And then he announced his ration coupon exchange scheme. Beginning at midnight, anyone was free to exchange any ration ticket in his possession—regardless of the fact that it bore his own personal serial number as well as the serial number of the ticket itself—for anybody else’s ration ticket. Ration tickets for cigarettes, for example, could be exchanged for ration tickets for bread or shoes or anything else, and at any ratio mutually agreeable to the parties to the exchange. He went on to explain how people with different needs, tastes and preferences would all be able to satisfy them better now than under the old system. He had ordered Bolshekov to call this parade, he said in conclusion, in order to celebrate the fact that the battle of the ration tickets had at last been won.
This time Peter was determined not to depend merely on second-hand official reports to know how his reform was working. He frequently put on his old Proletarian uniform, and a pair of horn-rimmed spectacles, to wander around and see the reaction of people at first hand.
At first there was no reaction at all. Nobody exchanged ration coupons, in spite of the fact that Peter’s broadcast had been published in every newspaper in Wonworld. By his own discreet inquiries and those of his agents he soon learned the reason. Everyone knew that all his own ration tickets were stamped with his personal serial number. Everyone feared a new sort of trap.
On Adams’ advice, Peter decided to dramatize the reform. He ordered the following week to be celebrated as Ration Coupon Exchange Week. Outstanding members of the Protectorate were ordered to stand in line on either side of the Red Square at noon each day. They would march towards each other, to the strains of the International, meet in the center, and there exchange their least valued ration ticket for another.
The result of this was again unsatisfactory. People now began to assume that it was compulsory to exchange at least a few ration tickets. They tried to learn from the Central Planning Board how many they were supposed to exchange and at what rates.
But after a few months these fears began to quiet down. Repeated instructions in the government press began to give people the idea. Genuinely voluntary exchanges of ration tickets began to take place, and at varying rates.
And now it was Peter’s turn to make a few surprising discoveries.
At first individuals or families merely exchanged ration tickets with other persons or families living in the same room with them. Then in the same house. Then in the same neighborhood or factory. The rates at which the ration tickets exchanged was a matter of special bargaining in each case. They at first revealed no describable pattern whatever. In one tenement or barracks someone would be exchanging, say, one shirt coupon for five bread coupons; next door one shirt coupon might exchange for fifteen bread coupons.
But gradually a distinct pattern began to take form. The man who had exchanged his shirt coupon for five bread coupons would learn that he could have got fifteen bread coupons from someone else; the man who had given up fifteen bread coupons for one shirt coupon would learn that he might have got a shirt coupon for only five bread coupons. So people began to “shop around,” 6 as they called it, each trying to get the highest bid for what he had to offer, each trying to get the greatest number of the coupons he desired for the coupons with which he was willing to part. The result, after a surprisingly short time, was that a uniform rate of exchange prevailed at any given moment between one type of coupon and another.
Throughout all of Moscow, for example—as throughout any district in which people were permitted to move freely without passports—virtually the same rate would establish itself as between any two coupons. For example, a uniform rate would be established of ten bread for one shirt coupon; and when this general rate was established, practically nobody would exchange for any other. For no man with a shirt coupon to exchange would take only nine bread coupons for it from anyone when he knew that somebody else would offer him ten; and nobody with bread coupons would give eleven of them for a shirt coupon as long as he knew that someone stood ready to give him a shirt coupon for only ten.
Then another striking thing happened. People had at first shopped around from house to house and street to street, trying to get the best rate in the kind of coupons they valued most for the kind of coupons they valued least. But soon people anxious to trade their coupons took to meeting regularly at certain places where they had previously discovered that they found the most other traders and bidders and could get the best rates in the quickest time. These meeting points, which people took to calling coupon “markets,” tended to become fewer and larger.
Two principal “markets” gradually established themselves in Moscow, one in Engels Square and the other at the foot of Death-to-Trotsky Street. Here large crowds, composed in turn of smaller groups, gathered on the sidewalk and spread into the street. They were made up of shouting and gesticulating persons, each holding up a coupon or sheet of coupons, each asking how much he was bid, say, in beer coupons for his shirt coupon, or offering his shirt coupon for, say, twelve beer coupons, and asking whether he had any takers.
Then shortly there took place a still further development. One enterprising coupon trader, a Deputy, brought along his little girl’s school slate, on which he marked the rates at which he was willing to exchange different coupons for other coupons. He would hold this slate up for the crowd to see.
He offered to trade other people’s coupons for them, to get the best rates and to save them the time and trouble of doing all this exchanging themselves. All he asked in return was a small fraction of what he got in exchange. If he got twelve beer coupons for a “client’s” shirt coupon, for example, he would keep one beer coupon for his trouble. This takeout gradually came to be called his “commission”—apparently because it was his reward for having the coupons committed to his charge.
