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Black Market

BLACK MARKET

A black market was a major structural feature of the Soviet economy throughout the communist era. Having emerged during World War I in response to the regulation of prices and supplies, the black market burgeoned after the Bolshevik seizure of power. In 19181919, the Bolsheviks' radical vision of socialism as an economy without capitalists or market mechanisms led to the closure of virtually all private shops. Until their re-legalization in 1921, in connection with the New Economic Policy, the distribution system consisted of a vast, bureaucratized, socialized network of state and cooperative outlets, and an equally vast underground trade.

In subsequent decades, the black market reflected the general condition of the economy. Through the early 1950s, staple foods, clothes, and other necessities predominated. World War II marked the zenith of this tendency, as the urban population was forced to sell off surplus possessions on the black market in order to purchase supplementary food. As survival-threatening crises receded, the array of goods sold on the black market widened to reflect the rising expectations of Soviet consumers. By the 1980s, observers noted the prevalence of such items as automobile spare parts, imported blue jeans, rock-and-roll records, and home decor. Foreign currency (especially U.S. dollars) was also the object of black-market transactions throughout the postwar period, with underground exchange rates for foreign bills greatly exceeding the official rate.

Three factors complicate assessments of the black market. First, a black market by definition eludes data collection and reporting. Quantitative estimates of its aggregate role in the Soviet economy thus necessarily remain speculative.

Second, the Soviet Union's unstable legal environment makes it difficult to track changes over time. The basic juridical rubric for the black market was speculation (buying and reselling goods with the intention of making a profit), which was outlawed in every Soviet criminal code. It was applied sparingly and rather arbitrarily during the New Economic Policy, but Josef Stalin's renewed assault on the private sector in the late 1920s created pressures for a formal redefinition. The law of August 22, 1932, mandated a five-year labor-camp sentence for speculation, including petty sales, but it failed to standardize prosecution, which exhibited the campaign character (extreme fluctuations in prosecution rates) typical of the criminal justice system as a whole. The law was finally softened in 1957 through the redefinition of petty speculation as a noncriminal offense, and then through the reduced prison sentence for criminal speculation in the 1960 RSFSR Criminal Code.

Third, the black market's parameters are blurred by the fact that some private transactions remained legal. Through at least the 1950s, most black-market sales took place at outdoor markets or bazaars. The primary function of these venues, from an official point of view, was to enable farmers to sell surplus produce after all delivery obligations had been met. Their secondary function, however, was to provide a space where any citizens could hawk used clothes and surplus possessions, and where registered artisans could sell certain kinds of handmade goods. These transactions, which eventually came to include the private provision of services, included many shadings of legality. Aron Katsenelinboigen accordingly argued that the Soviet economy should be thought of in terms of a spectrum of colored markets, and not just black versus red.

In sum, the black market was a product of regulated prices, shortages, and geographical disparities in the availability of goods, as well as a legal system that criminalized most private transactions.

See also: second economy

bibliography

Katsenelinboigen, Aron. (1977). "Coloured Markets in the Soviet Union." Soviet Studies 29(1):6285.

Julie Hessler

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Black Market

BLACK MARKET

The "black market" refers to the persistence of economic activity outside the bounds of the legitimate economy. Since colonial days there has always been a stratum of society that resisted being drawn into the formal market economy. The earliest black market involved virtually the entire existence of runaways the enslaved American Indians, abused indentured servants, and newly arrived African slaveswho sometimes escaped into the backwoods and reverted to a life of hunting and gathering or subsistence farming. During the "market revolution" of the early 1800s when ordinary settlers began using currency within the broad social division of labor, there were whole families that picked up and moved with the frontierthey trapped, shot, fished or otherwise raised their own food and made their own clothes.

The reasons that they avoided being drawn into mainstream American economy were various. Some faded into the woods to avoid serving out the terms of their indenture or to escape enslavement; some feared being conscripted into the army; others objected to paying taxes or having anything at all to do with the economic elite of the country or its institutions. Some, no doubt, just reveled in the bounty of the land and in the life of independence.

