During their last two decades under socialism, the economies of Eastern Europe struggled with current account deficits and limited access to credit with which to finance them. In most of these countries, this spawned efforts to acquire foreign ‘hard’ currency whenever it entered their borders, undertakings that involved a lot of creative thinking and government fiat. In practice, such schemes meant targeting inflows of foreign currency as basic as remittances and the money tourists took with them while travelling in the Eastern Bloc. One of the more visible results of these efforts were the hard currency shops established by various socialist governments in the 1970s and 1980s.
Hard Currencies
Sclerotic industries and restrictive market access made trade complicated for Eastern Bloc economies. They needed hard currency to buy foreign imports, but their state-controlled industry lacked the competitiveness to obtain this foreign currency from exports alone. To compound the problem, these deficits worsened following the rise in energy prices in the 1970s. Normally, a structural trade deficit might be solved by steadily devaluing the local currency. However, countries like East Germany kept an artificially high official exchange rate. Because no one was willing to sell their Deutsche Marks (West Germany’s currency) for Eastern Marks (East Germany’s currency) at those rates, the state looked to other sources for foreign currency.
In East Germany especially, an obvious place to look was in the remittances sent into the country, as many received Deutsche Marks from relatives in West Germany. So valuable was this hard currency for consumers in the east that locals without access to this money demanded consideration. In the mid-1970s, workers protested to have up to half their wages paid out in West German Deutsche Marks. The reason hard currency was so valuable in the east, even in comparison to its market value, was due to the access it gave to better goods at better prices.
Though it may seem a bit aggressive for workers in East Germany to demand payment in a foreign currency, when one considers that the ‘official’ exchange rate between the two German marks was 1:1, the demand seems more reasonable. However, the reality was that there was no real exchange happening at that rate. In the black-market, the actual going exchange rate varied over the years between 1:5 and 1:12 in favor of the Deutsche Mark, a far cry from the official rates.
The socialist governments of Eastern Europe also limited local ownership of foreign currencies altogether. Though East Germany allowed locals to hold and use foreign currency in the mid-to-late-1970s, most Eastern Bloc countries outright banned ordinary people from holding any hard currency. Usually, any remittances or other income brought in from abroad had to be exchanged upon entry; with the ‘good’ money going to the state. To keep hard currency flowing in though, the government usually exchanged this money for a type of nonrefundable coupon that could have been used in special state-run stores selling exclusive merchandise; these stores were another vacuum sweeper for foreign currency.
Intershop, Pewex, and Beryozka
In the 1960s, the East German state planned the creation of special stores for outsiders travelling through East Germany. Part of the reason they were travelling through East Germany at all was to get to West Berlin, which was surrounded by East German territory. West Berlin had dedicated highway access to West Germany and several rest-stops along the road were planned as a means of raising foreign currency from foreigners spending their Deutsche Marks there. It was here that the foreign currency store “Intershop” got its start.
Intershop was established by the East German government to harvest hard currencies from foreign travelers and any locals who had access to them. The first locations tended to be in airports and train stations. These stores sold some western imported goods to locals as well as travelers wanting familiar products that otherwise weren’t available in East Germany. However, they also carried cheap local products that were inexpensive compared to alternatives in West Germany. Foreigners close to the border would travel to East Germany for cheap shopping and the Intershop stores happily served them and directed their hard currency to the state.
Some westerners avoided the Intershop stores as shopping there was seen as supporting the East German government. Nonetheless, the concept was quite successful. Intershop had over 250 locations in the mid-1970s and by the end of the decade, their annual sales were estimated at $250 million. The hard currency acquired there would have gone some way to funding East Germany’s $2 billion trade deficit in 1979, a deficit that had perhaps doubled from four years earlier.
One of their more lucrative locations was beside a metro platform on a line that served both West and East Berlin (location seen above). At this store, West Berliners could stop in for cheap cigarettes and get back on a train home without having to cross East German border controls. However, it is worth noting that the Intershop served locals too. Many East Germans had access to foreign currency from relatives abroad and some had employment that required foreign travel. If they had any foreign money, the Intershop was an obvious place to spend it, especially as they carried products that were otherwise unavailable in the country. Indeed, after 1979, private holding of foreign currency altogether was banned by the East German authorities; anyone holding Deutsche Marks or other hard currencies had to convert them to a nonrefundable coupon only useable at Intershop stores.
The ‘hard currency store’ concept was actually quite common across Eastern Europe at the time. In the USSR, the local equivalent was called Beryozka; in Poland, it was Pewex (short for Internal Export Company in Polish). Like East Germany for all but a few years, Poland also limited ownership of foreign currency. Those receiving money from abroad had to have it converted into a kind of coupon similar to what East Germany did with Intershop. Poles could then only use these certificates at a Pewex location. In the 1980s, Pewex grew to considerable size. It was the largest of these Eastern Bloc hard currency shops, with 650 locations and $360 million in sales by the mid-1980s.
At Pewex, like Intershop, it wasn’t just imported goods that could only be found there. Even the best quality local products, like prized national foods, were often only available for purchase at these hard currency shops. This was because production of these quality goods was usually earmarked for export. Even when these stores sold many locally-produced products, as Intershop did, they were not available except in exchange for foreign currency. Outside of Pewex, it would have been difficult for a Pole to get ahold of the best Polish ham and vodka.
Genex
In Eastern Europe there were still more innovative forms of hard currency retailing than Intershop and Pewex. A notable example is that of Genex, a mail-order catalog selling products ranging from coffee makers to cars, many western made and in some cases higher-end versions of East German products. The catalog was not circulated in East Germany itself but was distributed to West Germans so they could send gifts to relatives in the East who would otherwise have had to save for years (or be stuck on waiting lists) to buy them. By setting up this catalog retailer, the East German state had found another way to squeeze money from the austere consumer culture of the country.
Of course, these schemes seem contradictory with socialist ideals. In all these countries, there seemed to be an inequality in access to goods between those with generous relatives abroad and those without. It wasn’t simply that those not receiving remittances from abroad simply had to wait longer until they too could afford the same products, but they had no means of buying them altogether. This was not a system where someone could just place an order for a French car and have it imported. The hard currency shops created a bifurcated consumer economy. There was a spartan one where consumer goods were a second thought and which was denominated in local currency and a more luxurious one open to foreign goods and operating exclusively in foreign currency.
Lesson
The hard currency stores of the Eastern Bloc economies were a peculiar economic workaround. Essentially, the nations of Eastern Europe were financing imports by harvesting foreign currency from locals and foreign tourists rather than by their own exports or external borrowing. Given the controls on local ownership of hard currencies, it seems that these governments stopped at nothing to ensure every Deutsche Mark, Franc, or Dollar entering these economies found its way into state coffers. However, these hard currency shops also represent an intriguing way in which the socialist world interacted with the capitalist one, especially in Germany, which had been split down the middle by that divide. Even in such a divided world economy, no system operated in a vacuum.
Further Reading
1. Diehl, Jackson. “Poland’s Dollar Stores Busy.” The Washington Post, WP Company, 21 Dec. 1986.
2. Eastern Europe: Shrinking Market for West European Exports. Central Intelligence Agency, July 1982.
3. “Everyday Life, West, East – Intershops Open.” History of the Berlin Wall and Its Fall Visualized with Videos and Images, Rundfunk Berlin-Brandenburg.
4. Kleiner, John Paul. “Strange Currencies: Money in the GDR.” The GDR Objectified, 5 June 2013.
5. Lentz, Ellen. East Germans Race to Spend Their Foreign Money. The New York Times, 6 Apr. 1979.
