Why Stalin rued the ruble

As Central Asian currencies weaken over the long haul, central banks here can learn a thing or two from Soviet history.

As World War II wound down, Stalin suffered from an embarrassment of paper riches. He had paid for the war by printing money: When it ended, there were more than enough rubles to pay for what little there was to buy. Prices soared. 

In December 1947, the Politburo decided to dampen the inflation by replacing 10 old rubles with one new ruble. This was to occur overnight. But planning the reform took months, so word of it leaked to the nomenklatura, who quickly exchanged their old rubles for durable goods like furniture and pianos.

Now Stalin had a migraine. Furniture and piano prices skyrocketed, and hundreds of Muscovians lined up at department stores and savings banks, which, depleted of goods and money, had to padlock their doors.

And the beat went on. Since stores had run out of durable goods, people bought nonperishable foods like smoked sausages. So the government ordered groceries to stop selling so much, to the discomfiture of the man on the street. “Today is the sixth day in a row that my wife stood in line for bread from 2 in the morning to 10, but alas, all six days she came home without bread.”

Moral of the story? Stalin had meant to contain inflation.  Instead, news of the coming currency reform stoked prices, endangered banks, and wiped out the paltry savings of impoverished Russians.  Evidently Stalin had thought that the devaluation would injure only the rich.  But they protected themselves by purchasing long-lasting products or possibly foreign currencies.

As the Nobel-laureate economist Robert Lucas would say, people act on what they know.  “…More than 2000 officials, including senior party and law enforcement officials, were prosecuted for violating the currency reform law,” writes the historian Oleg Khlevniuk. But “‘a significant proportion of senior party and government officials have essentially escaped punishment.’” – Leon Taylor tayloralmaty@gmail.com

Good reading

Oleg V. Khlevniuk, Stalin:  The biography of a dictator.  Yale.  2015.  The source of material used in this post.