austin-murphy-the-triumph-of-evil

182 THE TRIUMPH OF EVIL
realistic economic plan available at the time that could not only have
avoided the catastrophe (Murphy, 1990a) but that could have actually
led to the prosperity which many (including the West German leader
Helmut Kohl) were forecasting in 1990 (Ritschl, 1996). As the designer
of the idea, I gave copies of the plan to various media and government
officials in December 1989, although the plan was not published until
1990 (Murphy, 1990a) and did not appear in an academic journal until
1992 (Murphy, 1992a). The plan essentially focused on a transition
from a state-controlled protected economy to a competitive market·
oriented economy and from an inconvertible currency (the East Gennan
mark symbolized by M) to a convertible one (the West German mark
symbolized by OM). As stated by Czege (1989) and many others, both
previously and subsequently, alternative plans to integrate a protected
economy into the world market have generally been counterproductive.
This chapter simulates the economic events that would have transpired
if the Murphy plan had indeed been used. The results of the investigation
are important for demonstrating how useful the plan can be
to ease a country's transition to economic competitiveness and how
unnecessary economic catastrophes like the one that occurred in eastern
Germany in the 1990s really are.
THE PLAN FOR TRANSITION To EcoNOMIC CoMPETITIVENESS
According to the plan, the subsidized prices of East German goods
could be kept in a market economy by giving each resident a limited
amount of a special currency every month (perhaps called the Karl
Mark and symbolized by KM) that would effectively allow them to pay
for things like rent, food, monthly mass transportation tickets, some
cultural events (such as theater, sports, and vacation trips), child care,
and children's clothing at very low M prices. Sellers of necessities pro
duced in East Germany would be able to price their goods in M at
higher market-clearing prices, but they would be required to accept KM
for up to 90% of the price from East Germans who purchased such
goods produced in East Germany (and the selling state businesses would
then be able to exchange their KM so received for an equal amount of
M from the East German central bank). This system is similar to giving
all residents coupons or food stamps, except that these coupons could
CHAPTER 5
183
be used to pay for any necessities (the KM could also be made more like
food stamps by allowing 100% of the price to be paid in KM).
In addition, the plan called for the state to agree to exchange M
for DM at a set exchange rate like the 1 :I ratio estimated to be appro­
priate given the relative purchasing power of the two currencies (Col­
lier, 1985).2 However, a shortage of capital in East Germany (stemming
from the enormous reparations payments it had to make, as previously
explained in Chapters 2-4) made its industry too uncompetitive relative
to other countries like West Germany to earn enough DM to be able
to afford an unlimited amount of exchanges at that rate. As a result,
the plan mandated restricting the exchanges only to cases where an
individual or business agreed to invest a fixed number of M into sav­
ings accounts in state banks, such as M5 saved per Ml exchanged into
DM. Withdrawals from the savings accounts might be restricted for a
fixed number of years, which was set as 5-l 0 years in the original plan
(although the number of years could be varied between 2 and 10 years,
depending on the amount of foreign capital and financial assistance that
could be obtained). Given limited wealth and income in East Germany,
the amount that could be exchanged would be severely restricted by
such a rule.
The money from the special long-term savings accounts could then
� used by East Germany to invest into modem capital, either through
�trect government investment or indirectly through the govemme?t
mvesting into private businesses just as Japan has successfully done 10
the past (Blejer and Cheasty, 1986). Such investment would allow �t
German industry to become more competitive. The rate of return patd
on the savings accounts could be contracted at 3%, which was 0.25%
less than the rate available on East German checking accounts, and
Which would represent very cheap financing for the capital. The ratio
of exchanged M to mandatory saved M could be reduced in subs�quent
Years depending on the success of the plan in promoting domestic pro­
duct' ·
IVtty and production.
�erman goods, since necessities produced in East Germany �ould be
This currency exchange system would encourage the purchase of East
c eaply Priced in KM. In addition, excessive spending on tmported
8?ds would require prohibitively high levels of savings that would
gtve East Germans an incentive to buy "East German" as opposed to