EVALUATION OF INFLATIONARY PRESSURES IN THE USSR

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• Publication Date: April 1, 1963
• Content Type: REPORT

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Economic Intelligence Report
N? 11.1
EVALUATION OF INFLATIONARY PRESSURES
IN THE USSR
CIA/RR ER 63-7
April 1963
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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Excluded from automatic
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Economic Intelligence Report
EVALUATION OF INFLATIONARY PRESSURES
IN THE USSR
CIA/RR ER 63-7
WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
SECRET
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CONTENTS
Summary and Conclusions . .
I. Introduction
II. Recent Evidence of Inflation and Consumer Unrest ? ? ? ?
Page
1
3
3
A.
Official Discussions of Inflation
3
B.
Price Increases of June 1962 and Subsequent Civil
Disturbances
5
III.
Extent of Inflation
9
A.
Characteristics of Inflation
9
B.
Effects of Inflation on Real Output and Popular
Morale
11
C.
Extent of Present Inflationary Pressures
13
1. Recent Price Trends
13
2. Trends in Disposable Money Income and Real Output
of Goods and Services
18
3. Evidence on Behavior of Money Supply
20
D.
Summary of the Present Situation
22
IV.
Policy Implications
23
A.
Khrushchev's Problem
23
B.
Immediate Policy Considerations
24
Tables
1. Reported Civil Disturbances in the USSR, 1953-62 . ? ? ? 7
2. Retail Price Indexes in the USSR, Selected Years,
1950-62 14
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Page
3. Index of Moscow Collective Farm Market Prices, 1953-62 . 17
4. Indexes of Disposable Money Income and Real Purchases of
Goods and Services in the USSR, Selected Years,
1950-61 19
5. State Budget Surpluses and Changes in Short-Term State
Bank Loans in the USSR, 1951-61 21
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EVALUATION OF INFLATIONARY PRESSURES IN THE USSR*
Summary and Conclusions
Following 12 years of pronounced success in avoiding major infla-
tionary pressures, the USSR again experienced repressed inflation dur-
ing 1960-62.** Althouel the extent of these new pressures is not large
compared with the inflationary conditions of earlier periods in Soviet
development, there is reason to believe that they are being and must be
taken seriously by the present Soviet leadership. The volume of com-
ment in Soviet publications on the problem of purchasing power out-
stripping consumer output is one indication. Moreover, a survey of
civil disturbances in the USSR since Stalin's death shows a growing
willingness on the part of the population to strike or riot when real
consumer incomes are at stake.
The explanation of the reappearance of inflation can be traced to
the decision to give investment and defense needs priority over the
consumer in the face of declining rates of growth in industrial pro-
duction and the stagnation in Soviet agriculture. As the prospects
for holding down the rate of increase in household income are dim, the
leadership is forced back on either the hope that consumer output can
be spurred to the rates of growth prevailing in the early 1950's or
the distasteful alternative of squeezing out some of the excess con-
sumer purchasing power. In considering an anti-inflationary program,
however, the regime is hedged in to some extent by its widely publi-
cized actions in increasing various forms of transfer payments, abol-
ishing compulsory bond purchases, and promising the progressive elimi-
nation of direct taxation.
Having given expansive promises as to consumption levels and still
smarting from last summer's experience with civil disturbances, the
Soviet leaders can be expected to temporize in curbing excess consumer
demand. They may suspect that political controls are not pervasive
enough and that the population is not docile enough to permit the sweep-
ing inflation control measures used by Stalin. Instead, the emphasis
probably will be on holding down the rate of increase in wages and sala-
ries.
t The estimates and conclusions in this report represent the best
judgment of this Office as of 1 April 1963.
** For a discussion of repressed inflation, see III, A, p. 9, below.
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I. Introduction
During the past 4 years, there has been a striking evolution in
official Soviet statements concerning the problem of consumer purchas-
ing power outrunning the availability of consumer goods. That the
growing emphasis on this question shown in official attitudes reflects
a genuine concern can be inferred from a number of Soviet actions taken
in 1962 and from a rash of reports of civil disturbances in which con-
sumer protests figured heavily. The mediocre harvests of recent years
and the serious failure of the potato crop in 1962 combined with dif-
ficulties in production of consumer goods indicate that, on the supply
side at least, there is every reason to suspect the existence of in-
flationary pressures. 1/* The information is less firm on the demand
side, but it appears that the upward trend in disposable money income
has not abated. Clear evidence of these pressures can be seen in the
recent rise in the official index of kolkhoz market prices.
This report discusses the extent of inflationary pressures in the
USSR and the problems presented to Soviet policymakers by these pres-
sures. Throughout, the emphasis is on problems caused by the inflation
in the Soviet setting to the exclusion of any strains produced by the
failure of gains in real consumption levels to match Khrushchev's ex-
uberant promises. The policy alternatives open to the Soviet leader-
ship are then developed together with their implications for various
social groups and for economic performance.
II. Recent Evidence of Inflation and Consumer Unrest
A. Official Discussions of Inflation
Perhaps basking in the Soviet success in stamping out the
price inflation characteristic of the prewar and immediate postwar
years, Khrushchev in 1958 proclaimed:
There cannot be any inflation in our coun-
try, for in preparing the budget and product
plans we take into account the sums of money to
be paid in the form of wages and the necessary
quantity of goods to be manufactured in order
to maintain the balance between the stock of
money and ... manufactured goods. 2/
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More effective controls over wages after 1947 and rapidly
increasing production of both food and nonfood goods had allowed
reductions in state retail prices for food and nonfood goods of
30 percent and 19 percent, respectively, from 1950 to 1955. Indeed,
the enthusiasm for reducing prices during this period at times off-
set the goals of anti-inflationary policy by creating some excess
consumer purchasing power.* The authorities, however, could have
eliminated these balances easily by moderating the pace of retail
price reduction.
