Control the Money or Control the People

February 08, 1994|By ANDREI OSTALSKY

LONDON. — London -- An old Soviet joke of the 1970s asks: ''What is small, green, rustles at the touch, but is not money?''

Answer: ''A 100-ruble banknote.'' ''But why do you say, then, that it is not money?'' ''Because 100 rubles isn't money, it's peanuts.''

At that time, however, the sum of 100 rubles was a lot for those who had access to the special network of privileged government and party shops. It could decently feed an average family for nearly a month. Or buy a quality Western-made suit or a coat.

On the other hand, spent at the rynok -- farmer's market -- it would have allowed someone to buy no more than a few kilos of vegetables and fruits, while in the ordinary shops you had to queue for hours to get anything worth buying at all. Much stronger than the U.S. dollar in the government shop, Soviet currency suddenly lost most of its value outside it.

A palatial residence somewhere in the prestigious center of Moscow would cost its privileged occupiers not much more than a squalid one-room flat for an ordinary family in the suburbs. The national currency had little to do with how wealth was distributed in Soviet society; no wonder, then, that a lot of people accustomed to the old ways still find it hard to grasp the concept of money in a market economy.

So when Russian Prime Minister Viktor Chernomyrdin speaks now of ''non-monetary ways'' to curb inflation, he could simply be demonstrating the traditional, scornful disregard for Russian money, treating it as something as cheap and unimportant as syemechki (the Russian equivalent of peanuts).

This scorn is part and parcel of the Soviet ideological legacy. After the highly efficient (and monetarist) New Economic Policy of the early Soviet days, Stalin destroyed the theory of value and deprived the ruble of its natural role as a universal equivalent and value store, turning it instead into an instrument of ''socialist accounting'' -- an additional certificate of good behavior and work attendance.

Since that time, until former first deputy prime minister Yegor Gaidar's reforms started in early 1992, real purchasing power was determined by the place of the purchaser in the hierarchy, rather than by the quantity of the rubles he possessed.

It worked the same way for enterprises, too. They had to produce what was deemed necessary by the politicians; the quantity and the quality were both centrally dictated. Normal money could not serve the purpose of that kind of regulation, so it had to be abolished.

Today the proponents of the ''non-monetary approach'' argue that the way to curb inflation is to increase the supply of goods against the growing supply of money. The ruble then would not lose value and there would be more goods around. Wouldn't that be marvelous? And such a simple solution, too.

The only problem with this scenario is that, in the current sorry state of Russian industry, easy credits would by no means stimulate increased productivity. On the contrary, they would keep bankrupt enterprises and state farms afloat artificially, encouraging them to stick to their old, wasteful ways.

The other historically proven method to make people work harder and better in Russia is to start shooting them in sufficiently big numbers. As soon as the component of fear started to subside in the Soviet society after Stalin's death, the economy began falling apart.

The extravagantly high oil prices of the 1970s and early 1980s somewhat slowed the process, allowing Brezhnev's regime to stagnate rather comfortably. But finally it had to come to an end. When the fear generated by the KGB largely disappeared (1987-1988), the decline in output became obvious and irreversible. The junta of 1991 wanted to bring fear back into the system, but it was too late.

If the Soviet experience is any guide, it seems that to make an economy work coherently in Russia you have to choose what to control; the money supply, through fiscal and monetary discipline and a normal central bank, or human minds, through fear, propaganda and the secret police. But if you do neither, you end up with chaos.

Mr. Chernomyrdin's problem is that he is a decent man, not capable of ordering mass executions, torture and long terms of slave labor. That is why he will find it hard to switch the Russian economy back to fully ''non-monetary ways.'' It will take a much more consistent and ruthless leader, and probably a civil war, to achieve that.

Andrei Ostalsky is London editor of the Financial Izvestia newspaper.

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