The approach is straightforward and firmly empirical, using simple statistics and diagrams to illustrate the major points of theory and evidence. A consistent framework is used to explain the nature of the relationship between inflation and monetary growth in all countries under study.
This book discusses the origins and similar nature of the currencies of the socialist countries, and their value base; analyses the money supply process; studies the relationship between money and prices; reviews various theories of the nature of socialist money; and asks why there is financial crisis in the Soviet Union.
A Short History of Socialist Money is written in a clear and accessible style that will appeal to general readers and students interested in monetary economics, the planned economies, comparative economic studies and economic histories.
The approach is straightforward and firmly empirical, using simple statistics and diagrams to illustrate the major points of theory and evidence. A consistent framework is used to explain the nature of the relationship between inflation and monetary growth in all countries under study.
This book discusses the origins and similar nature of the currencies of the socialist countries, and their value base; analyses the money supply process; studies the relationship between money and prices; reviews various theories of the nature of socialist money; and asks why there is financial crisis in the Soviet Union.
A Short History of Socialist Money is written in a clear and accessible style that will appeal to general readers and students interested in monetary economics, the planned economies, comparative economic studies and economic histories.
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Overview
The approach is straightforward and firmly empirical, using simple statistics and diagrams to illustrate the major points of theory and evidence. A consistent framework is used to explain the nature of the relationship between inflation and monetary growth in all countries under study.
This book discusses the origins and similar nature of the currencies of the socialist countries, and their value base; analyses the money supply process; studies the relationship between money and prices; reviews various theories of the nature of socialist money; and asks why there is financial crisis in the Soviet Union.
A Short History of Socialist Money is written in a clear and accessible style that will appeal to general readers and students interested in monetary economics, the planned economies, comparative economic studies and economic histories.
Product Details
| ISBN-13: | 9781742696492 |
|---|---|
| Publisher: | Allen & Unwin |
| Publication date: | 01/01/2003 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 184 |
| File size: | 2 MB |
About the Author
Read an Excerpt
A Short History of Socialist Money
By Gavin Peebles
Allen & Unwin
Copyright © 1991 Gavin PeeblesAll rights reserved.
ISBN: 978-1-86373-113-3
CHAPTER 1
Subject and method
This book is a short, empirical, institutional and theoretical review of the monetary developments in six planned economies. The countries studied here are the Soviet Union, East Germany, Czechoslovakia, Poland, Hungary and the People's Republic of China. These countries shared similar economic institutions, and their monetary systems were the same in all essentials, copied from that created in the Soviet Union by the beginning of the 1930s. The main focus of this book will be on events since the Second World War, and only passing reference will be made to events in the Soviet Union before this time.
1.1 AIMS OF THIS STUDY
This book unashamedly makes use of hindsight in examining the monetary histories of these countries and making judgements oh the relevance of various approaches to these countries. As we have seen, the late 1980s brought major changes to the monetary affairs of some of these countries. It is fair to say that East Germany and the Soviet Union have experienced financial crises. Poland has experienced hyperinflation, and Hungary has seen rising inflation rates towards the end of the 1980s. China saw high, unstable and rising open inflation rates during the 1980s, popular protest against inflation and corruption being made possible by some of the economic reforms.
By financial crisis I mean the situation when the government adopts policies to abandon the traditional Soviet monetary system or when it adopts policies that the traditional system was designed to make unnecessary. This definition clearly applies to East Germany; it abandoned its own currency in July 1990 without foreign invasion or conquest and is now part of a united Germany. In the Soviet Union plans have been announced to abandon the administrative command system and reform to some sort of a market economy. Massive retail price rises are being contemplated, and even a confiscatory monetary reform is being discussed. The last stage of the two-year four-stage Gorbachev reform programme adopted in October 1990 (more moderate than Boris Yeltsin's 500-day programme) calls for full convertibility of the rouble. Individual Soviet republics demanded the right to issue their own currencies. This is not likely to be allowed to happen but it shows the extent of dissatisfaction with the centralised Soviet system and its monobank. Such currency independence may come about spontaneously of course. Poland and Czechoslovakia plan to make their currencies convertible from the beginning of 1991 and Hungary sometime later. All these proposed reforms are not part of the traditional system, and that is why we can say that there is a financial crisis in the Soviet Union. The European countries have dealt with financial crisis by abandoning the system that caused it. China dealt with its problems by retaining the modified system that emerged during the 1980s. It used restrictive monetary and fiscal policies in late 1988 and retreated from its ambitious reform programme slightly and reimposed price control in 1989 and after.
