The Russian Revolution

by Richard Pipes

  The standard reason the Bolsheviks gave at the time for their failure to decree money out of existence was that even after the passage of various nationalization decrees much of the economy, including nearly all of the food production, remained in private hands. According to Osinskii, the existence of a “dual economy”—part state-owned, part private—necessitated the retention of the monetary system for an “indeterminate period.”32

  In fact, however, the peasant was paid such ludicrously low prices for his product that this consideration was nowhere as serious as the official explanations claimed. In the summer of 1920, Larin conceded that the bulk of the money printed by the Treasury went, not to buy food, but to pay the salaries of workers and officials. He estimated that Soviet Russia had 10 million wage earners, who received on the average 40,000 rubles a month, for a total of 400 billion rubles. Compared with this figure, the money paid to the peasant for food was minuscule: Larin estimated that all the foodstuffs acquired at fixed prices (in 1918–20) had cost the government less than 20 billion.33

  The Bolsheviks could not nationalize banks immediately after taking power in Petrograd because of the near-unanimous refusal of banking personnel to acknowledge them as the legitimate government. This opposition, as we have seen, was eventually broken. By the end of the winter 1917–18, all banks were nationalized. The State Bank was renamed the People’s Bank (Narodnyi Bank) and placed in charge of other credit institutions. By 1920, all the banks were liquidated, except for the People’s Bank and its branches, which served as clearing agencies. Safes were ordered opened and gold found in them, as well as large amounts of cash and securities, was confiscated. These measures hardly fulfilled Bolshevik expectations: their result was not so much to give the government control of Russia’s business as to choke off credit. It was a bitter disappointment to the new regime.34

  Financially, the Bolshevik Government lived for a long time in a state of disarray. The tax system had all but broken down after October, and revenues were reduced to a trickle. The government improvised as best it could: among the currencies it resorted to were coupons from Kerensky’s “Liberty Loans.” There was nothing faintly resembling a regular budget: in May 1918, the Commissariat of Finance estimated (sic!) that in the preceding six months the government spent between 20 and 25 billion and took in 5 billion.* The government was unable to meet the needs of its provincial administrations, so it not only permitted but commanded guberniia and district soviets to extort money from the local “bourgeoisie.” Lenin thought this set a bad precedent by encouraging every local soviet to regard itself as an “independent republic,” and in May 1918 he demanded fiscal centralization.35 But one could not centralize finances if the center lacked money: in the end Moscow told the provincial soviets to stop importuning it for subsidies and manage on their own.

  To raise funds for extraordinary expenses, and at the same time undermine the economic power of the “class enemy,” the Bolsheviks occasionally resorted to discriminatory taxes in the form of “contributions.” Thus, in October 1918, a special one-time “contribution” of 10 billion rubles was imposed on the country’s propertied classes. This extraordinary tax followed the Chinese model, which the Mongols had introduced to medieval Russia, in that it set quotas for cities and provinces and left it to them to distribute the payments. Moscow and Petrograd were required to pay 3 and 2 billion rubles, respectively. Elsewhere the local soviets were asked to prepare lists of individuals liable for payment.† Similar “contributions” were imposed by local soviets on their own initiative, sometimes to raise money for current expenses, sometimes as punishment.

  Lenin was rather conservative in fiscal matters, and if he had his way, Soviet Russia would have adopted from the outset traditional methods of taxation and budgeting. He worried about the budgetary chaos. In May 1918, with his usual tendency to exaggerate the importance of whatever business happened to be at hand, he warned:

  All our radical reforms are condemned to failure if we do not succeed in financial policy. On this task depends the success of the immense endeavor we have conceived of reorganizing society on the socialist model.

  36

  But as he had little time to devote to this matter, he turned it over to associates with very different ideas. They wanted to abolish money and finance altogether, so as to create an economy based on state-controlled production and distribution. In the second half of 1918, Soviet economic publications carried many articles promoting the idea of such an economy, which had the support of such Bolshevik notables as Bukharin, Larin, Osinskii, Preobrazhenskii, and A. V. Chaianov.* Their idea was to make money worthless through the unrestrained emission of paper currency. The place of money was to be taken by “labor units,” similar to those issued in 1832 by Robert Owen’s “Labor Exchange Banks,” which were tokens representing quantities of expended labor entitling the holder to a comparable amount of goods and services. Owen’s experiment failed miserably (his bank closed after two weeks), as did Louis Blanc’s ateliers sociaux, introduced in France during the 1848 Revolution. Undaunted, Russian radical intellectuals would retrace this path.

  The Communist Party declared the abolition of money an objective in the new party program adopted in March 1919. Here it was stated that while the abolition of money was not yet feasible, the party was determined to achieve it: “To the extent that the economy is organized according to a plan, the bank will be abolished and turned into the central bookkeeping office of Communist society.”37 Accordingly, the Soviet Commissar of Finance declared his job redundant: “Finance should not exist in a socialistic community and I must, therefore, apologize for speaking on the subject.”†

  The result was an accelerating devaluation of Russian currency which ultimately transformed it into “colored paper.” The inflation which occurred in Soviet Russia in 1918–22 nearly matched the much more familiar inflation that Weimar Germany would experience shortly afterward. It was deliberate and accomplished by flooding the country with as much paper money as the printing presses were able to turn out.

