Historical story

Attention! Inflation

We had two hyperinflations in Poland - at the turn of the 1980s and 1990s and less than 70 years earlier. Will history repeat itself?

Prices are rising practically overnight, the real value of money in our wallets and in bank accounts is decreasing. The Central Bank is raising interest rates, and loan installments - including housing installments - become more expensive. Inflation! In a market economy, the prices of some products and services are rising, while others are falling. So what's the problem? We are talking about inflation when we are dealing with a widespread increase in prices, in addition to products and services necessary for an average citizen. In the People's Republic of Poland it was said that everything became more expensive, but the locomotives became cheaper. Unfortunately, this cut did not offset the increases.

Contrary to the opinions of the most dogmatic neoliberals, it is possible to live with inflation. It accompanies most European societies. The last, significant increase in inflation in our western neighbors is a by-product of various anti-crisis shields. You can live with inflation when it is under control. It can even be recovery for the economy. However, when it slips out from under it, it grows like a snowball, which is extremely difficult to stop. Hyperinflation is already a drama for the economy and households. We had hyperinflation relatively recently in Poland - at the dawn of the Third Polish Republic and at the beginning of the Second Polish Republic.

Inflation costs money, and so does fighting

In the times of the People's Republic of Poland, prices were regulated. They were simply set by the government. The last Polish government of Mieczysław Rakowski, in which the liberal Mieczysław Wilczek was responsible for economic policy, partially resigned from this mechanism.

The de facto building of capitalism was started by the Rakowski government by introducing, inter alia, ultraliberal law on economic activity - which is not prohibited, is allowed. The government also partially abolished price regulation, but only on agricultural products. The rest were controlled and therefore unavailable. Money depreciated. The hedge against the loss was investing in industrial products and hard currency. Poorly conducted price liberalization accelerated inflation. It was also influenced by saving the budget deficit by printing empty money.

The de facto building of capitalism was started by the Rakowski government by introducing, inter alia, ultraliberal law on economic activity

At the beginning of the Third Polish Republic, the economy was paralyzed by inflation, even exceeding 100% per month. The budget deficit reached 12% of GDP. Therefore, Balcerowicz's plan assumed the suppression of price increases, which would enable further system reforms. The tools were, among others budget cuts, the abolition of subsidies for many goods, the liberalization of prices, wages and interest rates, and the convertibility of the zloty. The social costs were huge. Opponents of Balcerowicz's plan argued that the cure turned out to be more harmful than the disease. At the end of 1990, unemployment reached 6%, two years later - 16.4%. Real wages fell by 1/4, GDP fell by 12% (5% was assumed). Although it was finally possible to suppress hyperinflation, prices continued to rise by 3–4% per month (42–60% annually).

For citizens, this meant a real drop in wages and an increase in prices. For example, the prices of coal and gas increased by 400%, electricity by 300% . Overall, prices have risen by 80% instead of the projected 45%. The increase in interest rates caused enormous problems in agriculture, which traditionally took out loans for future crops, troubles and bankruptcies of small and large enterprises.

For inflation, Grabski

The authorities of the Second Polish Republic also struggled with a huge budget deficit. Attempts were made to reduce it by printing money. The internal indebtedness of the state grew. Empty money and deficit fueled inflation. An additional catalyst was the hyperinflation in Germany and the collapse of the brand's exchange rate. The Polish mark was becoming worthless money. In 1923, the highest denomination of the brand was 10 million (3 years earlier - 10,000). In the same year, $ 1 cost 5 million marks.

The Witos government was unable to cope with the difficult economic situation. In December 1923, a new cabinet was established, headed by Władysław Grabski, economist and politician of the National Democracy. The Prime Minister received special powers of attorney from the Sejm, incl. could issue decrees with the force of statutes. From the first days, Grabski's cabinet started introducing fiscal and currency reforms.

The authorities of the Second Polish Republic also struggled with a huge budget deficit. Attempts were made to reduce it by printing money.

The former was to provide income to the state budget. Property tax was introduced, income tax was increased, as well as other direct levies. The government sold some of the state's assets, and the most profitable industries (e.g. alcohol, tobacco, sugar, matches) became a state monopoly. The reform brought spectacular results. As early as 1924, the Seym adopted the budget with a deficit of only 10%.

The currency reform introduced a new currency - the Polish zloty. Currencies were exchanged according to the scheme of PLN 1 - 1.8 million Polish marks. The dollar cost PLN 5.18. In order to implement the currency reform, an independent Bank of Poland and the State Mint were established. The reform took effect, the currency stabilized. Social costs were high but inevitable.

Source:

  • Sławomir Węglewski, Economic reforms in Poland 1988-2009 , Financial Observer, 4.11.2009.

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