In its early life, the Soviet Union tried to create a society without money.
And it was a disaster.
Despite the country wrecked by years of war and revolution, the Bolsheviks sought to immediately
create their ideal socialist utopia.
Namely, a money-less society.
A moneyless society that strangely involved the printing of hundreds of billions of roubles.
Hmm.
In this video, we look at the Soviet Union’s devastating first flirtation
with communism.
## Marx and Money
We should begin with Marx.
Classical economists saw money as a neutral link - helping only to facilitate the buying
and selling of goods.
Marx acknowledged this, but disagreed in how those economists downplayed money's role in
the economy.
First, Marx believed that money contributed to the cyclical booms of over and under-production
in the capitalist economy.
In a capitalist economy, someone has money, "M".
They use M to purchase a commodity "C".
Then they can resell the commodity again for money - we can call that "M prime".
So the complete equation goes something like this: M to C to M'.
The capitalist's foremost goal is to generate profit.
So they won't do this conversion unless they are sure that M' will be greater than M.
If not, then they will wait - leading to hoarding.
Periodically, those hoarding capitalists will all go produce commodities at the same time
- creating overproduction booms and crises.
Marx saw this as a problem.
Secondly, Marx saw money as the means by which the bourgeois class parasitically sucked out
the blood of the working class.
Workers work and are paid a wage.
But those wages are not as valuable as the outputs of their work, which generates wealth
for the capitalist to accumulate.
Money is the seemingly neutral medium by which overproduction crises occur and workers end
up becoming "alienated" or distanced from their valuable outputs.
Such a thing would not be needed in a socialist, centrally planned society.
So the notion of eliminating money from the entire economy was widespread and engrained.
The Bolsheviks never questioned it as one of the major facets of the economy they wanted
Russia to have.
## World War I
World War I led various governments across the European continent to go off the gold
standard and print money.
Russia was no different.
The imperial government left the gold standard in June 1914 - 4 days after entering the war.
They ran a 39% deficit the first year of the war and 75% the 2 years after.
The war led to large government budget overruns, foreign borrowing, physical destruction, collapses
in economic output and high rates of inflation.
Good times, all around.
Between 1913 and 1917, the number of industrial workers available in Russia declined by 16.4%.
Total industrial output had declined by even more than that, 22.7%.
This led to inflation.
At the start of 1917, the year the Bolsheviks took over, the amount of paper roubles in
circulation increased to 9 billion from the 1.6 billion it was in July 1914.
About a 5.5 times increase.
Far higher than the 100-200% increase seen in France and Germany.
The Russian government's deficit in 1917 was 82% of budget and 73% of that deficit was
funded using the printing press.
## Losses
So the Bolsheviks took over an economy already caught in an inflationary crisis.
Worse yet, the new revolutionary government would not have access to much of the Empire's
most productive land.
A few months after taking power, the Bolshevik government signed the Treaty of Brest-Litovsk
in March 1918.
The treaty lost Russia a third of its population, nearly a third of its agricultural land and
over half of its industry.
The oil wells of Baku and the Caucasus - representing some 97% of Russia's total oil output - were
inaccessible until late 1919.
And then there was Ukraine.
Ukraine alone had provided the Russian Empire with 78% of its coal, 74% of its iron ore,
and 80% of its grain.
Even after World War I ended, many territories were occupied by anti-Bolshevik forces as
the country plunged into the Russian Civil War.
The Bolsheviks would not reliably take control of Ukraine again until 1920.
## Towards Socialism
So when the Bolsheviks took over, the Russian economy was in a pretty sorry state.
And even if you discounted the damage inflicted by three years of war, Russian society was
semi-industrialized and largely agricultural.
Not ideal for transitioning to socialism.
Yet the newly installed Bolsheviks decided to move forward anyway.
Lenin had laid out the steps of constructing this new Russian socialist economy in a pamphlet
titled "The Immediate Tasks of Soviet Rule".
The Party announced that it would establish the dictatorship of the proletariat, and centralize
all of the country's economic activities into a single, national plan.
During this period of time, the government carried out a series of activities.
## Banks
Since money was so important in the capitalist society, controlling that money gave you power.
And what controlled money?
The banks.
Marx long believed that banking was at the core of the capitalist system.
The Communist Manifesto lists the establishment of a single central bank as the first step
towards centralizing the means of production within the state.
The Russian Empire was no different from the rest of Europe in having a very centralized
financial system.
About 12 banks held 80% of the country's total capital.
This made the country's bank nationalization swift and easy.
So one of the first things the Bolsheviks did was to declare a state monopoly on all
banking activities.
On November 20th, 1917, the People's Commissar of Finance seized the Russian State Bank - Gosbank.