And more and more people came to find that they could do better, everything considered, by turning their coupons over to him to exchange, than by trying to trade them directly themselves. For the process of trading was often wearisome and complicated. Someone would want, say, beer coupons for his shirt coupon. But he would not find anyone who wanted a shirt coupon for beer coupons, or who was willing to make this exchange at a satisfactory rate. So he might have to trade his shirt coupon first for bread coupons, and then perhaps trade these in turn for cigarette coupons—because he had learned of someone who was offering beer coupons for cigarette coupons. He saved all this tiring complication by turning his coupons for exchange over to the enterprising coupon trader, Comrade N-13, and letting the latter keep for his services a small percentage of what he got. Somebody happily thought of calling N-13 a “middleman.”
Others, for more obscure reasons, started calling him a “broker.” Both names stuck.
People found that they saved amazing time and work by taking their coupons for exchange to N-13. For if a man came with a shirt coupon, say, to exchange for beer coupons, N-13 would look in a little notebook he carried, which he called a “customer’s book,” and might find that someone had left beer coupons with him to exchange for a shirt coupon. Or he might find that someone had left beer coupons with him to exchange for cigarette coupons, and that someone else had left cigarette coupons to exchange for a shirt coupon. So he would make the “triangular” exchange himself.
The business of N-13 snowballed. But it was only for a few weeks that he had a monopoly on it. Other coupon traders also got slates, also set up as middlemen and brokers, also took orders from others. One result was that the “commission,” or percentage of the coupons that the brokers kept for themselves, gradually narrowed as they competed with each other to get this “business.”
Still another result was that the crowds began to diminish instead of growing bigger. They finally came to consist wholly of “professional” brokers (meeting late in the evening after their regular factory jobs were over) who acted as agents for exchanging the tickets left in their care. These brokers would often make their exchanges merely by comparing the orders on each other??
?s notebooks.
And still a third result was that the professional brokers finally put all their slates together to form in effect one great slate, which they hung against the blank wall of a building in Death-to-Trotsky Street, and on which they marked the prevailing “quotations” of different coupons in terms of other coupons.
These quotations consisted of a record of the ratios at which the last exchanges or transactions had been made. There was also often a record of, say, the maximum number of beer coupons being offered by any broker for cigarette coupons, and the maximum number of cigarette coupons being bid for beer coupons.
These latter quotations came to be known as the “bid and asked” prices. If they were equal, or overlapped, an exchange was possible and took place. But the best offer of anyone with beer coupons might be three of them for one cigarette coupon, while the best bid of anyone with cigarette coupons might be one of them for four beer coupons. In that case no exchange or transaction would occur until the highest bid and the lowest offer came together.
Then still a fourth development took place, to Peter the most unlooked for and fascinating of all. The market in ration coupons had become bewilderingly complicated. The immense slate could not begin to hold the bid-and-asked ratios of exchange for everything. For example, the ratio at which beer coupons were offered for exchange had to be stated in terms of shoe coupons, cap coupons, bean coupons, potato coupons, trouser coupons, cigarette coupons, and so on endlessly. But the ratio of potato coupons, in turn, had to be stated in terms of beer coupons, bread coupons, shoe coupons, cigarette coupons.... Though this made an infinite network of possible exchange ratios, the exchange ratio of any two items against a third always worked out to be pretty much in accord with their exchange ratios with each other.
When Peter first became aware of this he regarded it as a remarkable coincidence, and then as something of a miracle. But he soon came to realize that it was due to a perfectly natural and virtually inevitable development. Some brokers made it their business to specialize in what they called “triangular” transactions among ration tickets. They were constantly on the lookout for discrepancies in the mutual exchange relationships of any three commodities. As soon as they found any discrepancy from which they could profit, by a triangular exchange, they immediately tried to do so. Their competitive bids and offers continued until the relationships were ironed out, so that no further profit was possible for anybody as a result of a discrepancy.
For the same reason, Peter found, the ratios of exchange in the market at Engels Square were never far out of line for more than a very short period with the ratios of exchange on Death-to-Trotsky Street; for a set of brokers were always running back and forth between the two markets, or sending messengers, and trying to profit from the least discrepancy that arose between the markets in the exchanges or quotations.
A special name—“arbitrage business”—sprang up for this sort of transaction. Its effect was to unify, or to universalize, price relationships among markets between which this freedom of arbitrage existed.
As a result of this amazing consonance within the infinitely complicated pattern of exchange relationships, people took to the habit of saying that these wonderfully delicate market adjustments were “automatic.” The word was ingenious; but Peter was shrewd enough to recognize that it was only a striking metaphor which, if taken literally, could be misleading. These market adjustments were anything but “automatic.” They took place solely because there was an alert group of people ready to seize upon the slightest discrepancy to make a transaction profitable to themselves. It was precisely the constant alertness and the constant initiative of these specialists that prevented any but the most minute and short-lived discrepancies from occurring.