But remaining outside the market was sometimes ruled illegal. One example was the "Proclamation of 1763," in which the British government ruled that colonial whites could not move west of the Appalachian watershed. The motive for this was to prevent hostile encounters with the Native Americans and to integrate the European population into a colonial workforce. But the proclamation was a futile gesture: with no one to stop them the settlers kept coming over the mountains at the Cumberland Gap or at other crossings and they spread out into the Ohio basin.

Even after the War of Independence, the government of the United States tried to corral this population. In 1794 the "Whiskey Rebellion" in western Pennsylvania broke out over the government's attempt to tax corn whiskey. For a few months the rebels terrorized the "revenuers," or tax collectors. The rebellion was put down in the summer of 1794 with an extraordinary display of force, when President Washington and Alexander Hamilton (who, as secretary of the treasury, had recommended the tax in 1791) raised an army of 12,900 militia men, marched across Pennsylvania and dispersed the rebels.

This episode illustrates the relationship between the black market and the mainstream American economy. By refusing to pay the tax on liquor, the farmers were defending the black market, or the "informal economy," of barter and pseudo currency. The black market services social needs that the legal market cannot meet. Every time that the government passes laws making ordinary activity illegal, the boundaries of the "black market" expand to include this illegal activity. This happened in the 1920s when the 18th amendment to the Constitution ruled alcohol illegal. In more recent decades the same story has been repeated in the case of marijuana cultivation or the smuggling of cigarettes.

See also: Illegal Drugs, Prohibition, Whiskey Rebellion

FURTHER READING

Nash, Gary B. Red, White, and Black: the People of Early America. Englewood Cliffs, N. J.: Prentice Hall, 1982.

Sellers, Charles. The Market Revolution: Jacksonian America, 18151846. New York: Oxford University Press, 1991.

Tindall, George Brown and David E. Shi. America: A Narrative History. New York: Norton, 1999.

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black market

black market, the selling or buying of commodities at prices above the legal ceiling or beyond the amount allotted to a customer in countries that have placed restrictions on sales and prices. Such trading was common during World War II wherever the demand and the means of payment exceeded the available supply. Most of the warring countries attempted to equalize distribution of scarce commodities by rationing and price fixing. In the United States black-market transactions were carried on extensively in meat, sugar, tires, and gasoline. In Great Britain, where clothing and liquor were rationed, these were popular black-market commodities. In the United States, rationing terminated at the end of the war, but a black market in automobiles and building materials continued while the scarcity lasted. In the decades following World War II, as the countries of Eastern Europe were trying to industrialize their economies, extensive black-market operations developed because of a scarcity of consumer goods. Black marketing is also common in exchange of foreign for domestic currency, typically in those countries that have set the official exchange value of domestic currency too high in terms of the purchasing power of foreign money. Black-market money activities also grow when holders of domestic currency are anxious to convert it into foreign currency through a fear that the former is losing its purchasing power as a result of inflation. See also bootlegging.

See W. Rundell, Black Market Money (1964).

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black market

black mar·ket • n. an illegal traffic or trade in officially controlled or scarce commodities: they planned to sell the meat on the black market. DERIVATIVES: black mar·ke·teer (also black-mar·ke·teer) n. black mar·ket·er n.

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Black Market

Black Market

What It Means

The black market (also called the underground, unofficial, or shadow economy) refers to an area of economic activity where the buying and selling of goods and services is conducted illegally. Black-market trading occurs for various reasons. Many goods and services are simply illegal to sell; examples include cocaine, assault rifles, prostitution, the body parts of endangered animals, fake passports, and bootlegged (illegally recorded) CDs and DVDs. The general term for such goods is contraband. When people desire goods that they cannot obtain simply by going to a store and purchasing them, they are often willing to pay very high prices to anyone who can provide them. Correspondingly, many merchants and individuals are willing to risk breaking the law in order to earn substantial profits from selling contraband.

There is also black-market trading in legal goods. This arises to avoid certain government regulations, such as when cigarettes and alcohol are smuggled across borders to avoid import taxes (extra fees charged for bringing goods into a country) or when handguns are sold on the black market to avoid laws requiring their licensing and registration.

Another form of government regulation that often leads to black-market trading is rationing. When basic goods, such as meat and sugar, are in short supply (in wartime, for example), the government may place limits on the amount of that good that any individual can buy in order to make sure the supply gets distributed fairly and no one goes hungry. If individuals who want to buy more than the legal limit are willing to pay an extra price for this service, there will be merchants willing to ignore the government’s rationing limits to sell the goods for increased profit.