There is a large and growing controversial body of literature concerning the monetary and macroeconomic analysis of planned economies, which goes back more than ten years. Much of the debate is about the correct methodology to use in studying the monetary developments in these countries. Two schools of thought have been distinguished, and disagreement between them concerning method and conclusions has been marked. Chapter 5 will discuss this literature in detail, concentrating on the different methodologies used by different contributors. Here it is necessary to review the main points of contention.
It has traditionally been the view that planned economies suffer from chronic excess demand for consumer goods. The Hungarian economist János Kornai has described them as shortage economies (Kornai, 1980) and this term is frequently used (Birman, 1983; Hare, 1989; Brabant, 1990). The argument is that excess demand on the consumer goods market is not the result of mistaken policies or supply shocks that cause temporary shortages but is the result of the very nature of the planning system itself. The consequences of this excess demand are said to be plain to see in such phenomena as the commonly observed queues for goods, the necessity of bribing shop staff for scarce goods (buying them 'On the left', navelo, in the Soviet Union or going 'to the back door', zou houmen, in China), and rapidly growing household savings deposits and cash holdings. These growing holdings of financial assets are seen as forced savings as people just cannot find the goods they wish to buy.
This chronic-excess-demand hypothesis is offered as an explanation of these phenomena and underlies early predictions of financial crisis in the Soviet Union. In a number of neglected works (Birman, 1980a; 1980b; 1981; 1983) and in Birman and Clarke (1985) Igor Birman predicted that there would be a financial crisis in the Soviet Union. His prediction can be dated as having been first made in at least 1977, so the events he predicted cannot just be explained as the result of later developments under Mikhail Gorbachev when things did get worse. Birman and Clarke (1985) have listed four possible options for dealing with the monetary problems identified by Birman. At least three of them (radical reforms in agriculture, reducing defence spending and increasing retail prices) are part of current Soviet policy. Many of the writers who have claimed that planned economies suffer from permanent excess demand (for example, Kornai, 1980; Birman, 1980a; Winiecki, 1988; Podkaminer, 1989 — although they may not all agree on the applicability of the concept of aggregate excess demand) are citizens or former citizens of the countries under study and have been very critical of the attitudes and methods used by Western students of these economies.
The chronic-excess-demand hypothesis has never been formulated very rigorously, and this has made it unpalatable to a number of Western economists. From the late 1970s Richard Portes and a number colleagues have argued that the chronic-excess-demand hypothesis cannot be verified simply by listing various pieces of anecdotal evidence but must be subjected to rigorous econometric testing. This they have done in a number of papers (see Portes and Winter 1980; and the papers cited in Portes, 1989). Their approach has been to use disequilibrium macro econometrics to test the chronic-excess-demand hypothesis for four Eastern European countries (East Germany, Czechoslovakia, Hungary and Poland). Their comparative work has never gone beyond 1975, although they have continued with work on Poland. They have never studied the Soviet Union, although Portes (1982) has expressed his views that the excess demand hypothesis cannot be accepted for that country. Their conclusion is that there is no evidence that excess demand was the dominant regime in these four countries and that, although there is more evidence of excess demand in East Germany, this evidence is not sufficiently pervasive to invalidate the rejection of the chronic-excess-demand hypotheses (Portes and Winter, 1980). Van der Lijn (1990) has applied their methodology to East Germany up until 1985 and rejected the hypothesis of excess demand, ascribing shortages and the other excess demand phenomena to temporary excess demands and irrational relative prices.
