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Postwar Conditions and Reparations.

It would be impossible to appraise Hungary's enormous difficulties in the armistice period without considering what the Soviet occupation was doing to Hungary's economy. Without such understanding, no one can comprehend why political and diplomatic questions were settled as they were.

One of the fundamental difficulties in the armistice period was the fact that Soviet Russia was exploiting Hungary. Soviet methods for this purpose were efficient, far more than the German devices, and it was imperative that endeavors be made to stop the various forms of exploitation. The most pressing task of the provisional government was to provide for the physical survival of the people. This situation provided the Russians with their most effective means for applying pressure. Soviet interference in economic matters was frequently connected with major political goals.

The armistice agreement compelled Hungary to furnish goods, facilities and services for the occupying army. The Soviet Union took the old principle of "la guerre doit nourrir la guerre" seriously, and the Red Army lived off the land. Besides carrying the legal burden of the armistice obligations,1 Hungary suffered through illegal seizure and large scale looting. The notion of "war booty" was interpreted most extensively. Valuable machines, and in numerous instances whole plants, were dismantled and removed to the Soviet Union. Grains and other victuals were seized in huge quantities. Almost one-half of the livestock was taken out of the country. Safe deposit boxes were forced open and their contents removed. Whether the property was private or public did not make any difference. Private homes, public warehouses, stores, government agencies, and banks all received the same treatment. Legations of neutral powers, such as Switzerland, Sweden, or Turkey were not spared.

Obviously these large scale lootings could not have taken place over a period of several months unless approved by the Soviet High Command. When Hungarian political leaders complained to the highest Soviet authorities Voroshilov, Pushkin, or Susmanovich 2 the usual answer was that the looters were deserters from the Red Army and that the Soviet authorities would be happy if the Hungarian authorities assisted in capturing them. After such an answer, Count Geza Teleki asked


Susmanovich about the number of these deserters. The Russian replied that there were, in Hungary, about 150,000-160,000 deserters. Actually masses of looters in Soviet uniform could not have operated without some organization and tolerance on the part of the Soviet High Command. There were no Hungarian armed units, and any forceful action against the so-called deserters would have been considered as a treacherous attack against the Red Army. If a private individual complained to the Soviet authorities about the looting of the Red Army, his complaints were rejected and called slander because "soldiers of the Red Army would not commit robbery". Thus if anyone mentioned that he had been looted, he hurriedly added, "of course, by Finnish whale hunters disguised in Soviet uniforms". The propaganda of Goebbels did much less harm to Communism than the behaviour of the Red Army.

The looting violated the pertinent customary and contractual rules of international law, which determine "war booty" and prescribe that an occupying power is responsible for the population living on territories under its control. But the rules of international law were a poor consolation to a people at the mercy of a ruthless occupying power.3

The armistice agreement authorized the Red Army to issue currency to be redeemed by the Hungarian Government. In addition, the Soviet High Command was entitled to demand payments from the Hungarian Government to cover the expenses of the occupation. But the Debrecen government had no money or any other means to meet these and other financial obligations.

The Soviet High Command gave the provisional Hungarian Government, as a loan, part of the stock of bank notes which had been seized by the Red Army in the various institutions and banks in Hungary.4 As the bank note printing equipment had been removed to Germany, the government quickly procured new equipment of necessity. This became the main source of revenue for the new government. From this time onward, the problem of securing the necessary money for the governmental organization and for the occupation costs was mainly a problem of obtaining paper supplies in sufficient quantity. In the troubled postwar months the authorities found it impossible to proceed with the assesment or collection of taxes. In any case, there would have been few solvent taxpayers. Almost everybody had been looted and economic activity was only very slowly reviving. The state revenue covered about 10 percent of the expenditures between July 1, 1945, and June 30, 1946. It was necessary to rehabilitate quickly at least part of the industrial plants for the fulfillment of reparation obligations. This necessitated investment, and the plants produced little for the home market. Because of a chain of these and other related circumstances, Hungary experienced


a record inflation which might be considered unique in economic history.5 On April 1, 1945 the value of one dollar on the black market was 250 pengos; on December 31, 1945, 265,000 pengos; on May 31, 1946, 52,000,000,000 pengos; and in the last days preceding the stabilization, 4,600,000 quadrillion pengos.6 This enormous inflation completely disintegrated the Hungarian economic system. The average monthly salary of the government officials varied between one and three dollars in the highest categories and between one dollar and fractions of a cent in the lower categories.

