Monetary System, Soviet

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MONETARY SYSTEM, SOVIET

The early Marxists expected that money would die away under socialism, made unnecessary by the

abolition of markets, the use of central planning based on nonmonetary units, the replacement of scarcity by abundance, and the worldwide acceptance of socialism. Since none of this came to pass, a monetary system remained, but it was a very peculiar monetary system. In contrast to a market economy, where money-based exchange is fundamental and money plays an active role, under central management money adapts itself to planned production flows and is basically passive.

In a market economy, money has three functions: It is a means of exchange, a measure of value, and a store of value. A whole set of institutions supports these functions. In the Soviet economy, the ruble fulfilled these functions only in a limited way. The set of monetary institutions was similarly restricted.

Money circulation was strictly divided into two spheres. In the state sector, enterprises could legally use only noncash money, in practice transfers through a state-owned banking system. Only transfers sanctioned by a corresponding plan assignment could be legally made, and it was generally impossible to use the banking system for nonsanctioned transactions. The banking system was thus an important control mechanism. Households, on the other hand, lived in a cash economy facing mostly fixed-price markets for labor and consumer goods. There were also legal, more or less free-priced markets such as the kolkhoz markets for foodstuffs as well as illegal, often cash-based markets. To control the economy, Soviet planners put great emphasis on maintaining this duality. By and large, they succeeded. Under perestroika, enterprises found ways to convert noncash to cash money. This contributed to the collapse of the Soviet system.

The ruble was not a means of exchange in the state sector. It was not freely convertible to goods, except for goods allocated in the plan for each enterprise. For households, money was the basic means of exchange, but only goods produced according to plan were legally available (with the relatively small exception of the kolkhoz markets). Because of the frequent shortages, households did not rely on money as the only means of exchange but also used such allocation mechanisms as barter, queuing, and bribery.

As a store of value, money was useless to enterprises, but it was important for households because few other assets were available. In addition to gold and precious stones, one could invest in state bonds, but these were used to mop up excess liquidity. People had little confidence about keeping their wealth in rubles because of the recurring periods of very high inflation—during the civil war, in the early 1930s, during World War II, and afterwards—and also because of the frequent confiscatory money reforms. As foreign currencies were almost unavailable, and possessing them was a serious crime, households used any other store of value, and lacking them, cut down their efforts to earn money. The limited convertibility of the ruble into commodities, together with periods of very high inflation and monetary reform, made money a defective measure of value.

The Soviet Union had a monobank system consisting of a single state bank (Gosbank) that combined the functions of a central bank, a commercial bank, and a savings bank. Gosbank was not autonomous; it was a financial-control agency under the Council of Ministers. Acting as a central bank, it created narrow money (cash in circulation outside the state sector) by authorizing companies to pay wages according to accepted wage plans. Acting as a commercial bank, it issued short-term credit to companies, in accordance with the plan, for working capital. More important, it kept close track of transfers between enterprises to make sure that only transactions sanctioned by an accepted plan took place. Originally, there was a formally separate savings bank, but it was incorporated into Gosbank in 1963. It used the savings of the population to finance budget deficits. A couple of other banks existed for a short time, but like the savings bank were not independent.

The banking system and the budget system were the two pillars of the monetary system. The budget system had three layers—central, regional, and municipal—but, like the Soviet state, it too was unitary. Tax revenue mostly consisted of commodity-specific taxes separating retail and wholesale prices, company-specific profit taxation, usually confiscating any "excessive" revenue companies might have, and foreign trade taxes, used to separate domestic and foreign prices. As state revenue was thus based on fees specifically tailored for commodities, companies, and foreign markets, the system should perhaps not be called taxation at all. Wages were, in principle, set by the state, but there was little use for income taxation.

State revenue was used to pay state-sector wages and for investment, subsidies, and other public expenditure, including the military. To hide the extent of military expenditure and cover up the deficiencies of social services, state finances were always among the best-kept secrets of the Soviet state. This was especially so toward the end of the period, when there was much justified suspicion that the state, unable to cover expenditure by revenue, was actually engaged in the monetization of budget deficits. This created a monetary overhang with several undesired consequences, among them a popular withdrawal of work effort.

During the war communism of 1918 to 1921, Soviet Russia went through a hyperinflation that destroyed the ability of money to fulfill any of its functions. To what degree this came about by design so as to reach full communism immediately, to what degree by default due to inability to control the monetary system during a civil war, is still debated. Along with the partial rehabilitation of markets in the early 1920s, a successful money reform was made by introducing a parallel currency. The establishment of the centrally managed economy again drove the monetary system into turmoil, but in a few years it had found its new contours. World War II intervened before there had been sufficient time for monetary and financial policy to establish themselves. By the mid-1950s the situation had stabilized, but at the same time the need to reform the economic system was increasingly recognized. The reform proposals, based on the idea of indirect centralization, had little room for monetary or other macroeconomic questions. Not unexpectedly, the partial implementation of such thinking during the late 1980s left post-Soviet Russia in a situation of near hyperinflation with a financial system almost in collapse.

See also: banking system, soviet; gosbank; war communism