In the useful terms of Wanless (1985), their claims can be called the new view of planned economy macroeconomics. Its implication is that what excess demands exist are only temporary phenomena caused by supply shocks or mistakes in planning. A policy conclusion is that no radical changes are required to the planning or monetary systems. The phenomena that are said to support the chronic-excess-demand hypothesis are explained on different grounds. For example, queues are said to be the consequences of the underdeveloped retail-trade network and the selling practices of these countries. Portes (1982: 363; 1989: 43), among others, drawing on studies of retailing in these countries, uses this argument. Queues are also said to be the result of irrational relative prices and shortages of specific goods, not the result of overall macroeconomic excess demand. The policy implication is to adjust relative prices and improve the planning of consumer goods supplies. The rapidly growing volume of household financial assets is said to be the natural result of rising incomes, and such assets are interpreted as household desired holdings (Farrell, 1989).
In contrast, the traditional view that there is chronic excess demand has differed on the nature of the policies required to deal with permanent shortages. Davis and Charemza (1989a: 18) summarise them as the requirement that the budget constraints of firms should be tightened, their behaviour should be changed and planners should not plan using physical norms. There are two possible ways of doing these things. One method would be to retain the existing system of socialist ownership and introduce market discipline into various sectors of the economy, with more reliance on incentives, more market co-ordination with uncontrolled prices, the creation of competition for the state sector and the establishment of an independent banking system. To some extent this is what the Chinese economic reforms tried to do. The other, more extreme solution is to abandon the existing system of ownership and command planning entirely. This is what East Germany has done in its own unique way and may be the solution to be achieved by the Soviet Union. Kornai (1990) now advocates 'shifting from a socialist system' for Hungary. The other countries all have plans for rapid privatisation of their economies.
Birman (1983; 1988) became more apocalyptic in his prediction of Soviet economic and political collapse. He cites evidence of the falling effectiveness of monetary incentives and falling productivity, and he predicted collapse, which he defines as falling output, and the fall of the communist regime. Although his later works do not discuss the monetary factors underlying these phenomena, it is clear that they are seen as the main cause of all these problems relating to productivity and growth.
The controversy between the traditional school (mainly represented by Kornai's theory of the shortage economy but better represented by Birman's neglected works) and the new view of Portes and associates has produced two summary discussions of the state of disagreement about late 1988. The volume edited by Davis and Charemza (1989b) contains some very interesting papers relating to these issues. It allows Portes (1989) to reply to his critics and state exactly what he and his colleagues were claiming. Brabant (1990) also surveys this debate. Unfortunately, the timing of these publications meant that they could not ask simple questions such as: Why did East Germany give up its own currency? Why is the Soviet Union contemplating massive price rises and creating a convertible currency? Who predicted these events, who did not, and how? These are the important issues.
This book will not be a test of the various theories. I do not think that this is necessary, as events have judged between them. The chronic-excess-demand hypothesis, and particularly Birman's prediction of financial crisis in the Soviet Union that was based on it, have been shown to be correct. This book could thus be accused of cynically benefiting from hindsight to simplify the issue and of ignoring the detailed aspects of certain contributions to the debate. It does benefit in this way, but, of course, that is exactly how we progress. Refuted theories are discarded, and those not discarded are retained and applied until they are succeeded by better theories. Only hindsight can be used to judge between theories. I think that events have shown that the chronic-excess-demand hypothesis was a better description of the situation in the planned economies than anything else available. Therefore the approach of this book will be to explain events in these countries in the framework of this hypothesis, using its presuppositions and only parenthetically pointing out alternate explanations.
The approach taken is simple and mainly empirical. It is tempting to say that the approach is to let the facts speak for themselves and that, with the benefit of hindsight they are eloquent in support of the chronic-excess-demand hypothesis. I have not just done this, however, but have tried to explain events using this approach, showing why there were different degrees of monetary growth in these countries, what the money supply process was, why prices increased, the nature of the relationship between money and prices, the value basis of these currencies and so on. I conclude with a review of the different approaches to these questions and of the debate, or sometimes lack of it, between different writers.
This is not an issue made irrelevant by the abandonment of the traditional monetary system in East Germany and the Soviet Union. It has general methodological lessons for all types of comparative economic studies, in particular for the choice of approach for writing the monetary history of these countries, and for studying current events in such countries as China.
1.2 PROBLEMS IN THE ANALYSIS
There are many well-known difficulties in writing about the planned economies.