The stabilization was carried out with the help of the gold reserves of the Hungarian National Bank, returned to the Hungarian government by the American authorities. This gold reserve, taken into Gerrnany by officials of the Hungarian National Bank in late 1944, rendered a great service to the country. Had it remained in Hungary, the Red Army would have seized it as war booty, according to its consistent practice.7 On August 1, 1946 the forint became the new monetary unit. One forint was equivalent to 400,000 quadrillion pengos (30 zeros).

Meanwhile, Hungary had to begin reparation payments in 1945 under desperate economic conditions. Article 12 of the armistice agreement obliged the country to pay two hundred million dollars to Soviet Russia and one hundred million dollars to Yugoslavia and Czechoslovakia over a period of six years, and in commodities.8 The first economic agreement between the USSR and the provisional Hungarian Government pertained to the fulfillment of this obligation. This agreement on the delivery of goods by Hungary was signed in June, 1945, under Soviet threats, and provided for deliveries of industrial equipment, vessels, grain, livestock, and other articles, to be made in equal instalments annually during the period from January 20, 1945, through January 20, 1951.9 The value of the goods to be delivered as reparations was to be determined according to 1938 prices in American dollars, with 15 percent added for industrial goods and 10 percent for other goods. In fact the prices fixed by the Soviet Union were arbitrary, and the actual cost of producing or purchasing the goods to be delivered as reparations was greatly in excess of the original amount. The Soviet dictated bilateral agreement actually defined the prices of the commodities and the conditions of delivery in such a way that it doubled and in some cases tripled the original amount of reparations. Moreover, in case of late deliveries, five percent interest per month was to be paid in goods. The bulk of the goods to be delivered were industrial products a particularly difficult obligation for postwar Hungary. It was a great hardship to see vital branches of the badly damaged and slowly reviving Hungarian industry, in this crucial postwar period, working for the fulfillment


of reparation demands instead of reconstruction.10 Thus in June, ]948, Soviet Russia could easily cut the remaining reparations payments in half and grant some other concessions,11 and still receive more than was provided for in the armistice agreement and the peace treaty.

The armistice agreement, as well as some provisions of the Potsdam Protocol both signed by the three major victorious powers was interpreted by the Soviet Union with disastrous consequences for Hungary. The country was isolated. In 1945 Hungary had no trade relations with Western countries. and received practically no economic support from the West; thus at this most critical period she was left at the mercy of Soviet Russia.

Economic Cooperation Agreement.

A further major step on the road to the economic conquest of Hungary was the Hungarian-Soviet economic cooperation agreement, the enactment of which has an interesting background.

The Communist Minister of Commerce and Transportation, Gero, and the Social Democratic Minister of Industry, Antal Ban, were sent to Moscow in August, 1945, to conclude a short term trade agreement, which they signed on August 27. This agreement provided for a bilateral exchange of goods for the period from September, 1945, to December 31, 1946, to the value of about $30 million. It also provided for Hungarian factories to spin thread from Soviet raw cotton and produce fabrics for the USSR. This was the first example of the so-called "hirework" contracts.12 The same day, Gero and Ban, without proper authorization of the Government, signed another agreement of great importance, concerning general economic cooperation between Hungary and the Soviet Union. The latter agreement, which was to run for five years, had as its announced purpose, the facilitating of Soviet-Hungarian economic relations and the development of Hungary's economy by joint Soviet-Hungarian commercial organizations. This was patterned after the joint Soviet-Rumanian companies set up earlier in the same year following the economic cooperation agreement between the Soviet Union and Rumania, signed on May 8, 1945.

