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