The Bolsheviks ordered the other, privately owned banks to immediately begin funding the
country's worker-controlled factories.
The financiers refused and on December 1917, the Bolsheviks sent troops to occupy all of
the country's largest banks.
Their capital was transferred over to Gosbank.
Over the next few months, the banks were dissembled.
Their reserves and incomes redirected to the government.
Bank dividends were abolished.
Withdrawals of deposits before 1918 were restricted.
And all foreign debts were cancelled.
By the end of 1918, every bank in the country was liquidated and merged into Gosbank.
Gosbank would no longer lend out money but would simply keep accounts of the economy's
transactions.
Nationalizing the banks pinched off the flow of credit in the economy.
In the first quarter of 1918, 405 enterprises employing 205,000 workers closed down due
to a lack of credit.
Theoretically, a centrally planned socialist economy would no longer need money and free
markets.
Yet because it would take time to transition to this new system, parts of the old system
like taxation and worker wages would have to remain.
This led to a weird, seemingly contradictory situation.
The Bolsheviks - moving towards a moneyless society - while simultaneously printing a
whole lot of it to fund their budgets.
## Nationalization
In June 1918, the Council of the People's Commissar announced the nationalization of
industry.
This was another crucial part of this new transition plan towards socialism.
As Lenin wrote, this would be pulling out and cutting the wires through which the capitalists
controlled the economy.
Throughout the second half of 1918 and the first quarter of 1919, the Soviet government
nationalized the country's railways, shipping, mining, and so on.
Lenin wanted the Bolshevik nationalization drive to first gain firm control of the economy's
most critical levers.
But the whole thing happened chaotically, targeting industries here and there.
Less than 14% of the nationalizations were handled by the central government.
The large majority were performed by local organizations and trade unions.
This chaotic nationalization drive meant the ejection of many skilled workers and business
owners.
Their new owners had no idea how to run these machines, leaving them to seek the help of
the bourgeois.
## War
And all the while, the Bolsheviks were fighting the Russian Civil War.
From the summer of 1918 to the end of 1919, the Russian Civil War ebbed and flowed.
The various White armies pushed the Red Army nearly to the brink.
But the Whites' inability to work together and win the support of the peasants put them
at a disadvantage.
In response, the Bolshevik government dedicated every possible effort towards supplying the
Red Army.
Industrial policy sought to utilize every available laborer and resource towards the
war - forced mobilization.
## Printing Money
Both fighting the war and the nationalization drive strained the treasury.
This all needed to be done using traditional principles of capitalist finance.
But the government had no way to fund it without the use of the money printing press.
No one wanted to lend the new Bolshevik government any money.
Especially since 1918, when they repudiated all foreign debts and nationalized their assets.
So the government has to raise taxes to pay their expenses.
But who and what was there to tax?
In 1918, income taxes provided just 7.3% of total budget spending - forcing the Bolsheviks
to break promises made less than a year earlier about abolishing indirect taxes.
In fact, they raised those indirect taxes even further and threw in an extraordinary
income tax in October.
Nothing can be done to fill the gaps in the government budget but to print more money.
At the end of 1918, inflation measured at 598% and there was over 60 billion roubles
in circulation.
Yet the value of those roubles when measured using 1913 values had actually fallen by a
tenth from 1917 - from 2.4 billion to just 222 million.
## Food
The Party's prevailing effort was to keep the country supplied with food.
There were food problems early on.
In January 1918, Lenin wrote in a telegram:
> "For godssake, take the most energetic and revolutionary measures to send grain, grain,
and grain!!!
Otherwise, Piter [Petersburg] will die.
Special trains and detachments.
Harvest and collect.
Escort the trains.
Inform daily.
For the love of God!"
The Tsarist government had introduced a grain monopoly during World War I. It prohibited
grain trading in any way, shape, or form.
Farmers had to deliver their grain surpluses to the state at a fixed price - with no hiding
or concealment whatsoever.
The Provincial Government had continued the monopoly when they ran the country and the
Bolsheviks re-affirmed it too.
But the crashing ruble meant that wages no longer mattered to the peasants, who refused
to sell their goods at the official state prices.
The government - seeing the problem as being one of food distribution rather than production,
the food had to be there!
- responded by "requisitioning" the food, only further disincentivizing the peasants
from producing surpluses.
In May 1918, the Bolsheviks announced a "food dictatorship", which reaffirmed the grain
monopoly and permitted the People's Commissar of Food to use armed force to take food from
the peasants who were supposedly hiding it.
## Hyperinflation
High inflation soon became hyperinflation.
In May 1919, the People's Bank announced that it would print as much money as possible.
The bank would receive orders for cash and furiously print however much it can.
Inflation doubled from a mere 598% to 1,376% in 1919.