This illegal trade takes place in secret, or in the dark, hence the name “black market.” Because black-market trade occurs “off the books,” so to speak, it represents a whole sector of a country’s economy that cannot accurately be measured.

When Did It Begin

Illegal trading has existed for hundreds of years. In the early seventeenth century, for example, when Dutch and Portuguese traders first brought tea from China to Europe, it was considered a rare and highly desirable luxury. In Britain the government charged merchants a heavy import tax on tea, which made it very expensive to buy. An extensive black market in smuggled tea quickly arose, enabling merchants to avoid the tax and sell more tea at lower prices.

The term “black market” first appeared in print in The Economist magazine in 1931 in reference to an unofficial, or “black,” market in sterling exchange. Sterling is the word for British money, also called pound sterling. As with other trading, currency exchange (the conversion of one country’s currency to another’s, such as the conversion of British sterling into U.S. dollars) occurs on the black market in order to avoid government fees and regulations. The term began to be used widely during World War II (1939–45), when strict government rationing was widespread in Europe and illegal trade flourished.

More Detailed Information

Black markets function as they do because of the basic economic principle of supply and demand. Supply refers to the quantity of goods and services that businesses are willing and able to produce at any given time. Demand refers to the quantity of goods and services that consumers are willing and able to buy at any given time. The relationship between supply and demand does much to determine the price of a product. If supply of a product is greater than demand (say 500 concert tickets go on sale for $30 each, but only 150 tickets sell), it means that not enough people are willing to buy it. The theory of supply and demand suggests that, if the concert promoter had charged a lower price, she might have sold more tickets. On the other hand, if supply is lower than demand (say 500 concert tickets go on sale for $30 each, and 750 people line up to buy them), then the principle of supply and demand says that the promoter could have charged a higher price for the tickets.

It is with the latter scenario, when supply is limited, that a black market is likely to arise. Say the first 50 people in line buy 10 tickets each. The tickets are sold out, and 700 people still want to see the concert. The 50 people who bought the tickets would very likely be able to sell them off for more than $30 each. The practice of ticket resale (sometimes called scalping) is considered a black-market activity.

Similarly, by making a product illegal or imposing rations upon it, the government is restricting its supply. When a government imposes import tariffs, its aim is to restrict the supply of foreign goods coming into the country in order to give an advantage to manufacturers of the same product within the country (tariffs may also be a means of raising government revenue). Economists who favor a free-market economy (one in which trade is dictated purely by the law of supply and demand) believe that government interference in the market often causes more harm than good. By restricting the supply of goods, these critics contend, the government effectively assures the rise of a black market and a host of other criminal activities (including, in the drug trade, kidnapping, armed robbery, and murder) that are associated with secretive, high-risk, high-profit trading.

Another problem with driving certain goods into the black market is that, when these goods are sold in secret, there is no one to insure their quality or safety. During the late nineteenth and early twentieth centuries, for example, birth control products were banned in the United States under an antiobscenity law (the Comstock Act of 1873), and a black market arose to supply women with homemade contraceptives. Manufactured by amateurs with no proper oversight, many of these products were defective and even hazardous. While proponents of the Comstock Act believed that birth control products were immoral because they encouraged sexual promiscuity, those who defended women’s right to contraception argued that the Comstock Act itself was immoral because it subjected otherwise law-abiding women to the dangers of the black market.

Recent Trends

At the beginning of the twenty-first century, one of the fastest-growing areas of black-market activity was in the computer industry. Before 1998 most computer hacking (the practice of breaking through a computer’s security system) was done for sport by curious, but not malicious, individuals. In the next decade, however, there was rapidly increasing demand for stolen data (such as social security numbers, credit card numbers, corporations’ strategic plans, and classified military secrets), and as a result hacking was becoming a highly sophisticated business, delivering substantial profits for organized-crime associations.

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Black Market

Black Market

The underground economy—or black market, to use the term coined after World War I to describe illegal commodity exchange—often thrives during wartime as governments impose tighter restrictions, attempting to proscribe certain items or to limit trade between one side and the other. The U.S. Civil War was no exception.

