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Draft:Monetary reform in the Soviet Union, 1922–24

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Introduction

The monetary reform of the Soviet Union 1922-1924 was a set of monetary policies implemented in the Soviet Union as a part of the New Economic Policy. Primary goals of this reform included the easing of hyperinflation, establishing a unified medium of exchange (currency) and the creation of an independent central bank. The results of the reform were overall mixed; some modern-day economists label the new policies as a successful transition towards state capitalism, while others describe it was problematic from the very start[1]. Overall the reform could be best covered as an aggregation of short-term monetary experimentations which fundamentally altered the traditional intertemporal nature between monetary and fiscal policies.

Introduction of Monetary Reforms (July 1922)

           Having endured a budget deficit since 1914, by the end of the Russian Civil War (1918-1921), the Russian economy was in an excessive recession. Both the wartime policy measure of War Communism and the communist ideology drift in questioning the long-term necessity of the monetary system[2] triggered a massive increase in the issuance of money which prolonged the continuous rise in the rate of inflation. In 1921 the monthly inflation rate averaged around 50% and the quantity of currency circulation within the Soviet economy increased by 164.20 times.  According to Soviet achieves, 10,000 chervonets in 1921 was only worth the equivalent of 0.59 chervonets in 1914. [3]

           1922 reforms began in July after the Soviet Central bank, Gosbank, was provided with a certain degree of autonomy.[4] The central bank was able to issue independent banknotes and restrict the government’s access to capital. This enabled an increase in the standards of lending, return to the gold standard, eliminate the government’s budget deficit and lay the foundation for future tax policies. As a result, the Russian gold rouble was reintroduced as a unit of account while printed money, sovznak, was established as the nationalised medium of exchange and means of payment. [3]

Monetary reform and the Introduction a Dual Currency System (1922~1923)

           By June 1923, the monetary reforms have decreased the percentage Soviet government’s national expenditure against the entire nation’s currency circulation from the 1920’s 85% to 1923’s 26.6%.[5] The parallel currency approach where nationalised and privatised markets adopt a separate medium of exchange reconnected the Soviet economy with the international gold pecked monetary system and to a great extent, stabilised domestic commodity price. While liberal Keynesians, including Keynes himself, praised these monetary reforms, the majority of economist at that time maintained the position in which no long-term stabilisation in the Soviet planned economy was possible.[5]

           Stabilisation was the central monetary theme of 1923. Along with the nature of the Soviet planned economy gave rise to a series of monetary experiment proposals.[6] Gosbank, the Soviet central bank, proposed to issue banknotes based on short-term obligations which were backed by gold while Gosplan, the Soviet central planning committee argued for the elimination of the gold standard and transition into a commodity oriented monetary system. Ironically, previously denounced policies such as loans from foreign banks and integrating into the monetary system of foreign central banks were also considered acceptable during this phase of monetary reform.[5]

           Taking into account most of the policy proposals listed above, at the beginning of 1923, a dual currency monetary system, containing both sovznaks and chervonets, was formally launched by Gosbank. 25% of the new chervonets were backed by precious metals and stable foreign currencies pegged to the gold standard, while short-term commodity loans backed the remaining 75%. While in theory chervonets were fully convertible, no clear channel was established until 1924, and thus most economic activity conducted by the Soviet population was in sovzanks.

           As chervonets held a higher monetary value and was internationally recognised, its coexistence with sovznaks proved to be problematic. During the 12th Soviet Congress (1923) the concept of “peaceful co-existence,” between the two forms of currency was removed, and a gradually monetary shift towards a single currency began.[7] Soviet literature started labelling chervonets as the “stable currency,” whereas the sovznak was prescribed as “a declining currency.” On the 7th of July 1924, the Soviet Central Executive Committee decided to limit the issue of sovznaks and initiate a controlled elimination of the dual currency system.

The return of a single currency monetary system (1923~1924)

           With the rise of chervonets within a sovznak oriented economy, the effects of price scissors became more prevalent. High industrial prices and low agricultural prices led to an excessive transfer of resources across the nation into urban industrialised centres. This price imbalance accelerated the depreciation of sovznaks, and by October 1923, sovznaks experienced daily inflation rates of 4.4%[7], which in return opened the price scissors even further.

           Although the sovznak orientated Soviet population found it harder to conduct daily transactions, the chervonets dominated government expenditure experienced no shortages and the national balance sheet no longer had a deficit. State enterprises either have endured minimised losses, or in some instances been able to gain a profit, the Soviet Union’s current account became positive signalling the successful transition into an export-driven economy.

           On the 14th of February 1924, the issue of sovznaks came to a complete halt. Under an exchange rate of 1 gold rouble to 50,000 1923’s sovznaks and one gold rouble to 50 billion 1922 sovznaks, the entire circulation of sovznaks within the Soviet economy was bought outright in between 7th of March 1924 to 10th of May 1924. With the formal end to the dual currency system, the Soviet monetary reform of 1922~1924 was complete.[7] As a result, the nation’s currency circulation was optimised and the Soviet chervonet, later defined as the rouble, was pegged to gold, the universal storage of value before the adoption of the Bretton-Woods system.

Summary

The Soviet Monetary Reform of 1922~1924 was one of the first economic initiatives of the Soviet Union. Liberal economists describe this reform as the first successful establishment of state capitalism. In contrast, Austrian school economists refer to the reform as a “jagged return” to a market-orientated economic model.[8] As the first communist-led economic reform, the Soviet monetary reform of 1922~1924 demonstrated an ideological shift where the proposal to eliminate money was replaced with first a dual currency system, and later a stable gold pegged monetary regime. Pioneering along with other components of the New Economic Policy, the Soviet monetary model became a widely adopted exemplar for the late 20th-century economic reforms in nations like China and Vietnam.

  1. ^ Efremov, Steven (2012-08-15). "The Role of Inflation in Soviet History: Prices, Living Standards, and Political Change". Electronic Theses and Dissertations.
  2. ^ Ryan (2019-06-14). "Inflation: The Soviet Tool for Destroying Money". Mises Institute. Retrieved 2020-04-17.
  3. ^ a b Nakamura, Yasushi (2017), "Soviet Monetary Policy and Government Debts", Monetary Policy in the Soviet Union, Palgrave Macmillan US, pp. 151–190, doi:10.1057/978-1-137-49418-4_7, ISBN 978-1-137-49416-0, retrieved 2020-04-17
  4. ^ Ebrill, Liam (1999). "Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union". Occasional Papers. doi:10.5089/9781557758026.084. ISSN 0251-6365.
  5. ^ a b c Nenovsky, Nikolay; Rizopoulos, Yorgos (2005). "Measuring the Institutional Change of the Monetary Regime in a Political Economy Perspective". SSRN Electronic Journal. doi:10.2139/ssrn.665145. ISSN 1556-5068.
  6. ^ Holzman, Franklyn D. (1955-01-31). Soviet Taxation. Cambridge, MA and London, England: Harvard University Press. ISBN 978-0-674-49860-0.
  7. ^ a b c Pickersgill, Joyce E. (1968). "Hyperinflation and Monetary Reform in the Soviet Union, 1921-26". Journal of Political Economy. 76 (5): 1037–1048. doi:10.1086/259466. ISSN 0022-3808.
  8. ^ "National income, USSR territory, 1913 and 1928", Russian National Income, 1885–1913, Cambridge University Press, pp. 102–122, 1983-11-25, ISBN 978-0-521-24382-7, retrieved 2020-04-17
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