The gradual shift away from the complacency of this period
can be seen in subsequent exhortations by Khrushchev. In relating
the early success of the Seven Year Plan (1959-65)) he noted that
public demand for some consumer goods was going unsatisfied and de-
plored the presence of queues. 1/ In the wake of a series of meas-
ures in the realm of personal taxation, pricing of agricultural
products, and pensions, which had the effect of pushing up consumer
disposable money incomes, he told the January 1961 plenum of the
Party Central Committee:
We must do all we can to see to it that our
economy constantly satisfies the rapidly grow-
ing requirements of the people. Otherwise
there may turn out to be a gap between the re-
sources of the purchasers and resources for the
satisfaction of their demand. This is fraught
with dangerous consequences. 11.1
Khrushchev has continued the government's policy in effect
since 1948 of holding down increases in average annual money earn-
ings to about 3 percent per year. The success of this policy is
largely responsible for the arresting contrast between prewar and
postwar inflationary pressures, but it may be provoking worker
discontent as well. Somewhat defensively, Khrushchev has told
audiences that further increases would have to follow increases
in productivity -- "If we raise wages and wage funds are higher
than the amount of goods ... you have a lot of money but we won't
buy meat and milk in the shops, because production will fall still
further behind the population's buying capacity. In such a situa-
tion, the speculator is the only one to gain." .2/
* See III, C, 1, p. 18, below.
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The agricultural situation in relation to consumer demand re-
peatedly claimed Khrushchev's attention. In March 1962 he cited the
large increases in the sales of various food products since 1953 and
then entered on a curious passage in which he appeared to be second-
guessing himself:
But, comrades, why then are we talking
about shortcomings, and not only talking but
criticising Sharply? Because the rise in the
output of farm products is lagging behind the
rise in people's requirements. It would have
been possible to balance supply and demand with
the given amount of produce. Had we not been
repealing taxes and loans, had we not increased
wages as we converted to the seven-hour working
day and taken other measures directed toward
raising the well-being of the people, we would
have reduced the population's demand for food
products. ... Given the same situation in a
capitalist country, there would seem to be no
shortages. The capitalists would raise prices,
and tens of millions of people would not be
able to buy products under the circumstances. g
Given the reference to capitalist price raising, it must have
been only after searching consideration of the alternatives that 2
months later the Soviet leadership announced price increases for meat
and butter.
B. Price Increases of June 1962 and Subsequent Civil Disturbances
On 1 June 1962 the Soviet government announced that prices paid
to collective farms and to households for beef, pork, mutton, and poul-
try would be increased an average of 35 percent and that procurement
prices for butter and cream would be increased by 10 and 5 percent, re-
spectively. The prices paid to state farms for livestock and poultry
were set 10 percent below these new procurement prices. At the same
time, average retail prices for meat and meat products were raised by
30 percent and butter prices by 25 percent, while prices for sugar and
rayon print textiles were reduced by 5 percent and 20 percent, respec-
tively.
The action taken in raising both retail prices and procurement
prices was justified primarily on the basis of increasing agricultural
incentives. Procurement prices had been raised before, however,
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without increasing retail prices; so it is reasonably clear that the
retail price increases also were designed to bring the quantities of
meat and butter demanded into closer alignment with available supplies.*
Another reason could have been the desire to reduce excess purchasing
power in general, although the aggregate effect must have been rela-
tively meager.** Khrushchev, in discussing the price increases before
a Cuban-Soviet youth meeting on 2 June, admitted that as a result of
various measures taken in the past to raise incomes the Soviet people
had excess purchasing power. .Y
To the same youth meeting, Khrushchev introduced a theme that
has gained wide currency in recent months. As if sensing the trouble
that lay ahead, he pleaded for an understanding of the necessity for
the price increases. The collective farmers, he said, "accepted well"
the decision because it increased their incomes, but the urban popula-
tion, which would purchase meat at higher prices, "is accepting it dif-
ferently." Then he warned bluntly: "It is necessary to understand and
explain this, and to check those who do not understand or want to under-
stand. I repeat, it is necessary to explain and enlighten, and also to
check whomever necessary, wherever necessary." 2/
The public reaction to the retail price increases must certainly
have been even greater than expected. During June,
consumer reaction was "irate," that there was "grumbling," and that
the price increases were "a definite disappointment for the people." 10/
riots at Novocherkassk, Kemerovo, Aleksandrov, and Groznyy and strikes
in other localities. 11/ One of the prominently cited reasons for the
disturbances was protest over the price increases.
* With rising incomes, the demand for these "quality" foods is likely
to expand more than the demand for other foods or even for some nonfood
consumer goods. Therefore, abstracting from supply shifts, some price
adjustments would be necessary even though purchasing power was not in
excess over-all.
** Even if the new prices left the real pattern of consumer purchases
unaltered, the net increase in annual consumer expenditures would have
been only about 1.5 percent of consumer disposable income.
*** Table 1 follows on p. 7. For the methodology, see the first foot-
note to this table.
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Table 1
Reported Civil Disturbances in the USSR 2.1*
1953-62
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
Total number of disturbances reported
2
1
15
6
1
10
7
8
14
Demonstrations and riots
12
2
3
4
6
Strikes
2
1
3
Ii.
1
7
7
4
8
Causes of disturbances 12/
Causes connected with conditions of employment
1
5
3
1
4
6
1
3
Wages and work norms
3
3
1
3
5
2
Other working conditions
1
2
1
1
1
1
Causes related to levels of consumption
1
2
7
8
13
Housing
1
--
Food shortages
1
4
1
Exporting of food
--
2
2
State acquisition of privately owned livestock
--
2
General dissatisfaction with economic conditions
1
2
--
3
2
2
Price increases
--
8
* Footnotes for Table I follow on p. 8.
