The Role of Money in the Soviet Planned Economy 1918-1980
An often overlooked aspect of the Soviet economy was the role money played. Much of the emphasis is focused on the means of production and their corresponding organization. However, the role of money is still very significant even in a command economy. This is something the Soviets soon found out after underestimating its role.
A real true criticism of early Soviet economic thought is that the economic planners of the world’s first (some argue only) socialist state believed that the quantity of money in the system played no role in determining the value of the currency because there was no market. In all fairness to them, this seemed absolutely true: Since resources were allocated according to a calculated plan, not by the movements of money itself (the market) then there was no reason to think that the quantity would affect the quality. It didn’t appear there was much reason to be concerned about monetary stability and management.
The very act of planning an economy pulled money from its role in determining the allocation of resources, i.e., the market was abolished as a means of distribution of resources. Administrative permission determined where resources went, aside from household consumption (understood as the consumer sector).
Thus, the real role of money was to monitor activities. This falls perfectly in line with one of the roles of money Marx said would play in the socialist economy, money as a unit of account. For all intents and purposes, money served only as a means of measuring and accounting for resources.
Despite this perfectly reasonable view, there were still two errors made in their theory:
1. The quantity of money still affected its stability.
2. There was no consideration for the effects of the illegal movement of money.
Soviet Monetary Management: History and Institution
One of the main policies of the Bolshevik Revolution was to institute an economic plan to bring the industrial revolution to Russia. It certainly did that. Within less than twenty years the Soviet Union went from being a peasant backwater to a global industrial power capable of rivalling and surpassing the most advanced economies at the time. During the Great Depression, the Soviet economy expanded tremendously due to the fact it was separated from the world market (in terms of market influence). This feat of industrialization and immunity to the Depression gave it great legitimacy.
The purpose of economic planning, as in the mechanism by which to carry out its goals, was to control the supply and demand, as well as the prices of goods. The market, as a mechanism for the distribution of commodities and the determiner of the investment of capital, was the core of what was to be rejected. Marx has specifically outlined why the market was the driver of the horrors of the capitalist system and its lack of freedom or humanity.
“Thus Marx begins his attack on the liberal concept of freedom. The freedom of the market is not freedom at all. It is a fetishistic illusion. Under capitalism, individuals surrender to the discipline of abstract forces (such as the hidden hand of the market made much of by Adam Smith) that effectively govern their relations and choices. I can make something beautiful and take it to market, but if I don’t manage to exchange it then it has no value. Furthermore, I won’t have enough money to buy commodities to live. Market forces, which none of us individually control, regulate us.”
― David Harvey, A Companion to Marx's Capital
The purpose of the command economy was to explicitly reject the market and rationally plan out the construction of the economy. Despite the ignorant naysayers who claim it “doesn’t work”, the facts are plain to see (and they choose to ignore it). The growth of the Soviet economy is unrivalled by anything in history. Even the state-controlled capitalism of China has not managed to equal their feats.
Regardless, the purpose of this work is to discuss the role of money in the Soviet economy, particularly juxtaposing the correct and incorrect theories. The primary problem that kept eluding the Soviet planners was the stability of the value of the money. The assumption that: “if money doesn’t influence the allocation of resources, then monetary stability and management don’t mean much;” was wholly proven to be false. The entire history of monetary management in the Soviet economy proves this false.
A point of interest here was that the Soviet planners and economic theorists never defined monetary stability. (Probably because they paid so little attention to it in the beginning.) We can only assume it from a general understanding of the term. We understand it as a general lack of frequent and/or destructive fluctuations in the value of a currency. In periods of Soviet economic history, this has not been the case. It has very clearly been a problem and state planners have carried out measures to alleviate it.
Eventually, the experience forced the economic planners to acknowledge that monetary disequilibria could cause serious economic problems. This was primarily based on the experience of hyperinflation during the periods of war communism, World War 2, and the first five-year plan. Peripherally, instances arose from consumer trends, and after that, as free market reforms were made. (Though, the problems of the free-market reforms cannot be blamed on socialism.)
The period of “war communism” (ironically named because it was socialism, not communism) was a period from 1918 to 1921. It was the economic policy of the Soviet Union during the civil war. During this period, monetary stability was deliberately sacrificed in favour of war financing and accelerating economic goals. The necessity of it in a time of war was certainly understandable. What relevance would any monetary policy be if there’s no economy or country? The same is true of World War 2. Great strides in industrialization and more general economic goals were abandoned as survival against the Nazi invasion became the priority.
Starting in January 1920, the leftover Czarist banking system was abolished and only paper money issued by the state was accepted. This policy proved to be fruitless in advancing the goals of development as hyperinflation followed as well as the rise of bartering. This, along with “war communism” was proving to be ineffective at significant or sustained development. Once the civil war was over, policy could be changed. In October 1921, the banking system was brought back, albeit a modern one. The Gosbank was founded, one singular bank to oversee all operations. Economic policy switched from war communism to the New Economic Policy. Conditions and development began to improve.
