost 800,000 farms were incomplete in 1952 and fodder shortages became chronic. It became next to impossible for peasants in the 1950s to make a living independently, as economic and political pressures on them increased.

Naturally, increasing numbers of country people voted with their feet after 1949. The number of farms had fallen from 1,633,000 to 1,270,000 by 1953 and the number of active earners in agriculture was down by about 300,000. (Some 264,000 independent peasant farmers left agriculture for good between 1949 and 1956.) This led to a rapid increase in what was known as state reserve land, in practice left fallow and untilled. The total area of such land already surpassed 1 million cadastral hold (570,000 hectares) in 1953.

Taxes increased threefold in the five-years after 1949. An indication of the burden this represented is that a quarter of the farms were unable to meet their delivery quotas or pay their taxes even in 1948–9. Thereafter the quotas rose steeply. Compulsory produce deliveries accounted for hardly more than a fifth of state food stocks in 1950, but in 1952, the proportion was almost three-quarters. Perhaps more conspicuous still is the scale of the levies and deductions. Free-market prices rose sevenfold between 1949 and 1956, but the prices paid by the state for compulsory deliveries increased only one-and-a-half times over. More than 400,000 peasants were prosecuted between 1948 and 1955 on charges of endangering public supplies, which in most cases meant they had failed to meet their delivery quotas.

The communist system strove essentially to bring the agricultural sector, like industry and commerce, into public ownership. This was to be done through forced collectivization, for in terms of state control, the agricultural cooperatives and the state farms were interchangeable. The improvised cooperatives produced by force were often economically unviable and lacking in the tools, seed and labour they needed. Following the pattern of the Soviet kolkhoz meant that any machinery they used was hived off into machinery depots. These began to be founded in 1948 and a national network was largely in place by 1950, when there were 361. The efforts to make the cooperatives and state farms viable swallowed all the agricultural investment, but the performance of the large majority remained 20–25 per cent behind that of the private holdings. Agricultural yields as a whole stagnated at levels at or lower than those before the Second World War. Yields of wheat per unit area rose by an annual average of 0.8 per cent between 1949 and 1956.

It also followed essentially from the dictatorial system that the planned economy proved capable of increasing only its targets, not fulfilment of them. Agricultural policy had to be implemented by a new apparatus of tens of thousands, constantly hampered by lack of training and expertise. The absurdities of the planning process and the excessive regulation enhanced the prevailed anarchy, which left wide scope for arbitrary acts and atrocities against the producers.

The crisis that deepened during 1952 was relieved to some extent in the summer of 1953 by the New Course of policy announced by the new prime minister, Imre Nagy. Taxes on agriculture were reduced (albeit temporarily) and so were compulsory produce delivery quotas, which were applied to fewer products. Restricted rights were given for peasants to withdraw from agricultural cooperatives. However, framing and implementation of these essential changes were simply sabotaged by the apparatus. A further turn of political events ensued at the beginning of 1955, when Mátyás Rákosi regained power, and this was felt again in the daily lives of the peasantry. Produce collections resumed with full force, along with the collectivization campaign, speciously defended consolidation of land holdings, and a ban on withdrawals from cooperative farms. The old left-wing course resumed where it had been broken off in the summer of 1953. It led, of course, to higher political tensions. The urgent need for alterations was emphasized in the agricultural debate of the Petőfi Circle on June 20, 1956, where Zoltán Vas called in unrealistic to plan for full collectivization of Hungarian agriculture.

Only the 1956 Hungarian Revolution brought a temporary respite in the Stalinist policy towards agriculture and the peasantry. Heading the list of rural demands in October were the abolition of compulsory produce deliveries, tax reductions, redress for the injustices done on the pretext of consolidation of land holdings, restoration of a free market in land, freedom to withdraw from and disband agricultural cooperatives. The only one to be granted in full was abolition of the compulsory produce deliveries, which happened twice within a few weeks, under an order by the Nagy government at the end of October, and a similar by the Kádár regime after the revolution had been crushed.

The conclusion must be that the Hungarian economy proved capable, in the long decade from 1944 to 1956, of restoring most of the war damage. The transformation and structural alteration of the economy associated with the communist assumption of power amounted in many respects to a ‘seeming modernization’. It brought pointless economic sacrifices, which diverted the Hungarian economy and society away from the general trends in Europe for many decades to come. The tensions arising out of these faulty economic policies were a major factor behind the crisis that blew up in 1956.

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This page was created: Friday, 5-Dec-2003
Last updated: Friday, 5-Dec-2003
Copyright © 2003 The Institute for the History of the 1956 Hungarian Revolution

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