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Table 1
Reported Civil Disturbances in the USSR W
1953-62
(Continued)
1953 1954 1955 1956 1957 1958 1959 1960 1961 1962
Causes related to political unrest 14 1
De-Stalinization 5
Intervention in Hungary 5
Suppression of Molotov, Zhulchov, and others 1
Nationalistic demonstrations 4
Other (interference with police action and the like)
1
a7,71
2 1
Becauf.5ox1(1
the purpose of the survey is the examination of possible changing patterns in civil protest the tabulation is not
limited to the necessarily small number of absolutely verified disturbances.
In general, strikes were clearly reported as such while riots and demonstrations more often were reported in50Do
terchangeably in spite of the fact that the term riot implies disorder to a much greater extent than demonstration.
This was especially noticeable in 1962, when all disturbances were reported as demonstrations in spite of reports
of soldiers called in, tanks needed to disperse crowds, and martial law resulting in at least one case, at Rostov.
b. In some instances, no specific cause was reported, whereas in others more than one factor was believed to be
responsible. Therefore, for any year the number of cited causes may be different from the number of disturbances
reported. The tabulation of causes makes no attempt to assess the credibility of the causes 50X1
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Following an outbreak of disturbances in 1956, the number
dwindled during 1957-58 and then jumped sharply during 1959-62. 50X1
Even more suggestive is the change in the composition of these distur-
bances over time. After 1956 the number of instances of unrest con-
nected with political protest declined, while the number of disturbances
related to economic protest increased significantly. Khrushchev's ap-
parent concern with problems of control takes on more meaning against
this background. The disturbances have increased in violence as well
If an upswing in consumer discontent is accepted as probable,
this still does not show why Soviet policymakers Should be worried
about inflation itself as opposed to generally low levels of living or
the failure of real consumption gains to match the grandiose promises
made by the leadership. There are some reasons, however, for believ-
ing that the official concern is justified, on both political and eco-
nomic grounds. These reasons will be developed below.
III. Extent of Inflation
A. Characteristics of Inflation
For the purposes of this report, the inflationary pressures in
the USSR are defined to be the excess monetary demand for consumer goods
caused by a gap between the amount of money supplied to the economy and
the amount actually needed to purchase current levels of output at plan-
ned prices. Given the presence of excess demand for goods, "open" in-
flation results if prices rise in response. If, instead, prices are
fixed by decree, "repressed!' inflation exists in that consumers are
forced to hold cash or savings deposits in excess of the amount de-
sired if more goods and services were available.
In the USSR, almost all nonfood goods and most food goods are
sold in state stores at fixed prices. Inasmuch as these prices are
changed infrequently, excess monetary demand has resulted typically in
repressed inflation. Some of this excess purchasing power then flows
into the collective farm or kolkhoz produce markets, where prices rise
and fall according to day-to-day changes in supply and demand. These
collective farm markets are the only organized free markets in the USSR
and therefore represent a barometer of the extent of repressed inflation.
The supplies offered on these markets by collective farmers, collective
farms, and other cultivators of private plots and owners of livestock
have dwindled as a share of the total retail sales of foodstuffs, from
somewhat more than 14 percent in 1955 to less than 8 percent in 1961.
In both years, however, the collective farm market share of the sales
of the perishable foodstuffs sold both in the state retail network and
in the collective farm markets was almost double the collective farm
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market share of the total retail sales of all foodstuffs. For particular
commodities such as potatoes, the importance of these markets is even
greater. In general, their significance is greater in small towns and
rayon centers, although some large cities rely on them quite heavily.
For example, the share of free market sales in the total sales of food-
stuffs in 1956 ranged from 42 percent (Odessa) and 41 percent (Tbilisi)
to 31 percent (Tashkent), 10 percent (Sverdlovsk), and 7 percent (Moscow).
Although the prevention of inflation has been "the primary ex-
plicit financial objective of the Soviets," 12/ during much of its his-
tory the USSR has lived with inflationary pressures that would be un-
acceptable in a free economy. From 1928 to 1940, prices on consumer
goods increased a little more than tenfold, while prices on producer
goods and raw materials tripled. Forced-draft industrialization and
incentives geared to plan fulfillment, coupled with a relatively free
labor market, pushed up wages and consumer income while growth of con-
sumer output lagged. The accumulating excess demand was blown off peri-
odically by raising prices, thereby substituting open inflation for re-
pressed inflation.
After the monetary reform of 1947 the Soviet authorities success-
fully contained the inflation that had been characteristic of the earlier
period. Three factors seem to have been at work. First of all, wage
increases were controlled more effectively. From 1930 to 1940, average
annual money earnings of workers and employees increased by almost 16
percent per year, and this rate of increase continued in 1946 and 1947.
Since 1947, however, the average annual rate of increase has been about
3 percent. 132 At the same time, the real output of consumer goods and
services advanced rapidly, both absolutely and, before 1950, as a share
of gross national product (GNP). Finally, a series of relatively hiel
budgetary surpluses greater than the increase in short-term loans made
by the State Bank fostered a monetary stringency not present earlier.
Underlying the monetary restraint and the increased control over wage
increases was an improvement in planning performance compared with the
prewar experience. The setting of more realistic plans meant that firms
were under less pressure to recruit labor reserves and thereby bid up
wages. 221V
Anti-inflationary policy in the USSR must work within the limits
established by certain institutional characteristics of the Soviet econ-
omy. First of all, the dominance of planning in terms of physical goals
means that there is little connection between the demand for consumer
goods and services and the supply of these goods and services or the
price for productive factors. The inflexibility of supply in the face
of shifts in demand removes a restraining influence on inflationary
pressures present in the West. Moreover, an effective anti-inflationary
program in the USSR must operate on many fronts. It will not be enough
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to attack excess demand in the market for consumer goods by raising
taxes on the population when factory managers are assured of a market
and may be bidding up wages in an effort to get the labor force neces-
sary to meet and exceed their production quotas. In addition, tax
policy is hampered by the traditional reliance on indirect action in
the form of turnover taxes on consumer goods. Using this form of taxa-
tion to sop up excess consumer cash balances allows full expression to
the inflationary pressures already accumulated; by the use of direct
taxation, however, a general rise in prices could be avoided.