The first problem relates to the reliability of data. Many writers who uphold the traditional view regard official statistics from the planned economies as distorted, misleading or faked. Birman (1988) warns against accepting them. Vanous argues that output statistics for the Soviet Union were deliberately distorted under Gorbachev, but Treml (1989) points out his methodological errors in arriving at this conclusion. Winiecki (1988: 51) argues that East Germany's statistics are the most distorted; he really means that they were subject to 'doctoring' (p. 68, fn. 16). Planned economy data must be used with caution. Even Birman (1980a; 1980b; 1981) had to rely on official data for his basic information, but his interpretation of them is very different from that of such organisations as the Central Intelligence Agency (CIA) of the United States. Li Chengrui (1984) defends the general reliability of Chinese data, even for the ten years of chaos of the Cultural Revolution — data that suddenly appeared in the early 1980s after twenty years of no statistical yearbooks. This body of data has been enthusiastically accepted by econometricians studying China (Chow, 1987; Portes and Santorum, 1987; Santorum, 1989; Feltenstein and Farhadian, 1987; Feltenstein, Lebow and van Wijnbergen, 1990; Chen Chien-Hsun 1989). The general trends shown by the data are probably correct. Cautious acceptance seems to be the general attitude.
Certain statistical studies of the planned economies report statistical results to the third or even fourth decimal place. This presents a false and unscientific impression of precision that the underlying data just cannot support. I was tempted to report all statistics to the nearest whole number, but this is perhaps going a bit too far.
Data availability is another problem. For the Soviet Union, for example, no official data of currency in circulation are available for the postwar period, and it is said that such data have been a state secret since 1936 (Wiles, 1982: 145; Grossman, 1989: 32, fn. 4). This means that Portes and Winter could not apply their model to the Soviet Union. For the Soviet Union I have had to rely on Western estimates of currency and some recent Soviet statements. China publishes a whole table of money incomes and expenditures of the population as well as the consolidated balance sheet of the banking system. Both data sets allow us to see why household money holdings change, viewed from two different perspectives. Although there are problems with the household income and expenditure data (Peebles, 1987), they are extremely useful and have been used here. Currency and savings deposit data are available for China right back to 1952. During the 1980s China, Poland and Hungary joined the International Monetary Fund (IMF), and this organisation published their monetary data for recent years using IMF definitions. I have not made much use of these data in the subsequent statistical work but have referred to them for comparisons with other sources. One exception is that I have used the series 'currency outside banks' for Hungary for a few years as these data are not available to me from other sources. For other countries I have relied on Western compilations taken from official national statistical yearbooks.
The differences in the availability of data have meant that studies of different countries have taken very different forms. This can be illustrated by the nature of studies of China and the Soviet Union. In the early 1980s China began to publish long runs of macroeconomic data in its statistical yearbooks and, soon after this, monetary data. These data have been used in several econometric studies referred to above and by Chinese econometricians. Yet at the same time there are recent works that continue to use the old-style China-studies approach that developed when there were no statistical publications. This approach required the combing of newspapers, radio broadcasts and so on to produce valuable quantitative information, which was often only an isolated figure for a single year. Even today one can read studies of the 1980s that ignore the statistical yearbooks and quote isolated figures the significance of which the reader is supposed to appreciate. Combing Chinese newspapers is no longer necessary to provide relevant data. On the other hand, when studying the Soviet Union, where much macroeconomic and especially monetary data are not published, reference to isolated statements in newspapers and journals is necessary. There have been some interesting recent statements on such things as the extent of monetary growth, the size of household money incomes and the stock of currency in newspaper reports on the economy and in speeches. These concepts are basic to this book but were hardly ever talked of in the Soviet Union when Soviet writers denied that there was any problem of inflation. It is necessary to use such figures. Given the lack of data for the Soviet Union, there are hardly any statistical studies of macroeconomic developments by Western scholars for this country — certainly, not to the extent to which they are appearing for China. Monetary and macroeconomic work on the Soviet Union is, from necessity, very patchy.
(Continues...)
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Table of Contents
Contents
Figures and tables,Acknowledgements,
Introduction and author's notes,
1 Subject and method,
2 The currencies: nature and quantities,
3 Monetary institutions and the money supply,
4 Analysing and money and prices,
5 A methodological review,
6 Conclusions,
Endnotes,
References,
Index,