Of course each of these specialists was doing this, not in order to make a more perfect market, or with any conscious effort to confer any benefit on society, but solely in the hope of making a transaction profitable to himself—profitable in the sense that he would end up with more ration tickets. And as everybody was trying to maximize his own satisfactions by getting the maximum supply of the particular kinds of ration tickets he wanted, his drive to do this, and the devices to which he resorted to do it, might also be called “automatic.” But the process was not automatic in the sense that it took place without anybody’s initiative or effort or ingenuity or planning. It took place precisely because each individual—or at least each individual who was energetic and enterprising—was devoting his initiative, effort, ingenuity and planning toward maximizing his own satisfactions.
And soon a fifth fascinating development occurred. The exchange relationships had become too complicated for any blackboard or notebook or for anyone to hold in mind or calculate in their totality. Therefore the practice grew up of quoting other ration tickets in terms of only a few leading kinds of ration tickets, chiefly those for bread, potatoes, and cigarettes. In the course of further time everything came to be quoted solely in terms of cigarette coupons. The quotations on the big blackboard, which came to be known simply as the Big Board, then became comparatively easy to read. The last transactions would be recorded like this:
Beer coupons = 1/4 cigarette coupons
Bean coupons = 1 cigarette coupons
Bread coupons = 1 cigarette coupons
Cap coupons = 8 cigarette coupons
Chair coupons = 40 cigarette coupons
Potato coupons = 1/2 cigarette coupons
Shirt coupons = 10 cigarette coupons
And so for all other coupons.
This resulted in enormous simplification. It eliminated the necessity for all the complex cross-rates and cross-calculations of any one type of coupon in terms of another. If a shirt coupon exchanged for 10 cigarette coupons and a chair coupon for 40 cigarette coupons, then it was obvious at once that it would take four shirt coupons to exchange for one chair coupon—and so for any other two items. Thus the device of quoting every type of coupon in terms of a single type of coupon simplified the whole task of comparing the exchange value of any type of coupon in terms of any other.
Instead of speaking of the exchange ratios of these coupons, people now began to speak of the “price” of the coupons. And by the “price” of the coupons they always meant the ratio of exchange with cigarette coupons.
How did cigarette coupons come to be chosen as the kind in which all the others were quoted? This was a problem that particularly fascinated Peter. As a result of his inquiries and inferences he concluded that the situation was something like this. Practically everybody smoked cigarettes and wanted cigarettes.
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But if anybody didn’t smoke them himself, he nevertheless found that cigarette coupons were the easiest to exchange for other coupons. This was so for several reasons. A cigarette coupon entitled the holder to one package of cigarettes. This package did not spoil quickly like many other things. It was compact and easy to handle and carry in proportion to its value. And in case of necessity exact “change” could be made by opening the package and exchanging single cigarettes.
And as soon as people discovered that they could handle and exchange cigarettes and cigarette coupons more easily than other coupons, they were ready to accept cigarette coupons in exchange for the kind of coupons they had to offer rather than demand the particular kind of coupons that they ultimately wanted. For they found that they could make the best and quickest bargains by taking cigarette coupons first, and then re-exchanging them for what they ultimately wanted, instead of trying to make a direct exchange. A man with a chair coupon who wanted instead an extra shirt, an extra cap, and more bread, for example, no longer had to shop around until he found someone who had and was willing to part with the exact combination that he wanted—and who was also eager for a chair. He found that he could satisfy his wants more quickly, fully and exactly by exchanging his chair coupon for cigarette coupons first.
And then occurred what was to Peter still one more fascinating development. As cigarette coup
ons began to establish themselves as the chief medium of exchange and “standard of value,” people who already had as much as they could smoke, and even nonsmokers, began to demand cigarette coupons in exchange for their own “surplus” coupons of all kinds, for the sole reason that they found it easier in this way to get the particular coupon and commodities that they ultimately wanted. And this extra source of demand for cigarette coupons—as a medium of exchange—increased their exchange value—which meant that the “price” of other goods in terms of cigarette coupons began to fall a bit.
But one day, after the new system of free exchange had been in effect about six months, an extraordinary and alarming thing happened.
The “price” of all the coupons on the board began to shoot up simultaneously. Most people were at first delighted by this development. People with bread coupons now found that they could get two cigarette coupons for their bread coupons instead of only one; people with shirt coupons found that they could get twenty cigarette coupons for them instead of only ten; and so on. And as many people had got into the mental habit of measuring their welfare in terms of the value of their coupon holdings in cigarette coupons, they began to feel richer and better off. They were disillusioned, however, the moment they tried to re-exchange their cigarette coupons for the coupons they ultimately wanted. They regarded the “prices” of these other coupons as exorbitant.
What had happened? Why had the price of everything suddenly gone up simultaneously?
Peter soon discovered the reason. A rumor had developed that the government did not have as many actual packages of cigarettes available as the number of cigarette coupons it had issued, and that therefore people would soon not be able to exchange their cigarette coupons for actual cigarettes. As soon as this rumor developed there was a run on the government shops and warehouses for the actual cigarettes, with everyone presenting his ration coupon at once. The rumor was true. The supply of cigarettes was not in fact equal to the supply of outstanding cigarette coupons.