Later in 1922, real monetary and economic reform began to take hold. One of the most significant measures was a return to the gold standard. Along with this was the policy of bringing inflation under control by promoting a budget surplus. This was decided by the 11th Party Congress as a means of taking care of the persisting economic woes.
Later the Gosbank issued the Chervonets to replace the Ruble which had been decimated by years of war and mismanagement. It was backed by gold, but in a combination of other assets: 25% gold and foreign exchange, 75% short-term bills and goods. These were traded on the international market and retained their value without succumbing to instability.
By 1924 inflation finally stopped with the reforms of the two years previous and the accomplishing of budgetary and trade surpluses.
With all the damage of the civil war, war communism, and mismanagement, so began the reforms of 1928 to accelerate industrialization across the country. At this time, the president of the Gosbank, Hryhoriy Pyatakov, pursued a policy of issuing nearly unlimited credit to the state enterprises to conduct production. The theory was, as discussed previously, that resources didn’t move according to money, so there was nothing to fear from doing so. Enterprises could take as much money as necessary in order to fulfil their requirements. When the negative effects of this policy hit in 1930, he was promptly fired from his position and replaced with Christian Rakovsky.
Rakovsky pursued a different policy: he tied money growth entirely to economic growth. What money existed would exactly match what economic activity there was in the economy. This policy, the opposite of Pyatakov, was fully functioning until structural changes began to be made in the economy which this policy was unable to keep up with. Changes were made and the economy skyrocketed to the previously mentioned unprecedented, accelerated growth.
Then came the events of World War 2. The time of the Nazi invasion had a seriously damaging effect on the economy. Once again, the Soviets were forced into inflationary war financing. Again, they had no choice in the matter. It was either that or allow the Nazis and Hitler to win the war. The sacrifice made by the Soviet people to stop the Nazi war machine and the Holocaust is unmatched by the Western-allied powers.
During this time, there was significant inflation as money production and industrial production were geared towards the war effort. The rapidly rising money supply caused great increases in the state retail sector and in the Kolkhoz market. It was at this point that there was absolutely no denying that money could influence resource allocation.
Once the Second World War was over, life could return to normal, and the economic damage caused by Hitler’s rampage across Europe could begin to be repaired. In 1947 rationing came to an end in the Soviet Union. However, they were still left with the problem of hyperinflation from the war.
In other to deal with the excess money supply a number of policies were instituted. Firstly, retail prices were increased so that the increased excess amount in price could be transferred to the Gosbank taking the money out of circulation. Second, the currency was altered once again.
The currency called “old face Rubles” was replaced with “new face Rubles.” This exchange rate was 10-to-1. For every 10 old Rubles 1 new Rubles was issued. This was limited to physically held cash only. Their policy was different for bank deposits. If a household deposit was under ₽3,000, it was not affected by the conversion. If it was over ₽3,000 then it was reduced by one third. If it was over ₽10,000, it was reduced by half. This reform did not include denominations, so financial flows like pensions and wages were not altered.
One of the problems this was also intended to alleviate was excess liquidity in high-amount deposits and confiscating hoarded currency. The old face Ruble wasn’t going to be accepted anymore, so any hoarder had to turn them in for the new face. Here a lesson had been learned: one of the functions of money under capitalism still remained: money as a means of hoarding.
For a time, everything remained in equilibrium until 1949 when state subsidies to many industries were reduced. This increased prices as the state enterprise had to make up for the amount of budget that was being covered by the state. This wasn’t a burden on the consumer as the economy had significantly recovered since the war.
In the 1950s the Soviet authorities decided to increase real household income by lowering the prices of consumer goods. After the price increases of 1949, they were reduced in 1950 and 1952.
From 1950 to 1960 the money supply grew. However, the monetary authorities deemed it no problem as long as it remained within a reasonable amount. When the money supply came close to what would be considered an excess, they had a policy in place to alleviate it. When the threshold neared, consumer prices would be increased with the increased amount being absorbed by the Gosbank and taken out of circulation. A simple mechanism, easily implemented, is a strength of the planned economy that capitalism wishes it had.
Things remained relatively stable until the Perestroika period beginning in the 1980s. At this point it was clear that the Soviet Union was no longer socialist, and was, to use the phrase, state capitalist. Here the Gosbank began bizarrely running deliberate budget deficient, while at the same time, removing price controls and introducing private economic activity. These measures can only rationally be seen as a deliberate effort to sabotage socialism. Which literally did happen a decade later with more of the same reforms.
Sources:
The Role of Money of the Soviet Planned Economy by Yasushi Nakamura
https://nintil.com/the-soviet-union-gdp-growth/