B. Effects of Inflation on Real Output and Popular Morale
In an economy relying primarily on physical controls, inflation
does not have the same impact that it would have in a price-directed
economy. In terms of effect on real output, repressed inflation
first of all tends to reduce the supply of labor. Marginal workers
such as elderly people and working wives tend to withdraw from the
labor force when additional income cannot be used to its fullest because
of the lack of available goods and services.* Some of the withdrawal
may be dictated by time considerations alone -- shortages of consumer
goods and extensive queuing increase the expenditure of time and effort
required to keep a household supplied. The Soviet currency reform of
1947, which wiped out much of the repressed inflation accumulated from
the war and early postwar years, is said to have been followed by an
increase in the number of people seeking jobs. 12/ The inflationary
process, moreover, is likely to distort the composition of output to
some degree. Perhaps the most important consequence of this distor-
tion is the increased incentive that repressed inflation gives to agri-
cultural workers to sell as much as possible at higher collective farm
market prices and to shift their efforts to their own "enterprises" --
their private plots and livestock holdings -- at the expense of kolkhoz
or state farm work. If consumer goods are not made available, this pri-
vate output may be withheld even from the collective farm markets and
consumed instead by the producers, as was the case during the 1920's.
The accumulation of idle cash balances in the hands of the popu-
lation encourages speculation and private production -- a favorite target
of regime rhetoric. As Khrushchev said, when "wage funds are higher than
the amount of goods ... the speculator is the only one to gain. People
of my generation remember the period of the civil war, when we were all
millionaires of a sort. You paid one million rubles for a box of matches
and there was nothing to eat." lg For the Soviet authorities, however)
the war against speculation has as much ideological content as economic.
* The exception, of course, is the relatively small share of the total
consumer expenditures spent for food in the collective farm market.
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If the excess cash balances accumulate in the hands of enter-
prises rather than consumers, the enterprises are tempted to try to
evade controls by hoarding inventories and recruiting additional
workers. Insofar as they are successful, real output will be af-
fected and the production mix distorted. The authorities may try
to counteract all of this by tightening controls on enterprises,
but the application of these controls requires a more expensive
bureaucracy. Furthermore, if controls are applied to the distribu-
tion of consumer goods through rationing, the costs are even greater.
The influence of inflation on the morale of the population
and thus on problems of political control consists mainly in a dif-
ferent set of relations. If inflation is repressed by holding prices
at levels that do not clear the markets for consumer goods, the re-
sulting shortages lead to queuing, the use of waiting lists, or other
informal methods of distribution. At best, they are irritating to the
consumer and perhaps also infuriating when the informal devices show
favoritism to particular consumers or groups of consumers. The short-
ages also present a constant reminder of the failure of levels of living
to match Soviet progress in other areas. If, instead, retail prices are
raised to clear the market, there may be a shock to consumer morale with
the "dangerous consequences" of which Khrushchev warned. The events of
the summer of 1962 attest to this. In following a policy of making gen-
eral periodic retail price reductions before 1956 and selective price
reductions since, the Soviet leadership may have conditioned the popula-
tion to regard any increase in prices as a betrayal.
Even more fundamental than the consequences cited above, however,
is the redistribution of income that takes place during inflation. Be-
cause of the existence of the collective farm markets, excess consumer
demand flows into these markets, raising prices and increasing the in-
comes of agricultural producers able to supply them. Since 1953 the
policy of the leadership has been to increase agricultural incentives
by raising procurement prices. Inflation reinforces this redistribu-
tion to the disadvantage of the urban worker, who has been the most
solid supporter of the Soviet regime. The urban workers, moreover,
have continued to forego major wage increases since 1955, while retail
prices have leveled off after a period of rapid decline. As a result,
their real wages have leveled off or declined since 1955, in sharp con-
trast to the steady rise in real wages that they enjoyed from 1949
through 1955. Once before, in 1947, the leadership had to resort to a
sweeping currency reform in order to squeeze out the cash hoards accu-
mulated in the agricultural sector during the wartime inflation. It
would seem that a paramount concern of Khrushchev must be to prevent
the urban worker from a further deterioration of his relative position.
Observers in the USSR have noted a good deal of disillusionment on the
part of these workers and even, incredible as it may seem, nostalgia
for the Stalin era. 11/
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C. Extent of Present Inflationary Pressures
At best, the measurement of inflationary pressures in the USSR
is difficult because of the lack of comprehensive official data on in-
comes, price levels, real output, and the money supply. No attempt is
made in this report to measure an "inflationary gap." Instead, the
trends in prices are presented, using the differential between state
retail prices and collective farm market prices as the best indicator
of inflationary trends over time. Further evidence is provided by
comparing estimated time series for disposable money income and real
purchases of consumer goods and services. Finally, the scanty evidence
as to the behavior of the money supply is introduced.
1. Recent Price Trends
An examination of the retail price series presented in
Table 2* shows at once that any inflationary pressures present in the
USSR are of relatively recent origin. The trend in prices on nonfood
goods in state retail trade was level during 1955-59 and then downward
slightly, while the level of state prices on food goods was almost un-
changed. For food price trends in the USSR, 1955-62, see the accom-
panying Chart. (The rise in the state retail price index for food**
120
110
100
90
80
70
1955 1956 1957 1958 1959 1960 1961 1962
(Estimated)
immo.mm
1955 :100
!NOM
Moscow Collective
Farm Market
USSR State Retail
USSR Collective
Farm Market
37318 3-63
* Table 2 follows on p. 14.
