Compendium: CMEA’s Fixed Exchange Rates and its Hard Currency Shops

There are no doubts whatsoever that the demise of the Eastern Bloc countries and the Soviet Union by extension came as a direct result of the death of Bretton Woods. While the Western Bloc and the United States opted for Floating Exchange Rates and Fiat Currencies as one of their survival moves, the Eastern Bloc and Soviets did little except allow their Currencies to appreciate from the 1970s onward. Additionally, the Energy Crises of 1973 and 1979 caused far more harm to their economies than benefited them since they too were relying on Petroleum. The result led to “Current Account Deficits” in which they were accruing Trade Deficits by Importing far more than they were capable of Exporting as part of the Council for Mutual Economic Assistance (CMEA).

The Eastern Bloc countries lacked adequate access to Credit from the Western Bloc to offset their Trading Deficits because of the CMEA being a Debtor rather than a Creditor. In essence, the CMEA borrowed more Kapital from the Western Bloc than actually lending to the Western Bloc as a consequence of its member-states’ excessive Imports.

Naturally, the Trading Deficits alone could have been mitigated by creating goods and services of comparable quality and quantity to offset the need for Imports. But due to the flaws of STEP (Soviet-Type Economic Planning), that was not possible since their economies were never able to compete against the Western Bloc. It also did not help that there was a proliferation of black markets in imported Western Bloc goods, certain workers demanding to be paid in foreign currencies after others got paid in them by working in other countries, and ownership of these foreign currencies being banned altogether. These factors are all economic symptoms that can be traced back to the death of Bretton Woods.

All Western Bloc Currencies after Bretton Woods became Fiat Currencies allowed to achieve Floating Exchange Rates according to the Incentives of Supply and Demand. It in turn created a precedent whereby maintaining any Fixed Exchange Rate required maintaining reserves of Kapital in foreign currencies. Without the sufficient reserves, a Fixed Exchange Rate can no longer be sustainable and must be allowed to gradually shift toward a Floating Exchange Rate.

But the CMEA did not recognize this possibility nor did they embark on anything closely resembling the Work-Standard. Instead, the solution proposed by the Eastern Bloc and Soviets was a gradual implementation of market reforms that revolved around acquiring the most Kapital in foreign currencies. One of the most well-known endeavors that were launched under the CMEA was the introduction of “Hard Currency Shops.”

Hard Currency Shops, regardless of their name or national origin, are specialty stores catering to Western tourists by selling Western consumer goods and certain services like hotels and bars, kiosks, and rest stops. Western Bloc newspapers and literature, cigarettes, alcohol, and other goods normally unavailable are commonly sold. It was also common to encounter domestically-produced goods that are intended for Export but are not for the local population. Again, this too was a reflection of the same consequences that came after the death of Bretton Woods because it led to circumstances where the locals would visit them just to buy whatever the regular shops did not have readily available.

The problem here cannot be reduced to something as simplistic as the propagated meme of “creating a bifurcated consumer economy” of so-called ‘haves’ and ‘have-nots’. The real problem here was an attempt at trying to resolve a financial problem with an economic solution, rather than resolving the financial problem with an appropriate financial one. If anything, the Hard Currency Shops only worsened conditions while at the same time resulted in a wasted opportunity that should be taken into consideration for the Work-Standard. The best place to begin is by justifying why the Work-Standard relies on Fixed Exchange Rates.

To begin, when a nation-state enters a Trading Deficit with a Floating Exchange Rate, the Price of the foreign currency will rise higher than the Price of the domestic currency. The goal is to dissuade the people from overspending on Imports and focus more on trying to regain the Balances of Trades and Payments. This is known as “Automatic Rebalancing” because, unlike Fixed Exchange Rates, Financial Markets under the Incentives of Supply and Demand can adjust the Prices themselves at the Forex Markets.  

Automatic Rebalancing does not happen with Fixed Exchange Rates in nation-states, including those that rely on Soviet-Type Economic Planning. The Financial Régime manually adjusts the Exchange Rate insofar as they are capable of maintaining ample reserves of foreign currencies, otherwise they enter a Currency Crisis where they are forced to devalue their Currency. A “Currency Devaluation” involves injecting enough Depreciation into a Currency to reduce its Value in order to sustain the Exchange Rate. “Currency Revaluation,” however, is its opposite and that entails injecting enough Appreciation to increase the Value of the Currency to sustain the Exchange Rate.  

The Work-Standard is ideal for maintaining the Balance of Trade and the Balance of Payments. Just as there must be a Balance of Power in the political realm, so too must there be Balances of Trades and Payments in the economic and financial realms as well. The Central Bank should maintain reserves of foreign currencies to facilitate Imports and Exports. However, where the Work-Standard deviates is when Trade Deficits become apparent.

Any Imports recorded while in a Trade Deficit will increase the nation-state’s Sovereign Schuld according to the Value of the Import. That alone creates the potential for a future “Sovereign Schuld Crisis.” Moreover, the Price of foreign currencies is increased by the Financial Régime and executed through the help of a distinct financial institution serving as the Work-Standard’s alternative to Financial Markets. The Work-Standard is capable of employing “Semi-Automatic Rebalancing” as a means of last resort. It can be employed only when the nation-state has a Trade Deficit, cannot take in additional Schuld, low on foreign currency reserves, and cannot afford to devalue its Currency by compromising its Fixed Exchange Rate. Again, this requires conceptualizing the Work-Standard’s alternative to the Financial Market.

Moreover, the Hard Currency Shops as a concept can be salvaged by the Work-Standard and reconstituted to fulfill other purposes. One potential alternative for them is the facilitation of foreign goods and services for domestic purchases, where all transactions must be conducted in the Currency of the State that owns the shop and issues its affiliated Currency. This rendition cannot exist without the hosting nation-state also simultaneously opening its own specialty store in the other nation-state. Another potential alternative is for the shops themselves to facilitate a different model of economic organization that has only been partly conceptualized by the Shopping Mall. And rather than simply presenting a viable opportunity to obtain foreign currencies, they can also facilitate the creation of an alternative to the concept of Free Trade, which was another consideration neglected by CMEA.

Categories: Compendium, Economic History, Politics

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