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Mr. Wynand

Russia's post communist hyperinflation

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In my comparative politics class, we are studying the effect of "shock therapy" on Russia's economy. My professor argues that the hyperinflation was due to the liberalization of prices causing the price of normal goods to skyrocket. While the demand curve for normal goods may have shifted to the right, the price increase would only be temporary as more of these goods would be brought to market. The only other reason I can think of is that production of goods might have been very difficult due to some lagging elements of the soviet economy, leading to higher prices, but this just doesn't cut it. I know that the money supply increased substantially during this time. Also, my book for microeconomics states that the only possible reason for hyperinflation is manipulation of the money supply. So what do you think?

Edited by Mr. Wynand

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I don't know much about the historical episode; what do you mean by "liberalization" of prices? Were there price controls that were lifted or something?

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Under communism, the official currency was mostly useless. While officially it was tied to gold (a ruble was worth around a gram of gold), no one would've actually sold you any gold if you had rubles. Not a gram for a ruble, and not a gram for 1000 rubles (not because it was forbidden, but because the rubles had very little value)/

So, if let's say someone in the Soviet Union suddenly got paid a trillion rubles/month, that would've made almost no difference in his life. The goods he could "buy" were his food and clothing rations, and possibly an apartment and a car after ordering one of each and spending five to ten years on the waiting list for them. In reality, what got people all these items was not the actual payment in rubles, but the ration card the local party official had to stamp (and official approval, in the case of the car and apartment, contingent on good behavior).

Other items were not bought for rubles. They were purchased either through political connections, or, for regular people, on the black market. But the currency on the black market wasn't rubles, it was cartons of cigarettes, whiskey, or western currency (German Marks, usually).

So the ruble had no actual value, the banknotes were merely colorful paper handed over as a symbolic gesture, when you went over to the store (and waited in line for hours) to pick up your rations. Once the Soviet Union and the rationing system ended, Russians simply discovered that their rubles had no value. The currency didn't suddenly lose its value, it never had any. It took a while for the government to realize this, and start from scratch (by issuing a new currency, and actually backing it up).

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Under communism, the official currency was mostly useless. While officially it was tied to gold (a ruble was worth around a gram of gold), no one would've actually sold you any gold if you had rubles. Not a gram for a ruble, and not a gram for 1000 rubles (not because it was forbidden, but because the rubles had very little value)/

A 15 min. search in Internet shows that in the 1970s, one gram of gold was sold to the public for 16 rubles (found here, post #7, which shows a bill for a wedding ring). It could be that it was a one-time preferential price and that the normal one, for normal jewelery, was somewhat higher. A modest monthly income was about 150 rubles.

Also, I have reasons to be skeptical about some of your other claims about the origins of the Soviet hyperinflation in the 1990s. One fact is that the central bank printed as much money as the printing industry was capable of, and this was still insufficient to cover the state deficit. The other fact is that there were not enough goods to absorb the money supply. This information is from Yegor Gaidar's Collapse of an Empire.

Alex

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I don't know much about the historical episode; what do you mean by "liberalization" of prices? Were there price controls that were lifted or something?

Yes, apparently price controls were lifted on almost everything. Many anti-capitalists argue that this "shock therapy" (which encompassed some other reforms as well) led to hyperinflation. However, simple economics states that hyperinflation is a symptom of an extreme inflationary monetary policy (unless I am missing something).

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In my comparative politics class, we are studying the effect of "shock therapy" on Russia's economy. My professor argues that the hyperinflation was due to the liberalization of prices causing the price of normal goods to skyrocket. While the demand curve for normal goods may have shifted to the right, the price increase would only be temporary as more of these goods would be brought to market. The only other reason I can think of is that production of goods might have been very difficult due to some lagging elements of the soviet economy, leading to higher prices, but this just doesn't cut it. I know that the money supply increased substantially during this time. Also, my book for microeconomics states that the only possible reason for hyperinflation is manipulation of the money supply. So what do you think?

Granted I am not an economist, nor do I know anything about this specific episode, but you have to consider that mainstream orthodox economists define inflation as “when the prices go up,” which can include anything from increase in the money supply to changes in aggregate supply and demand (cost-push, demand-pull, etc.) Keynesians even say that changes in the money supply do not directly affect prices. Austrians and broadly the classical economists define inflation as “an increase in the supply of money and credit,” which has the effect of a general rise in price levels. So, if you consider the fact that a socialist economy is an economy with all-around price controls, and those are lifted, and you take into consideration the various supplies and demand, and whatever the money supply happens to be, and whatever various methods were used to de-socialize (such as “privatizing” state enterprises into well-connected monopolies), then the prices can go up. Anti-capitalists can then go OMG look! Economic liberalization caused “hyperinflation,” bring back socialism!

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Are we talking about the 1990s or the inflation of 1918-1921? The 1918-1921 inflation was deliberate (and as far as I know the earliest historic example of hyperinflation). The new Soviet government was trying to destroy the concept of money so they deliberately tried to make it worthless.

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Yes, apparently price controls were lifted on almost everything. Many anti-capitalists argue that this "shock therapy" (which encompassed some other reforms as well) led to hyperinflation. However, simple economics states that hyperinflation is a symptom of an extreme inflationary monetary policy (unless I am missing something).

Just about every modern economist, from both sides of the aisle, would acknowledge that price controls are harmful and distortionary. If the prices rose after controls were lifted, that just showed that the prices should have been much higher the entire time. At best, your teacher could make an informed case for a gradual, rather than sudden, move to market prices. However, arguing that liberalizing prices was bad because switching to market prices involved a rapid rise in overall prices is simply ridiculous.

True runaway hyperinflation arises from a sustained, rapid increase in the money supply. Rising prices from liberalizing literally cannot be runaway hyperinflation, because there is a very definite stopping point: the true market price.

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Are we talking about the 1990s or the inflation of 1918-1921? The 1918-1921 inflation was deliberate (and as far as I know the earliest historic example of hyperinflation). The new Soviet government was trying to destroy the concept of money so they deliberately tried to make it worthless.

Sorry I wasn't more concise. The 1990's hyperinflation.

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