** Text continued on p. 16.
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Table 2
Retail Price Indexes in the USSR
Selected Years,
1950-62
1955 = 100
Food price indexes
State retail
Collective farm market
1950
1955
1956
1957
1958
1959
1960
1961
1962
143
100
100
101
104
103
101
101
(103)!,./*
Total USSR 12/
97
100
91
88
92
90
91
95
(99 to 101) Ei
In 71 large cities
87
100
89
87
95
91
96
102
N.A.
In Moscow .2/
N.A.
100
96
92
92
93
96
N.A.
114
Meat price indexes
State retail
167
100
115
113
110
110
110
110
N.A.
Collective farm market
Total USSR 12/
84
100
88
89
92
86
93
103
N.A.
In 71 large cities
86
100
89
85
go
87
93
105
N.A.
In Moscow 1/
N.A.
100
94
97
90
94
97
N.A.
116
Nonfood state retail price
index
123
100
99
99
99
99
97
96
N.A.
Footnotes for Table 2 follow on p. 15.
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Table 2
Retail Price Indexes in the USSR
Selected Years, 1950-62
(Continued)
1950
1955
1956
1957
1958
1959
1960
1961
1962
Ratio of collective farm
market prices to state
retail prices for food
1.14
1.75
1.45
1.34
1.38
1.31
1.35
1.43
1.44 to 1.48
a. The 1962 index for state retail food prices is based on an estimate of the effect of recent retail price in-
creases.
b. Excluding sales of producers to other producers in the so-called in-village trade.
c. The 1962 index for collective farm market prices is based on an estimate of trends in prices in all collective
markets and in Moscow collective farm markets.
d. The Moscow collective farm market price indexes are based on an average of the monthly prices, weighted ac-
cording to the procedure described in the footnote to Table 3, p. 17, below.
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goods in 1958 was caused solely by a 20-percent increase in liquor
prices.) Meanwhile, the collective farm market price index for the
country as a whole has been rising since 1957 but by 1961 still had
not reached the level of 1955.
The lack of official data on price indexes for 1962 makes
it difficult to extend the price indexes in Table 2.* The June price
increases in state retail store prices of 30 percent for meat products
and 25 percent for butter probably will not push up the state retail
price index for food goods by more than 2 percent, because of the low
weight of these products in total sales. The increase in collective
farm market prices in 1962, however, undoubtedly was substantial. An
index of Moscow collective farm market prices based on US Embassy re-
porting indicates a possible increase of 8 to 14 percent during 1962.
In the Soviet economy the best single measure of the failure
of the state to drain off excess purchasing power is the margin between
state retail store and collective farm market prices for food. As noted
above, the collective farm market sells mostly perishable foods -- meat,
vegetables, and dairy products -- and the price levels are determined by
supply and demand. Demand in turn depends on consumer disposable income
and the prices in state stores and the quantities of goods and services
available there. Supplies in the collective farm markets depend on
(a) the level of real income of the producers, (b) the relation of prices
in the collective farm markets to the prices paid by producers for con-
sumer goods, (c) the total output of the commodities sold in these mar-
kets, and (d) the procurement prices and policies of state agricultural
procurement organizations. The pronounced fluctuation in prices on these
markets is evident in Table 3,** where an index of prices on Moscow col-
lective farm markets is given. This index also offers the best direct
evidence available on the increase in inflationary pressures during 1962.
Although during 1959-62 the ratio of the prices in the two
markets rose from 1.31 to 1.44 - 1.48 (see Table 2*), the ratio still
was far below the ratio of 1.75 in 1955. Furthermore, the ratios pre-
vailing in recent years are still farther below the ratio of about 2.2
prevailing in 1940. Even these ratios overstate the case for the im-
portance of repressed inflation because they do not take account of the
diminishing importance of the collective farm markets in the total re-
tail trade. Holzman has suggested the use of a measure of repressed in-
flation which expresses the ratio of the difference between actual ex-
penditures in collective farm markets and these same expenditures valued
at official state retail prices to the sum of state retail sales plus
* P. 14, above.
** Table 3 follows on p. 17.
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Table 3
Index of Moscow Collective Farm Market Prices 2/
1953-62
July 1955 = 100
Month
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
January
102
112
120
102
98
104
104
109
109
124
February
N.A.
115
114
114
100
107
105
107
103
128
March
101
111
114
116
98
111
106
106
96
117
April
95
108
114
102
99
113
111
101
129
119
May
94
114
122
107
105
100
92
108
119
N.A.
June
93
118
114
103
91
93
100
108
103
133
July
N.A.
119
100
101
97
104
105
118
93
106
August
N.A.
119
112
102
100
98
102
105
N.A.
135
September
N.A.
110
108
113
102
94
104
104
122
139
October
103
114
103
101
114
98
102
106
108
120
November
102
114
104
111
113
99
106
100
N.A.
128
December
110
107
107
101
116
102
104
102
N.A.