The provisional Hungarian Government was at first reluctant to ratify the economic cooperation agreement asserting that such important commitments could not be accepted until the conclusion of the peace treaty. Pressed to discuss it, the council of ministers later accepted the agreement. Its members who opposed ratification were assured that Marshal Voroshilov negotiated in the matter with the Hungarian Government as chairman of the ACC.13 Subsequently American and British protests took place, but these Allied notes, couched in very mild


terms,14 were addressed to the powerless Hungarian Government. The armistice agreement put Hungary under the control of the ACC, in which both protesting Western powers were members. In view of the fact that the chairman of the ACC put pressure on the Hungarian Government, an effective British and American intervention could have taken place only in the ACC or in Moscow. The Western powers vainly protested in both places.15 The provisional Hungarian Government, under Soviet military occupation and the tutelage of the ACC, and undermined from within by the Communist Party, simply could not be expected to resist effectively Soviet pressure for any length of time.

In the case of the economic cooperation agreement, the delaying maneuvers of a few Hungarian non-Communist political leaders were successful. The ratification did not take place under the provisional Government. The political committee of the National Assembly did not recommend the economic cooperation agreement to the National High Council for ratification until December 20, 1945, taking cognizance of the statement that this agreement would not prevent Hungary in any way from concluding any agreements whatsoever with other states.

On the same day the National High Council ratified the agreement and the Foreign Ministry informed the Soviet and American envoys and the British political representative in Budapest of this action.16

Proposals for Inter-Allied Assistance.

In view of the rapidly deteriorating Hungarian economy, the Hungarian minister of finance soon submitted to the Soviet economic advisor of the ACC, a report on the Hungarian economic and financial situation. This report concluded with the following statement:

The only way that we can see out of our serious financial and economic difficulties is a plan of reconstruction, to be carried out with the assistance of the Allied Powers, the objective of which would be to raise production to a substantially higher level than at present, and restore equilibrium in the country's economic and financial affairs.

Since, however, we cannot work out a plan of reconstruction until it is known what support we may count upon from the Allied Powers, there is an urgent necessity that the Allied Powers should send a commission which, with the cooperation of the Hungarian Government, would examine the economic and financial situation of the country and the methods by which assistance could be given. We should expect from the work of the commission a statement of what measures and what foreign assistance is necessary, in the


present economic state of the country, with its present burdens and requirements, in order that the country may recover economically and be able to meet the triple obligation arising from reparations, other obligations under the Armistice Agreement and pre-war foreign debts.17

But the Soviet chairman of the ACC refused to accept or even consider this report. Previously, in October, 1945, Marshal Voroshilov had almost ordered the imprisonment of Arthur Keresz, President of the Hungarian National Bank, because in a memorandum Keresz had proposed that Hungary should join the International Bank for Reconstruction and Development and the International Monetary Fund.18

The Soviet Government also showed the same negative attitude towards American proposals made in accordance with the provisions of the Yalta Declaration on Liberated Europe. An official American communique aptly summed up the history of these American endeavors:

Since December, 1945, the United States Government has taken the initiative in proposing that the Soviet Union, Great Britain, and the United States consider means whereby the three powers, as contemplated in the Crimea Declaration, could assist Hungary to rebuild its shattered economy. These proposals, however, have been rejected by the Soviet Government.

In a meeting of the Allied Control Commission in Budapest in December, 1945, the United States Representative recommended the establishment of a subcommittee of the Control Commission to consider questions of Hungarian industry, finance, and economics. This approach was unavailing.