The laissez-faire ideas that prevailed in the nineteenth century kept political leaders of the Union and the Confederacy from introducing regulations on consumer consumption of liquor and other substances. Despite taxes on virtually all commodities, the Union did not experience severe shortages or exorbitant prices during the war, and never imposed widespread rationing on its citizenry. Consequently, few Northerners ever encountered the underground economy.

In the South, however, the region's lack of industry and manufacturing, a poor transportation and distribution system, the Union blockade, disruptions caused by the Union army's penetration, and the Confederacy's own economic policies resulted in shortages of everything from shoes, leather, food, and salt to military arms and ammunition. As the war wore on, Southerners faced runaway inflation, widespread shortages, and, for some, the real possibility of starvation. Southern women, especially those left behind by Confederate soldiers, demanded government action. An observer of a riot in Richmond, Virginia, watched as crowds of mostly female Southerners armed with "clubs, axes, brooms, etc.," rushed "frantically up and down the street, crying for bread," and raided prisons, warehouses, and grocers for food in response to sky-high prices and government inaction (Scioto Gazette, October 25, 1865). Similar events also were reported in Richmond, Virginia; Mobile, Alabama; and Augusta, Georgia. Confederate states and cities sometimes responded with price controls or antimonopoly laws, which almost never succeeded.

In Richmond, for example, General John Winder (1800-1865) instituted price controls in spring 1862, but farmers and fishermen stopped selling their products at the stipulated prices, and the controls were rescinded within a month. Some merchants were punished if enough people complained that their prices had far exceeded the prescribed limit, or if they sold inferior provisions. In Mobile, Alabama, a trader who was convicted of violating the city's price controls was fined and jailed for three months. A Richmond butcher named Louis Frick was charged with selling "filthy and unsound meat" when one of his customers broke open a sausage Frick had sold him to discover "a number of puppy's claws," according to an account from the Richmond Examiner (reprinted in the Cleveland Daily Herald, October 3, 1863).

Probably the most widespread and profitable black-market activities involved the "contraband trade" with the enemy, and illegal speculation in cotton; these two sometimes were closely linked. Civilians in areas between the Union and Confederate armies often traded with the enemy. The Official Records of the War of the Rebellion note that in all areas of the South where Union forces penetrated, military officers complained of civilians engaged in illegal trade (U.S. War Department 1995). Southerners who found themselves in Union-occupied areas often continued to support the Confederacy by selling salt, coffee, shoes, leather, food, weapons, and ammunition to Confederate guerrillas, regular Confederate army units, or civilians.

In 1864, for example, the Eleventh Wisconsin Infantry surprised a boatload of men and women carrying supplies of coffee, salt, and a chest full of merchandise from Union-occupied Louisiana to outlying Confederate forces. In December of the same year the colonel of the Third Minnesota Infantry reported that between Memphis and rural Arkansas "an extensive contraband trade is carried on… at enormous profits (such as a bale of cotton for a barrel of salt) to the parties at Memphis engaged in it," and concluded his report with a list of recently captured articles that included "10 barrels salt, 1 barrel pork, one-half barrel molasses" (U.S. War Department 1995, Vol. 51, p. 990). Union soldiers on garrison duty in occupied territory spent much of their time stopping illegal trade.

The Lincoln administration recognized fairly early in the war that the United States needed Southern cotton to supply Northern textile mills and to export to Great Britain. To restore the flow of cotton after secession, the administration devised a system overseen by Treasury Secretary Salmon P. Chase (1808-1873) to license individuals to trade Northern goods for Southern cotton and other agricultural products in areas that came under the Union flag. Unfortunately, as cotton prices skyrocketed, the temptations became too great for many soldiers, officers, and civilians, and corruption flourished. Unlicensed speculators flooded into areas controlled by the Union military, trading supplies or Union gold to Southerners for cotton. Jewish merchants were singled out by military officers for their participation in the illegal cotton trade. In late 1862 Ulysses S. Grant banned all Jewish traders from his theater of operations.