118
a. The Moscow collective farm market price index is a weighted, seasonally adjusted index based on prices in collective farm markets. The
original compilation (available in this Office) indicates both the number of observations (which vary from one to four) and the price of each
commodity. A simple average of prices is used if more than one price has been obtained. The methodology for the construction of the index
follows. (1) The index is based on four major groupings (meat, dairy products, fruit, and vegetables) and 18 commodities. (2) The simple aver-
age ruble prices of the commodities are converted into index numbers using July 1955 prices = 100. (3) To derive a seasonal adjustment, 12-
month moving totals of these index numbers were calculated for 8 years, 1953 - mid-1961. (In a few cases, primarily in 1953, it was necessary
to interpolate monthly figures in order to obtain a 12-month total.) Each 12-month total was divided by 12 to yield a seasonal index for the
given month. Then a simple average of the monthly seasonal index numbers was taken as the average seasonal index. In some instances where the
average seasonally adjusted monthly indexes did not add to 12, a further adjustment was necessary -- that is, multiplication by the appropriate
ratios. ()4) The price index numbers are then divided by the adjusted average seasonal index numbers to eliminate insofar as possible seasonal
bias. (5) Using weights based on the structure of collective farm market sales in 71 large cities in the USSR in 1955, the seasonally adjusted
monthly index numbers are aggregated into group price indexes for meat products, dairy products, fruit, and vegetables. In those months where
an index number for one or more commodities of a group is missing, as in the case of milk during the summer months, a simple ratio is used to
calculate a comparable total for the group. (6) The group price indexes are added to get a monthly collective farm market price index, and
these indexes are then recomputed on a July 1955 base.
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collective farm market sales valued at state prices. 1W An index of
these adjusted ratios (1955 = 100), represented in the tabulation below,
shows sharp declines during 1956-57 and 1959. Only in 1961 does it be-
gin to rise again, and even then it is 12 percent below the level of
1958, 64 percent below the level of 1955, and only about one-sixth of
the 1940 index. Perhaps the most surprising aspect of these price level
comparisons is the 150-percent increase in the index between 1950 and
1955.
By 1959, this rise had been wiped out.
1940
1950 1953 1955 1956 1957 1958 1959
1960
1961
1962*
220
39 87 100 59 40 41 32
30
36
36 to 40
2. Trends in Disposable Money Income and Real Output of Goods
and Services
After inspecting the relative trends in disposable money
income,** the apprehension over excess consumer purchasing power be-
comes more understandable. The relevant data in index form are sum-
marized in Table 4.*** From 1950 to 1955, disposable money income
increased at an average annual rate of 6.4 percent, with no appreciable
difference in the behavior of any of its components.
At the same time, real consumption of goods and services
by the population increased by more than enough to allow price stability.
The real consumption of food, services, and nonfood goods rose at average
annual rates of 10.6, 10.0, and 12.8 percent, respectively. Thus the re-
appearance of repressed inflation after 1950 can be traced to the govern-
ment's policy of reducing state retail prices across the board too rapidly
during this period.
From 1955 to 1959, disposable money income began to expand
at an accelerated rate of 9.0 percent per year. Although gross incomes
of wage and salary workers increased at 6.3 percent per year, or at
about the same rate as from 1950 to 1955, the state took other actions
that increased consumer disposable incomes. The introduction of higher
* The index for 1962 is based on the assumption that the physical
volume of collective farm market sales was the same in 1962 as in 1961.
** This series for disposable income excludes certain urban labor
incomes earned in private activity because there is no way to estimate
their behavior over time with any confidence.
*** Table 4 follows on p. 19.
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Table 4
Indexes of Disposable Money Income and Real Purchases of Goods and Services in the USSR 2/
Selected Years, 1950-61
1955 = loo
1950
1955
1956
1957
1958
1959
1960
1961
Disposable money income
73
100
109
123
134
141
152
165
Of whiCh:
Gross earnings of workers and employees
in state and nonagricultural cooperative
sectors
72
100
106
115
122
128
140
155
Collective farm wage payments and house-
hold income from sale of farm products
73
loo
120
130
147
150
149
147
Earnings in military establishment
102
100
91
86
84
84
83
78
Transfer payments
70
loo
116
138
142
156
163
180
Less:
Direct taxes and bond purchases
78
loo
106
89
74
73
73
73
Purchases of food by households in 1958 prices
60
loo
107
117
123
131
144
150
Purchases of services by households in 1958
prices
62
loo
110
120
132
143
159
179
Purchases of nonfood goods by households in
1958 prices
55
loo
110
127
134
145
161
169
a. Income in kind is excluded from these calculations. In 1955, income in kind (mostly foodstuffs) came to about
23 percent of disposable income of households from all sources. Because households over time have been receiving
a larger proportion of their disposable income in money, the rise in money income since 1955 has been somewhat
greater than the rise in total disposable income.
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procurement prices for agricultural products helped to increase sharply
the incomes of collective farmers and household income from the sale of
agricultural products. Transfer payments increased at a far greater
rate, largely because of the expansion of the pension program. Mean-
while, a 27-percent reduction in direct taxes and bond purchases from
1955 to 1959 caused by reduced income tax rates and the abolition of
compulsory bond purchases gave a further impetus to the increase in
the disposable money income of consumers.
While disposable money income was increasing at an acceler-
ated rate, the rate of increase in real consumption of goods and services
was falling off. Real purchases of food, services, and nonfood goods
rose at average annual rates of 7.0, 9.4, and 9.7 percent, respectively.
Although the data are not good enough to say that the rise in real pur-
chases lagged significantly behind the growth in consumer purchasing
power, a slight inflationary situation probably was developing. The
authorities, however, may have more than offset this situation by rais-
ing state retail prices on vodka and other liquor in 1958.
It is only during 1960-62 that a solid basis exists for
inferring the presence of substantial inflationary pressures. During
the 2-year period 1960-61, disposable money income increased by 17 per-
cent, while real purchases of food increased by 14 percent and real pur-
chases of nonfood goods rose by 17 percent. Although the purchases of
services increased by 25 percent in constant prices, they are a very
snail part of the population's purchases. In continuing to reduce state
retail prices during 1960-61 while the increase in supplies available to
the consumer was lagging behind the growth in disposable income, the re-
gime evidently manufactured a significant amount of repressed inflation.