  At the time the Bolsheviks took power in Petrograd, paper money circulating in Russia totaled 19.6 billion rubles.38 The bulk of it consisted of Imperial rubles, popularly known as “Nikolaevki.” There were also paper rubles issued by the Provisional Government, called either “Kerenki” or “Dumki.” The latter were simple talons, printed on one side, without serial number, signature, or name of issuer, displaying only the ruble value and a warning of punishment for counterfeiting. In 1917 and early 1918, “Kerenkis” circulated at a slight discount to Imperial rubles. After taking over the State Bank and the Treasury, the Bolsheviks continued to issue “Kerenkis” without altering their appearance. During the next year and a half (until February 1919), the Bolshevik Government produced no currency of its own, which was a striking forfeiture of the traditional right of a sovereign power to issue its own money, and can only be explained by the fear that the population, especially the peasants, would refuse to accept it. Since the tax system broke down completely after October 1917 and other revenues fell far short of the government’s needs, the Bolsheviks had recourse to the printing presses. In the first half of 1918, the People’s Bank issued between 2 and 3 billion rubles a month, without any backing whatever.* In October 1918, the Sovnarkom raised the limit on the emission of uncovered bank notes from the 16.5 billion previously authorized by the Provisional Government, and long since exceeded, to 33.5 billion.39 In January 1919, Soviet Russia had in circulation 61.3 billion rubles, two-thirds of them “Kerenkis” issued by the Bolsheviks. The following month, the government produced the first Soviet money, called “accounting tokens.”† This new currency circulated alongside “Nikolaevkis” and “Kerenkis,” but at a deep discount to them.

  In early 1919, inflation, though increasingly severe, had still not reached the grotesque dimensions that lay ahead. Compared with 1917, the price index had increased 15 times: with 1913 as 100, it grew to 755 in October 1917, to 10,200 in October 1918, and to
92,300 in October 1919.40

  Then the dam burst. On May 15, 1919, the People’s Bank was authorized to emit as much money as in its view the national economy required.41 From then on, the printing of “colored paper” became the largest and perhaps the only growth industry in Soviet Russia. At the end of the year, the mint employed 13,616 workers.42 The only constraints on emissions were shortages of paper and ink: on occasion the government had to allocate gold to purchase printing supplies abroad.43 Even so, the presses could not keep up with the demand. According to Osinskii, in the second half of 1919, “treasury operations”—in other words, the printing of money—consumed between 45 and 60 percent of budgetary expenditures, which served him as an argument for the most rapid elimination of money as a means of balancing the budget!44 In the course of 1919, the amount of paper money in circulation nearly quadrupled (from 61.3 to 225 billion). In 1920 it nearly quintupled (to 1.2 trillion), and in the first six months of 1921 it doubled again (to 2.3 trillion).45

  By then, Soviet money had become, for all practical purposes, worthless: a 50,000-ruble bank note had the purchasing power of a prewar kopeck coin.46 The only paper currency that still retained value was the Imperial ruble; these notes, however, were hoarded and all but disappeared from circulation.47 But since people could not carry on without some unit to measure value, they resorted to money substitutes, the most common of which were bread and salt.48 Inflation reached astronomical proportions, as the following tables indicate:

  R

  EAL

  V

  ALUE OF

  R

  USSIAN

  M

  ONEY IN

  C

  IRCULATION

  49

  (in billions of rublesi

  November 1, 1917

  1,919

  January 1, 1918

  1,332

  January 1, 1919

  379

  January 1, 1920

  93

  January 1, 1921

  70

  July 1, 1921

  29

  P

  RICES IN

  R

  USSIA

  , 1913-1923

  50

  (as of October 1)

  1913

  1.0

  1917

  7.55

  1918

  102

  1919

  923

  1920

  9,620

  1921

  81,900

  1922

  7,340,000

  1923

  648,230,000

  “From January 1, 1917, to January 1, 1923,” in the words of one economic historian, “the quantity of money [in Russia] increased 200,000 times and the price of goods increased 10 million times.”* 51

  The Left Communists exulted. At the Tenth Party Congress, held in March 1921, before inflation had attained its apogee, Preobrazhenskii boasted that whereas the assignats issued by French revolutionaries had depreciated, at their lowest, 500 times, the Soviet ruble had already fallen to 1/20,000th of its value: “This means that we have overtaken the French Revolution 40 to 1.”52 On a more serious note, Preobrazhenskii observed that the massive inflation caused by the government’s policy of printing unlimited quantities of money helped to extract food and other products from the peasantry: it was a kind of indirect tax that for three years had played a crucial role in supporting the Bolshevik revolution.53 At the Eleventh Party Congress, the speaker on financial policies, G. Ia. Sokolnikov, remarked with surprise that his was the first full-length report on the subject ever presented to a Party Congress. The policy until then, he stated, had been to regard money and fiscal policy as something to be done away with. The means to this end was deliberate inflation.54

  Students of economic history had long warned that money was an indispensable element of every economic activity, not only in its “capitalist” form. In the words of Max Weber:

  The assumption that some sort of accounting system will somehow be “found” if one resolutely tackles the problem of a moneyless economy, is of no help. This is the basic problem of every “full socialization.” One cannot speak of a

  rational

  “planned economy” as long as one does not have in

  this

  most decisive point a means of rationally establishing a “plan.”