Soldiers often made fortunes trading or seizing cotton and selling it at a premium—often using government ships or wagons to transport it to markets in Memphis or New Orleans. The practice became so widespread among the military in the Mississippi River Valley that Lincoln appointed a special commission headed by General Irvin McDowell (1818-1885) to investigate. The commission exonerated General S. R. Curtis of using his position to obtain and sell cotton in violation of regulations, but the testimony confirmed the existence of a thriving and extremely profitable black market in cotton and supplies. Captain S. N. Wood of the Sixth Missouri Cavalry, for instance, admitted to making $20,000 in cotton speculation (Chattanooga Daily Gazette, July 10, 1864). The commission's final report was never made public.

In 1862 William T. Sherman (1820-1891) argued that the legal and illegal trades in cotton, supplies, and gold were prolonging the war: The "secessionists" who traded cotton to Northern speculators "had become so open in refusing anything but gold…Without money…they cannot get arms and ammunition of the English colonies; and without salt they cannot make bacon and salt beef. We cannot carry on war and trade with a people at the same time" (U.S. War Department 1995, Vol. 17, pp. 140–141). Despite the efforts of Sherman and other officials to curb illegal trade, where large profits or dire necessity existed, the underground economy continued to flourish throughout the Civil War.

BIBLIOGRAPHY

Chattanooga Daily Gazette, July 10, 1864.

Cleveland Daily Herald, October 3, 1863.

Cole, Garold L. Civil War Eyewitness: An Annotated Bibliography of Books and Articles, 1955-1986. Columbia: University of South Carolina Press, 1988.

Coulter, E. Merton. The Confederate States of America, 1861-1865: A History of the South. Vol. 7. Baton Rouge: Louisiana State University Press, 1962.

Fite, Emerson David. Social and Industrial Conditions in the North during the Civil War. New York: Macmillan, 1910.

Freehling, William W. The South vs. the South: How Anti-Confederate Southerners Shaped the Course of the Civil War. New York: Oxford University Press, 2002.

Gallman, J. Matthew. The Civil War Chronicle. New York: Gramercy, 2003.

Massey, Mary Elizabeth. Ersatz in the Confederacy: Shortages and Substitutes on the Southern Homefront. Columbia: University of South Carolina Press, 1993.

McPherson, James M. Battle Cry of Freedom: The Civil War Era. New York: Oxford University Press, 2003.

O'Connor, Thomas H. "Lincoln and the Cotton Trade." Civil War History 7, no. 1 (1961): 20-35.

Ramsdell, Charles. Behind the Lines in the Southern Confederacy. Baton Rouge: Louisiana State University Press, 1997.

Scioto Gazette, October 25, 1865.

Smith, George Winston, and Charles Judah. Life in the North during the Civil War: A Source History. Albuquerque: University of New Mexico Press, 1966.

Speyer, Ronald Jeffrey. "The McDowell Commission: February—July, 1863." Ph.D. diss., St. John's University, 1974.

U.S. War Department. War of the Rebellion Official Records of the Union and Confederate Armies. Series I. Wilmington, NC: Broadfoot Publishing, 1985.

Robert S. Shelton

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Encyclopedia.com gives you the ability to cite reference entries and articles according to common styles from the Modern Language Association (MLA), The Chicago Manual of Style, and the American Psychological Association (APA).

Within the “Cite this article” tool, pick a style to see how all available information looks when formatted according to that style. Then, copy and paste the text into your bibliography or works cited list.

Because each style has its own formatting nuances that evolve over time and not all information is available for every reference entry or article, Encyclopedia.com cannot guarantee each citation it generates. Therefore, it’s best to use Encyclopedia.com citations as a starting point before checking the style against your school or publication’s requirements and the most-recent information available at these sites:

Modern Language Association

http://www.mla.org/style

The Chicago Manual of Style

http://www.chicagomanualofstyle.org/tools_citationguide.html

American Psychological Association

http://apastyle.apa.org/

Notes:
  • Most online reference entries and articles do not have page numbers. Therefore, that information is unavailable for most Encyclopedia.com content. However, the date of retrieval is often important. Refer to each style’s convention regarding the best way to format page numbers and retrieval dates.
  • In addition to the MLA, Chicago, and APA styles, your school, university, publication, or institution may have its own requirements for citations. Therefore, be sure to refer to those guidelines when editing your bibliography or works cited list.