Preliminary plan fulfillment figures indicate that the gap
between the growth in disposable money income and real output of con-
sumer goods and services was not closed in 1962. The total money earn-
ings of workers and employees increased by 7.5 percent while the volume
of retail trade in state and cooperative outlets increased by 6 percent
in real terms. 12/ Sales of food in collective farm markets probably
did not increase as much.
Thus, while consumer disposable money income increased at
roughly the same pace from 1955 to 1959 and from 1959 to 1962, a slow-
down in output of consumer goods provided a basis for a growth in infla-
tionary pressures.
3. Evidence on Behavior of Money Supply
In the USSR the money supply includes the State Bank's cur-
rency issue (treasury notes and bank notes), deposit liabilities, and a
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number of less important special liabilities. It also includes coins
issued by the Ministry of Finance. The expansion of the money supply
during the 1930's contributed heavily to the rapid rate of inflation,
although monetary policy in no sense had the independent character that
it has in Western countries. If an accurate time series for the Soviet
money supply were available, it would be a valuable indicator of infla-
tionary trends. For the postwar years, however, such a series does not
exist in the West.
Because of the data limitations, an estimate of the degree
of monetary tightness in the USSR can be made only indirectly and with
wide margins of error. Raymond P. Powell, in his study of Soviet mone-
tary policy, found that changes in the aggregate supply of money tends
to be proportional to changes in the amount of State Bark loans. In
turn, the supply of money in the hands of enterprises and the popula-
tion was inversely related to the size of the state budget surplus. 22/
A comparison of the behavior of bank loans and budget surpluses from
1950 to 1961, therefore, should be helpful in analyzing changes in
monetary stringency. This comparison is no more than suggestive be-
cause there is no way of determining how much of new short-term bank
credit is used to increase the money supply or how much of the budg-
etary surplus involves a reduction of the money supply. 21/ In addi-
tion, it is probable that some of the state budget revenues during
the 1950's included bookkeeping entries that did not reduce cash in
circulation.
These caveats should be kept in mind when inspecting the
time series for state budget surpluses and changes in State Bank loans
presented in Table 5. Nevertheless, the combination of bank loans and
Table 5
State Budget Surpluses and Changes in Short-Term State Bank Loans
in the USSR 21
1951-61
Billion New Rubles
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
(1) Budget surpluses
2.7
3.8
2.5
4.7
2.5
2.2
2.0
3.0
3.6
3.9
1.7
(2) Changes in bank
loans
2.1
1.9
0.4
-1.8
0.9
4.4
2.0
5.7
6.3
2.8
4.5
Combined deflationary
effect [(1) minus
(2)] 12/
0.6
1.8
2.1
6.5
1.5
-2.2
0
-2.7
-2.7
1.1
-2.8
a. Totals have been derived from unrounded data and may not agree with the sums of the
rounded components.
b. In line with the accompanying text, the more that budget surpluses exceed the net
increase in bank loans, the greater is their combined deflationary effect.
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budgetary policy seems to have been much less deflationary after 1955,
largely because of a faster growth in State Bank short-term loans. It
is quite possible, then, that a factor given major credit for the suc-
cess of anti-inflationary controls in the early 1950's, monetary strin-
gency, has lost its influence in recent years.
D. Summary of the Present Situation
The reappearance of repressed inflation in the USSR contrasts
markedly with previous inflationary experience in that country in some
ways but is similar in one important respect. For 15 years (19)47-62)
the Soviet authorities were able to hold down the increase in average
annual earnings of their labor force far more successfully than in the
1930's. At the same time, high rates of growth in output of consumer
goods and services in the early 1950's allowed them to reduce retail
prices drastically. The early success of Khrushchev's agricultural
policies provided a major bulwark against inflation during these years.
After 1955, instead of raising real incomes by general price reductions,
the emphasis changed to one of raising incomes selectively through ex-
panding transfer payments, cutting income taxes beginning with the lower
income levels, and raising agricultural procurement prices while allow-
ing only a slow growth in money earnings. Between 1955 and 1959, how-
ever, the essential prop for carrying out these policies in a noninfla-
tionary manner was slipping away. The increases in goods and services
available for purchase were barely keeping up with the rise in consumer
disposable incomes.
Thus the economy could have absorbed the effects of the accel-
erated rise in incomes if the rate of growth in output had not begun to
fall. This decline in the rate of growth presented the Soviet leaders
with difficult choices. Since 1959 they appear to have elected to give
investment and military needs priority while consumer-oriented output
struggles on as best it can. It is quite likely that the increased
stress in policy statements in the past few years on the prevention of
inflation stems from a conscious decision of this nature. Once it is
accepted that the growth in output of consumer goods and services will
not be able to match previous performance, a strict supervision of the
growth in consumer incomes is required.
In 1962, some first steps were taken to deal with the emerging
inflationary situation. The June state price increases on meat and
butter reduced excess consumer purchasing power somewhat, although
these increases were accompanied by increases in procurement prices
that raised agricultural incomes. This action was followed in Sep-
tember by a suspension of further income tax cuts "temporarily" in
the "interests of [the] homeland's security." 22/ The scheduled re-
duction in the workweek from 41 to 44) hours evidently also has been
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shelved, thus avoiding some of the loss in output that the program for
reduction of hours had brought in earlier years, particularly in the
consumer goods industries.
IV. Policy Implications
There seems to be a solid basis for believing that the Soviet
authorities do face a problem with inflation -- a problem that is
unlikely to disappear unless the rate of growth turns upward or they
unexpectedly find themselves able to enlarge the share of national
product destined for consumption. More than this, there is reason
to believe that they cannot follow the old formulas in dealing with
inflation. The reasons why this is so are summarized below, and the
nature of the alternatives facing the leadership are then considered.