Subsequently, in a note to the Soviet Government on March 2 1946, this Government again raised the issue by reviewing the grave economic plight of Hungary, by calling attention to the over-burdening of that country with reparations, requisitions, and the costs of maintaining large occupation forces, and by requesting the Soviet Government to instruct its Representatives in Hungary to concert at an early date with the United States and British Representatives there in devising a program which would bring to an end the process of disintegration in Hungary and at the same time provide a framework within which the rehabilitation of the country and its reintegration with the general European economy might be accomplished.

In a reply dated April 21, A. Y. Vyshinski, the Soviet Deputy Foreign Minister, rejected the United States proposal on the ground


that the working out of an economic rehabilitation plan for Hungary fell within the competence of the Hungarian Government.19

Vyshinsky's reply was typical of the constant Soviet policy followed in Hungary. Joint action was always barred by the Russians, who invoked either the exclusive rights of an occupying power or the independence of the Hungarian state.

An American note of July 23, 1946, delivered to the Soviet Government,20 again requested but without any results that instructions be sent to the Soviet representative in Hungary to concert with the American and British representatives there with regards to halting the economic disintegration. This note pointed out that half of the current output of Hungarian manufacturing industry which was operating at only one-third of the pre-war level, was absorbed by reparations and other requirements of the occupying power. In the case of heavy industry coal, iron, metal, and machine production reparations alone absorbed between 80 and 90 percent of the current output. Moreover, the note gave detailed data concerning the economic burden placed upon Hungary by the Soviet occupation forces and the war damage to the Hungarian manufacturing industry. As to the $300,000,000 reparations, the note stated that at the time of the conclusion of the Armistice with Hungary, the U. S. Government believed:

that with careful management, Hungary might have been able to pay $300,000,000 in reparations. It did not foresee that Hungary's production capacity and national income would be cut to half or less in the space of a few months, and that the reparations payable by Hungary in 1945, for example, would equal 24 per cent of the national income. Likewise it did not foresee that Hungary would be required to surrender large quantities of goods and services over and above its reparations obligations.

Concerning the Soviet accusation that any outside economic help would mean interference in Hungary's domestic affairs, the American note retorted:

The United States, in proposing tripartite discussion of an economic program for Hungary, had in mind the discussion of aid and assistance which the three powers could give to Hungary, once the economic obligations of that country were carefully defined and scheduled so as to permit their discharge without depriving the people of Hungary of their means of livelihood. The United States


has no desire to impose a plan for Hungary's economy, but does desire to lend assistance to Hungary through a concert of policies such as was envisaged in the declaration made by the three powers at the Crimea Gonference.21

The Soviet Government, in a reply,22 nonetheless disputed the facts regarding the economic situation in Hungary as explained in the American note, and at the same time again rejected the proposal of the United States for a tripartite investigation and a plan aiming at the economic restoration of Hungary. The Soviet note reiterated the usual Soviet argument that "the working of such a plan belongs exclusively to the competence of the Hungarian Government".

The American position was expressed once more in a note of September 21, 1946. The note reaffirmed the facts presented in the previous American communications addressed to the Soviet Government concerning the economic situation in Hungary, and stated regretfully that because of the non-cooperative attitude of Soviet Russia it would be impossible to obtain agreement as to the exact situation existing in Hungary, and as to the causes of that situation. Accordingly, the United States Government considered "that no useful purpose will be served by further assertions and denials". As a conclusion to the exchange of views between the two governments, the American note again referred to the joint undertaking entered into by the three major victorious powers at Yalta, and pointed out that "the Soviet Government not only has refused to implement the undertaking freely assumed by it at the Crimea Conference, but moreover has failed to indicate its reasons for so refusing". 23

So much for the agreements at Yalta. The Soviets had flouted them openly and often. But there were other Allied agreements made at Potsdam in the summer of 1945. And the Russians soon managed to break these too.

Potsdam Agreement and Soviet-Hungarian Joint Companies.

