Hungarian Bond Story

Bruce Krasting's picture
I was rummaging through some old stuff and found this:

Here is a close up of the legend:

As you can see this is a $500 Hungarian bearer bond issued in 1924. It
is worn, but still pretty. This is how they printed money back then. They
issued bonds. Sound familiar?

A bit of history. My father bought these and hundreds of others like it
after WWII in Zurich, Switzerland. Czech, Polish, Yugoslav and
Hungarian bonds. The pile was six inches high. They stayed in a closet
until I got them in 1980. Years later, with the help of the Foreign
Bondholders Protection Agency I was able to peddle the pile for a few
pennies on the dollar. I kept this bond as a reminder.

There is a stamped legend on the front of the bond that says it was
restructured in 1937. At that time the principal was rolled over to
1979. The interest rate was reduced to 4.5% from 7.5%. A forty-year
extension of the principal, the yield was cut in half. A lousy deal for
the bondholders.

Attached to a bearer bond are coupons which one clipped and sent to a
bank for collection. The following is a picture of the remaining
coupons. Presumably the August 1941 payment was made. But no effort was
made to collect on the February 1942 coupon. Not hard to imagine why.

Fifty years later the $500 of principal and the $1,250 of accrued
interest were worth $40.

In 1924 Hungary was a prosperous nation and could issue debt because
people believed it would be paid back on a timely basis and in the
meantime it was a “store of wealth”. Banks were suspect, but a
sovereign credit was as good as gold. And this store of wealth could be
transported across borders.

Things changed in the first 13 years in ways that could not be
anticipated. An effort was made to formally restructure what were
un-payable debts. The evidence is that partial interest continued for
another five years and then it was worth nothing.

There are very few similarities to the Hungary of 1924/37/42 and
Hungary/PIIGS/etc. of today. First and foremost there are no attractive
looking, negotiable bearer bonds. But electronics has made the debts
more mobile then ever. There is no war in Europe to destroy the value of
a debt. Today there is just too much debt. That alone will destroy its

The observation is that many countries defaulted over the years. Every
country south of Texas went bust in the 80’s. Each time the bondholders
got whacked. Some debts just got rescheduled at a lower rate. Some paid
nothing at all. The difference between 1945 in Europe and the problem
countries in the EU today is that the numbers are so crazily large. The
deflationary implications of restructuring a few trillion in debt are
difficult to fathom. But history does have a way of repeating itself.

Another takeaway from a review of this bond is that it was backed by
gold. Of course there was no gold. Only ink that said there was. And
today we are still talking about this very same subject. Ink is not
gold. Amazing how little things change.