The ruble's value was crashing so fast that the government published their budgets retroactively.
Planning ahead of time was basically impossible.
In the second half of 1919, money printing costs took up 45-60% of the mint's total budget.
And even still the ministries were not fulfilled on what they asked for.
Even the War Ministry got less than 40% of their request.
Amazingly, the Bolsheviks argued that this hyperinflation was a sign that their socialist
transformation was working.
Their goal in printing unlimited paper money was to devalue it to nothing.
Doing so would annihilate the power of the wealthy money hoarders - transitioning to
a system of state distribution, and finally giving us a moneyless world.
The ABC of Communism wrote:
> The gradual disappearance of money will likewise be promoted by the extensive issue
of paper money by the State
But one can also argue that the unlimited printing of money indicated just how much
the Bolsheviks still relied upon the old capitalist system - ruined as it was - to keep their
industrial and war machines going.
## Victory?
Starting around April 1920, the Red Army had essentially won the civil war.
Defense spending began to wind down.
But the Bolsheviks' successes on the battlefield gave them the confidence that they would be
able to win the "economic war" as well.
All the policies implemented during the war - demonetizing the economy, nationalizing
the economy, and requisitioning food from the peasants - they would only intensify them.
The state sought to take over the entire supply and distribution system, passing legislation
to make every public service from transportation to telegraph use free.
In December 1920, Lenin signed a flurry of new decrees to make medicines, food, consumer
goods, fuel, and postage free.
The government intensified its attempts to de-monetize the economy.
Private trade and money would be banished for good.
The government would control all the inputs and distribute all the outputs.
Taxes and wages were to be paid in kind, meaning using physical goods, rather than cash.
By 1921, 93% of all wages were paid in this way, thanks to the rouble's collapsing value.
Money would be replaced by a new accounting unit, but what would that be?
Some suggested using physical properties.
Others, salt or cooperative funds.
One interesting unit was to use the combined thermal and labor energy that went into the
item.
They eventually suggested the "tred" (trudovaia edinit), a unit of labor defined as a day
of simple labor at a normal intensity.
All of these suggestions only confused people in determining the value of the goods they
were trying to trade with, making them unreasonable accounting units.
In the end, there was only the hyperinflating rouble.
In 1921, the government issued 16.3 trillion new roubles.
Despite this the hyperinflation ran so fast that the government still ran a deficit of
21.9 trillion roubles that year.
One year later in 1922, that issuance swelled to 1.97 quadrillion new roubles.
## Stabilization
By 1921, the Soviet government realized that War Communism had gone too far.
The Russian economy fell into ruins.
The state was nowhere near ready to take centralized control of every item from soap to food.
Nor were they correct in believing that once the state took over distribution of an item,
economic market laws no longer applied.
Illegal markets flourished, providing most of people's food.
Meanwhile, production of items like steel, sugar, and bricks practically ceased.
Overall industrial production had fallen to a third of the pre-war era in 1913.
Without money there was a total lack of incentive for people to work.
Work desertion rates in the railways hit 40%.
And a worker in 1920 produced an average of just 45% of what they used to before the war
started.
Hyperinflation ruined the lives of the Russian people.
Daily caloric intake in 1919 had fallen by 30% from the eight year average in the 1910s
- 3,820 calories to 2,680.
Famine broke out in 1921, lasting into 1922, resulting in the deaths of five million people.
Food requisitioning had left them with nothing left to fall back upon.
Despite the end of Russian Civil war, peace did not return.
The peasants started to revolt.
One insurrection in particular, the Kronstadt Rebellion in 1921, shook Lenin's views on
the current direction.
Lenin realized that market activity had to return in some way.
In March, they implemented the New Economic Policy or the NEP to reverse the decline,
grow output and stabilize the currency.
A few years later in 1923 - a year in which 176.5 quintillion new roubles were issued
- the Soviet government fully reversed course.
They issued a gold-backed currency, made its central bank independent again, and rebalanced
the budget.
The rebellions calmed down - or were more like put down - and output began to recover.
## Conclusion
Reflecting on it, Lenin said:
> [We were] caught up as we were in the wave of enthusiasm and having kindled the people’s
enthusiasm, first general-political and then military enthusiasm, we were counting on utilizing
this enthusiasm directly to accomplish economic tasks … that were equally important ... Life
has shown how wrong we were!
He considered his new NEP policy as the real way forward, attributing the mistakes of the
"War Communism" years to the interruptions from the civil war.
But make no mistake.
They wanted this.
The state's intention during the war communism years was to tear the country away from capitalism,
create a monopoly on trade, and eradicate money itself.
But their plans instead led to chaos, violence, and a total, crisis-level collapse in production.
Except in roubles, of course.