A. Khrushchev's Problem
It has been shown that the inflationary pressures of the past
few years do not measure up to those which the USSR has handled before
with little difficulty. Stalin allowed wages to run ahead of produc-
tivity gains in order to preserve maximum production incentives. When
necessary, he raised retail prices or confiscated savings. Fundamental
to the success of his policies was an iron control that permitted him
to disregard their impact on the real incomes of various sectors of the
Soviet population.
What, then, are the reasons for the Soviet leadership's pre-
occupation with inflation? Is it to be interpreted as an immediate
concern or simply a determination to prevent a future deterioration
in the situation? There are reasons for believing that Khrushchev
may consider inflation a problem now rather than in the future. These
reasons rest on the two facts that Khrushchev does not have the same
absolute authority which Stalin had and that the Soviet population is
not so docile as it was under Stalin.
Certainly Khrushchev's position appears to be weaker. De-
Stalinization probably is irreversible in the sense that rigid con-
trols cannot be reimposed without destroying incentives or perhaps
endangering Khrushchev's own position. Moreover, it is likely that
Khrushchev realizes this. The outbreak of civil disturbances involv-
ing economic issues and analogous experiences in the Satellites shows
what can occur after a relaxation of police controls and coercion
lessens the populace's fear of reprisals against protests of various
kinds. It is difficult to visualize Stalin pleading for "understand-
ing" in the manner of Khrushchev's oration of June 1962. Indeed, it
is possible that the Soviet leadership's wariness over popular re-
action arises from events only partly recorded in the West.
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Since 1953 the Soviet propaganda media have saturated the popu-
lation with promises of quick progress toward higher levels of consump-
tion, promises that were fulfilled to some extent before 1958. As a
result, the Soviet authorities may have provoked their own "revolution
of rising expectations." Khrushchev seems to recognize that any action
he takes relating to real incomes must be weighed carefully. Yet re-
pressed inflation fosters speculation and private activity that the
leadership has opposed ruthlessly in the past and also redistributes
income to the disadvantage of industrial workers and the bureaucracy,
the classes whose support the government must have.
While making promises as to future consumption levels, the
Soviet leadership also has made some commitments that may restrict its
freedom of action. The new pension program will become more costly
over time, and concrete welfare policies of this sort will be ex-
tremely difficult to retract. Equally as important, a reversal of
the plans to eliminate income taxation or a reintroduction of compul-
sory bond purchases could have a serious impact on consumer morale.
In many ways, then, although existing inflationary pressures are not
so large as those sustained in the past, the regime no longer has a
full range of alternatives open to it in dealing with them. In addi-
tion, the limited policy choices that might be made embody distasteful
economic and political consequences.
B. Tmmediate Policy Considerations
The extent of the Soviet problem with inflation in the near
future will depend on the course of the cold war as well as the rate
of economic growth. As far as the available data show, the balance
has only in the past 3 years tipped against equilibrium in the markets
for consumer goods and services. It is doubtful that the Soviet authori-
ties have given up the hope that economic performance will improve or
that they can hold down military spending. If their hopes should mate-
rialize, they would have less reason to worry about inflationary pres-
sures; so it seems likely that they will temporize in dealing with infla-
tion. The experience of the past summer was not encouraging as far as
any frontal attack on the problem is concerned.
A slowdown in the rate of increase of disposable money income
is not likely during 1963-65. To achieve a meaningful slowdown, the
regime probably would introduce some scheme of forced savings such as
compulsory bond purchases rather than tamper with the schedules of
transfer payments -- pensions, sickness benefits, grants, and stipends.
Pension payments especially will continue to increase because of the
large increments in population of pension age projected over the next
6 years. The pace of annual increases in disposable income may even
quicken if a lid cannot be kept on the rate at which wages and salaries
go up.
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Since the war the relative success in avoiding inflation can be
traced in large part to the firm control exercised over the increases
in average annual earnings in state enterprises. Whatever the reasons
for this success -- improved supervision by the State Bank, more effec-
tive planning, or other factors -- matching the previous record may
prove to be the critical area in Soviet stabilization policy. The
creeping rate of wage and salary gains in recent years probably has
not far outstripped the continuing upgrading of skills in the labor
force. As a result, the pressures for wage and salary increases may
be building up within the present tight labor market. That this situa-
tion prevails is indicated by the increasing number of complaints appear-
ing in the Soviet press concerning enterprises or groups of enterprises
exceeding their planned wage expenditures. The frequent references to
high rates of labor turnover also may reflect some of the pressures ex-
perienced by factory managers in keeping a labor force. Therefore, any
Soviet inflation control program probably will feature administrative
devices designed to maintain effective supervision over the use of
working capital advanced to enterprises through the state budget or
through short-term State Bank loans.
For the reasons discussed above, across-the-board price in-
creases do not appear probable during 1963 or during the 2 remaining
years (196)4-65) of the Seven Year Plan. Even isolated price increases
to meet particularly nasty disequilibrium situations in selected mar-
kets will not be very appealing when the potential economic gains are
weighed against the possible political effects. In any case, if, dur-
ing the coming year, output does not increase at a higher rate and in-
flationary pressures continue to increase, the leadership can be expected
to take more direct action to reduce consumer purchasing power. Because
a one-time raising of prices through higher turnover taxes will not cure
a chronic inflationary condition arising from a difference in rates of
growth of disposable income and output of consumer goods and services,
the action will have to take the form of something like a wage-freeze
or a reintroduction of direct taxation on a scale large enough to keep
planned levels of consumer output in balance with consumer demand. Some
redistribution of income in favor of urban workers could be accomplished
in the process by making special levies on income earned in collective
farm markets, but such levies would offset to some extent the regime's
effort to increase agricultural incentives. Whatever the nature of such
a program, the decision to proceed with it will be taken with a good deal
of misgiving. Consequently, its introduction is likely to be postponed
as long as possible, and some compromises favoring a somewhat larger al-
location of GNP to consumption might be reached before its adoption.
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