The kind of monetary reform the Soviet Union undertook last week in an attempt to get its black market under control -- calling in all the big bills that had been stuffed in mattresses and returning only a few -- isn't unheard of in the United States. It just hasn't been very widely experienced.
Soldiers who served in Vietnam remember the occasional currency swaps the Army would order, requiring troops to trade play-money scrip of one color for another. Drug dealers and others worry that the Treasury Department will some day do the same thing to real money at home, replacing $100 bills featuring the familiar likeness of Ben Franklin with new notes featuring the visage of, say, Martin Feldstein. The idea would be to clobber those who have more money than they can explain.
But the Soviet maneuver was different in several important respects. For one thing, it was designed to address a terrible economic problem, not a legal one: The cache of mattress money in the Soviet Union is of enormous proportions, such that every new shipment to the stores is immediately snapped up.
For another, though, the surprise swap apparently is expropriating millions from the wrong people -- the babushkas, first and foremost, or old women who are small savers, who don't put their money in banks.
For still another, the measure disappointed virtually all the Western (and, for that matter, Soviet) economists, who'd been offering Moscow advice on how to go about converting their failing command economy to market principles.
But above all, it cast into sharp relief the feebleness of the Soviet economy. For in withdrawing from circulation around 35 percent of the currency and replacing only a fraction with new cash, the authorities went for only the biggest bills -- 20 ruble notes worth about $2.50 at black market exchange rates, and 100 ruble notes, worth $5.
No wonder that the landmark joint report published earlier this month by the World Bank, International Monetary Fund and the Organization for Economic Cooperation and Development on "The Economy of the U.S.S.R." reckoned per capita income in the Soviet Union as being about one-tenth of that of Japan ($21,040), the United States ($19,780) and Germany ($18,530).
The report estimated Soviet per capita gross domestic product, the total of goods and services produced in the country, at $1,780, when figured at the official rate of 1.8 rubles per dollar -- a devaluation of the ruble by a factor of one-third. That's poorer than Hungary, Poland and Yugoslavia, richer than China, Egypt and Turkey, and about at the level of the Latin American countries such as Argentina, Brazil, Chile and Mexico.
Would that meant that there is some good news from the Soviet Union! The beating-up of the Baltic Republics is plenty grim. It would be pleasant to imagine it were part of some larger plan on the part of Mikhail Gorbachev to hold the country together while liberalizing slowly. But after the ham-fisted ruble call-in, there is no longer grounds for such hope. It is pretty clear that these guys don't know what they are doing.
To understand what went wrong with the ruble, it is necessary to think a little about the malady the authorities are trying to treat. Here's the way Tufts University's Franklyn Holzman puts it. Holzman, 72, was one of the pioneers of Soviet economic studies. His essay on how to achieve a convertible ruble recently won first prize in a global contest judged by three Soviets and three Americans, including Nobel laureate Wassily Leontief, former World Bank honcho Anne Krueger and Ed Hewett of the Brookings Institution.
The problem, says Holzman, begins with a budget deficit that is enormous even by American standards, thanks mainly to absurd subsidies of everyday goods. A quarter of the budget is subsidies, one-eighth of national income: Meat sells for half its cost, bread for a quarter. These prices must be allowed to rise.
Then there is the method of financing the deficit. "In our country, if we have a deficit, the government finances the deficit by selling bonds, and while some bonds are picked up by the Federal Reserve System, a lot of bonds are bought by the public. The interest rate goes up accordingly, and if the government puts more money in the system, it has also taken some out by selling bonds.
"They don't do this in the Soviet Union," continues Holzman, "because the public won't buy the bonds. The interest rate there is 2 percent or 4 percent, not enough to keep up with inflation. They haven't used that kind of fiscal mechanism for decades. Instead, the government simply prints money to meet expenses, with nothing to offset it. The result is a huge supply of rubles, which we call the 'overhang,' and prices that don't change very much. This is what they must change."
So what should they do? "Well," Holzman says, "some of the ways they can soak up that cash is by selling property, selling people their apartments, for instance. These are assets that won't depreciate with a price rise. They could sell peasants their land -- the present idea is to lease it -- and they could sell stock in small enterprises."
And on the other side of the equation, Holzman says, the authorities must permit prices to rise and to shift to reflect appropriate levels. "You see peasants from Georgia riding the airline to Moscow with shopping bags full of vegetables because tickets are so cheap. That's no way to allocate resources in an economy."
But there was none of this last week -- only the excess ruble confiscation. The effect will surely be a further loss of faith in the government of Mikhail Gorbachev. The proud authorities of the Soviet Union are taking no pointers from anyone. It is a land where prices make no sense.
David Warsh is a columnist for the Boston Globe.