  *

  Closer to home, Peter Struve had demonstrated both before and after the Revolution that since economic activity meant striving for the greatest return at the least cost, it required an accounting unit or “money,” whatever its name or physical form. Money could not be abolished: whenever a government tried to prevent money from performing its natural function, the result was a split market (part regulated, part free).55

  The Bolsheviks now discovered the truth of these observations. The one difficulty the advocates of a moneyless economy had not foreseen and which ultimately doomed their undertaking was their failure to provide a method for the settling of accounts among the nationalized enterprises and other state institutions. A decree of August 30, 1918,56 instructed Soviet agencies to deposit their monetary assets, except those required for current expenses, with the People’s Bank. They were to consign their products to appropriate agencies (glavki) of the Supreme Council of the National Economy (of which later) and receive, in return, equipment and raw materials. These transactions were to be carried out by means of book entries, without reference to money. But this procedure apparently did not work, for additional decrees came out the following year specifying in tortuous detail how to carry on moneyless bookkeeping of transactions between nationalized enterprises as well as between such enterprises and state agencies.57 Osinskii claimed that government officials from the outset opposed and circumvented decrees regulating financial relations between Soviet institutions and enterprises; he would not concede that the system was unworkable.58

  He and his fellow-hotheads were not fazed. In February 1920, Larin and his associates drafted a resolution for the forthcoming Congress of Soviets formally abolishing money. Lenin agreed in principle but wanted to discuss the matter.59 A year later (February 3, 1921) a decree was ready for release which, if implemented, would have for the first time in recorded history abolished taxes.60 It never came out, however, because the following month, with the introduction of the New Economic Policy, the government, even while turning out money at an accelerating pace, took steps to return to fiscal responsibility.

  As previously noted, after seizing power in Petrograd, Lenin had no intention of expropriating Russia’s industrial wealth. Although he tended greatly to oversimplify the complexities of managing an industrial economy, he was realist enough to understand that a party of professional revolutionaries could not possibly run it by itself. While political pressures had compelled him to give up his pet idea of “state capitalism,” he continued to believe that the national economy required the discipline of a central plan. In March 1918 he spoke of the government facing the following tasks:

  the organization of accounting, control of large enterprises, the transformation of the whole of the state economic mechanism into a single huge machine, into an economic organism that will work in such a way as to enable hundreds of millions of people to be guided by a single plan.

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  Trotsky agreed:

  The socialist organization of the economy begins with the liquidation of the market, and that means the liquidation of its regulator—namely, the “free” play of the laws of supply and demand. The inevitable result—namely, the subordination of production to the needs of society—must be achieved by

  the unity of the economic plan

  , which, in principle, covers all the branches of productivity.

  62

  At Lenin’s request, Larin drafted a project for a central administrative and planning agency to direct the economy of Russia. After some revisions, it was issued as a decree on December 2, 1917, which established a Supreme Council of the National Economy (Vysshy
i Sovet Narodnogo Khoziaistva, or VSNKh).63 This institution, which in 1921 would be renamed the State Planning Commission (Gosplan), was to enjoy the same monopoly in regard to the country’s economy (at least in theory) that the Communist Party enjoyed in the realm of politics. We say “in theory” because in view of the existence of the private agricultural sector and the large and expanding black market in goods, the VSNKh never came even close to controlling Soviet Russia’s economy. Operating directly under the Sovnarkom, its formal task was to “organize the national economy and state finances.” It was to prepare and implement a master plan, to which end it was authorized to nationalize and syndicate all the branches of production, distribution, and finance. According to Trotsky, it had originally been intended to make the commissariats of Supply, Agriculture, Transport, Finance, and Foreign Trade into branches of the Supreme Economic Council.64 The council was further to take charge of the economic sections of provincial soviets, and where these were lacking, to install its own branches. In conception, the Supreme Economic Council sought to adapt to the conditions of a socialist economy Hilferding’s notion of a “General Cartel.”65 In actuality, it turned into something much more modest.

  Lenin entrusted the direction of the council to Aleksei Rykov, whom one acquaintance described as a “warm-hearted Russian intellectual,” rather like the “kindly doctors from the old-time provinces.” Others he reminded of a “provincial zemstvo agronomist or statistician.”66 Certainly, he had neither the personality nor the expertise of a man to reorganize the Russian economy from top to bottom.67 Born into a peasant family, he had received a sketchy education and then dedicated himself to full-time revolutionary work for Lenin, to whom he was fanatically devoted. Shabbily dressed and usually unkempt, he spoke little and slowly, a habit which earned him a reputation for forcefulness: but, as it turned out, when required to make decisions, he was quite helpless. His lack of administrative talents rendered his task, difficult to begin with, quite impossible.