Competitive Money Creation in China and in the Soviet Union

Abstract

With economic reforms, the control of financial resources becomes important as a means of securing property rights. Both China and the former Soviet Union, in their transition from a centrally-planned economy, have faced problems of a weakened center which, either completely or on occasions, has lost control of the money creation process. This paper analyses the attempts of provinces and republics to vary the money supply with the objective of acquiring physical resources at the cost of the other provinces (republics), while balancing the costs of potential inflation. Equilibrium outcomes are found to depend on the provinces' (republics') preferences about the growth in real absorption and the rate of inflation, on the growth of national output, and on the relative size of their economies.

Chinese Reform Strategy

“…The consequence of this influence is competitive money creation among local governments. If a local government is able to increase the money supply to its region, it will be able to gain access to more resources, but if every local government is able to do likewise, the consequence is high rates of inflation (Liew, 1994). Between 1987 and 1988, when competitive money creation was at its height, inflation reached a staggering annual rate of 37.3 per cent.17 In response, the central government reasserted control over the monetary system and reimposed many central controls over the economy.…”