The Scissors Crisis and Narkomfin's Choices, 1923
You are a senior official at the People's Commissariat of Finance in Moscow in October 1923. The 'scissors' between industrial and agricultural prices has widened sharply: peasants receive low prices for grain but must pay high prices for textiles, metal goods, and kerosene. Grain marketings are 30 percent below plan; peasants are holding grain and buying less. Industrial trusts, protected by state credit, have raised wholesale prices. The state has extended 100 million rubles in cheap credit to industry, fueling inflation. Urban unemployment is 1.5 million and strikes have broken out in several factories. Narkomfin can tighten credit, cut industrial prices by decree, or raise grain procurement prices. Each option threatens either industrial investment, the budget, or the party's alliance with the peasantry. The Politburo wants a decision before the winter procurement campaign. Narkomfin estimates that a 10 percent cut in industrial prices would cost the budget 40 million rubles in lost revenue.
1. Diagnose the causes of the scissors crisis. Which is more important: state credit to industry, monopoly pricing by trusts, or low procurement prices?
Read the worked answer
The scissors crisis is a chain rather than a single cause. Cheap state credit lets industrial trusts ignore costs and raise wholesale prices; monopoly pricing converts credit into higher prices; low procurement prices reduce peasant incentive to market grain. For policy, credit expansion is the most controllable proximate cause: 100 million rubles of cheap credit financed price increases without corresponding output. Trust monopoly explains why the price rise persisted; low procurement prices explain the peasant response. If forced to rank, credit is most important for immediate action because tightening it can reverse the price spiral, whereas breaking trusts or raising procurement prices takes longer and has larger political costs. The diagnosis matters because a credit diagnosis points to Narkomfin, while a monopoly diagnosis points to industrial reorganization, and a procurement diagnosis points to the Politburo's peasant policy.
2. Which policy-tightening credit, cutting industrial prices by decree, or raising procurement prices-would you recommend, and what are its second-order effects?
Read the worked answer
Recommend a sequenced package: tighten credit first, cut industrial prices for key consumer goods by decree as a temporary bridge, and raise procurement prices modestly. Tightening alone may cause industrial unemployment, already 1.5 million; price cuts alone may create shortages; higher procurement prices alone worsen inflation. Sequencing matters: tighten credit to reduce inflationary pressure, then cut prices to restore peasant terms of trade, then raise procurement prices only enough to draw grain. Second-order effects include lower budget revenue, slower industrial investment, and possible layoffs, but urban unrest eases if textiles and kerosene become cheaper. The decree should cover a narrow list of goods peasants actually buy, not all industrial output, to limit fiscal cost. The package is politically defensible because it shows workers price relief and peasants a better deal, while placing the adjustment burden on credit rather than on either class alone.
3. What political risk matters most to the Politburo, and how should it shape the timing?
Read the worked answer
The biggest political risk is urban hunger and strikes, because the party's legitimacy rests on workers. But squeezing peasants too hard risks a procurement failure that causes urban hunger later. The Politburo should act before winter procurement; delay makes both risks worse because peasants will consume or hide grain. Timing should favor measures that show quick results to workers-price cuts on consumer goods-while credit tightening is phased to avoid mass layoffs. If procurement prices are raised too late, peasants may already have fed grain to livestock. The Politburo should also announce the package as a single bargain: peasants get higher prices and cheaper goods, workers get price relief, industry gets credit discipline. A divided announcement invites each group to blame the other.