According to Part III of the Potsdam Protocol, reparation claims of the USSR were to be met mainly by removals from the eastern zone of occupation in Germany, as well as by German foreign assets in Bulgaria, Finland, Hungary, Rumania and Eastern Austria. But the arbitrary Soviet interpretation of the phrase "German foreign assets" had a disastrous result throughout Eastern Europe. The Soviet Union considered as German assets, not only German war investments and other German properties, but even all properties and rights seized by the Germans during the Nazi occupation. This interpretation violated the general principles of law and the specific rules of international law. In addition, it contradicted


the declaration of London issued on January 3, 1943, by eighteen Allied Powers, including Soviet Russia, regarding forced transfers in enemy controlled territories.24 This abusive interpretation was of particular importance in reference to Austria and the considerable Austrian properties in Hungary. In the definition of "German assets" the Russians included even property which was taken under duress from the Austrians or Jews by the Germans after the Anschluss.25

Thus after Potsdam, Soviet Russia, as successor of Germany, claimed to be the ownner of a considerable part of the Hungarian economy. Instead of removing the former "German foreign assets" to the Soviet Union or running them as exclusive Soviet enterprises, the Soviet government offered to hand them over to the jointly owned companies, to be established under the economic cooperation agreement. This Soviet offer was used as one of the arguments for the ratification of the economic cooperation agreement between Hungary and the Soviet Union. It was stated that otherwise the Soviet Government would simply ship to the Soviet Union all former "German assets" that were movable. Some of these assets were vital to Hungarian economy.

Hungary had no really effective means of defense against the abusive interpretation given to the expression "German foreign assets", and used by the Russians to "snowball" through all sections of Hungarian economy. If the Russians, as successors of Germany, claimed to have interest in an enterprise, and this enterprise in the course of regular commercial relationships had claims on other enterprises, the Russians claimed to have interests in all these enterprises which eventually embraced the whole economic system of Hungary. The Russians moreover declared themselves to have acquired only the net assets and credits without any debts or liabilities whatsoever. All liabilities were thoughtfully left to the non-Soviet part-owners and creditors. This Soviet interpretation of the Potsdam agreement was later strengthened by the peace treaty.26

At the end of the war Germany owed over one billion marks and about two billion pengos to Hungary.27 Russia promptly demanded from Hungary two hundred million dollars as equivalent of certain German claims in Hungary, whereas the aforementioned Hungarian claims against Germany were considered null and void. After protracted negotiations the Russians announced themselves willing to settle their Potsdam claims for a lump sum of $45 million, plus certain concessions and privileges for the Soviet controlled enterprises in Hungary.28

Thus the combination of the Potsdam Protocol and the economic cooperation agreements assured a practically free hand to Soviet Russia in the conquest of the Hungarian economic system. Under these circumstances Hungary agreed to establish joint companies with theoretically


equal Soviet-Hungarian participation but actually under exclusive Soviet control. The general manager in charge of the operations of each company invariably was a Soviet citizen. The Hungarian chairman was a mere front. Through these joint companies the Soviet Union has, since 1946, controlled Hungarian aviation, river transportation, crude oil and petroleum refining industries, the bauxite industry, and other connected industries and enterprises.29 These companies were granted exemption from income taxes and enjoy other important privileges. In addition to the joint-stock corporations, exclusively or overwhelmingly Soviet-owned enterprises were created by the dozens with the help of the former German interest in the various industrial, commercial and financial companies. These Soviet enterprises enjoyed privileges almost tantamount to extraterritorial rights, and operated under the supervision of the Soviet Bank in Hungary.30

Thus in the armistice period Soviet control over Hungarian economy was gradually established by a variety of means: looting (labelled sometimes as "war booty"), reparations, German assets, creation of joint companies, and Soviet enterprises and trade agreements. The calculated use of trade agreements diverted Hungarian goods from their usual markets and decreased the volume of commerce with the West. Moscow determined, arbitrarily, the prices of both raw materials and finished products in these relationships. At the conclusion of peace, the Hungarian economy was well prepared for further Sovietization and integration toward Moscow.


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