The development of the Soviet State, 1921-1929

Essay

The development of the Soviet State, 1921-1929

On 26 November 1921, Lenin sent a note to Viacheslav M. Molotov for transmission to the Politburo, requesting that it appoint Gregorii Iakovlevich Sokolnikov a member of the Board of the People's Commissariat of Finance (PCF). The next day the Politburo approved this suggestion. Nikolai Krestinskii, the Left Communist who had served as people's commtssar of finance since July 1918 and who oversaw the virtual dismantling of that ministry, had become the Soviet diplomatic representative in Germany. Although he would formally hold the title of people's commissar of finance until December 1922, Krestinskii had ceased to play a role in the PCF a year earlier. Sokolnikov quickly took over the ministry, especially after he became deputy commissar in January, at which time Lenin wrote Sokolnikov saying that he was "actually in charge of the most important people's commissariat". Thus, although Sokolnikov officially became people's commissar of finance only in December 1922, he was de facto, if not de jure, in control from the beginning of 1922.1

Although Lenin might have called the PCF the most important ministry to boost Sokolnikov's morale, his statement probably reflected a belief that it was a key cornmissariat whose success was essential to the economic restoration goals of the New Economic Policy (NEP), which had been introduced several months earlier. In addition, the commissariat was important because it would play a key role in overcoming the hostility of Communists who saw the economic policies of war communism as the key to the future and who viewed NEP and potential fiscal reforms as a giant retreat. The NEP concessions also drew scorn in the west as proof that a socialist economy was unworkable.

Sokolnikov was young, thirty-three years old, but such youth was not unusual for Bolshevik leaders in those years. More significantly, he had played an important role in Bolshevik party politics and post-1917 state activities. He had joined the Bolsheviks as a seventeen-year old in 1905, had served time in prison and exile, had lived abroad from 1909 to 1917 as a sometimes recalcitrant Bolshevik, and was an internationalist during World War I. Abroad, he had earned degrees in economics and law at the Sorbonne. Returning to Russia with Lenin in the sealed boxcar, Sokolnikov was a leftist throughout 1917, serving first on the Moscow Oblast Bureau and then, after the Sixth Congress in August, as a member of the party's Central Committee, primarily as an editor of leading party publications, including Pravda. After the revolution he served on the peace delegation and was the Bolshevik signer of the Treaty of Brest-Litovsk. Both before and after that he served in the Supreme Economic Council, where he directed the nationalisation of the banking industry. From mid-1918 he served on the military revolutionary councils of the Second, Eighth, Ninth and Thirteenth armies during the civil war. When, in 1919 at the Seventh Congress of Soviets, Lev Trotskii, people's commissar of war, praised the political commissars as "a new communist order of Samurais", he singled out among them "Sokolnikov, the revolutionary journalist". In August 1920 the Central Committee appointed Sokolnikov the head of the Turkkomissiia of the Central Committee and the commander of the Turkestan front. Turkestan, covering the vast area from the Caspian to the Gobi Desert (today including Turkmenistan, Tadzhikistan, Kirghizia and parts of Kazakhstan), was an important area, and Sokolnikov helped to keep it within the new state. He fell ill in 1921 and had been out of work for quite a few months when Lenin placed him in the finance ministry.2

Later, Trotskii would say. "Sokolnikov has original ideas. He has a very inventive mind." E.H. Carr correctly points out that "He [Sokolnikov] now threw himself with vigour into the financial aspects of NEP ... and for the next few years made Narkom-fin a key-point of the conservative or Right tendencies in Soviet policy."3

We may divide Sokolnikov's work in these years into three areas. The first was propagandistic, an effort to convince the Communists that it was necessary, as he told a correspondent in 1922, to use "the technical machinery of capitalism" to build socialism.4 A second area is what I would call his "technical" work, including restoration of the PCF and the development of such integrally related areas as banking and credit, printing of money, currency, gold, tax policy and budgeting. The third area is "ideological", dealing with such things as Sokolnikov's attitude toward NEP, foreign trade, the centrality of agriculture to economic development, economic rationalism in industry and productivity problems. In retrospect, it is clear that Sokolnikov held his own in the first area, that he carried the day in the second, but that he ultimately lost in the third area.

That third area brings us to his role in the party and the struggle for power in the years after Lenin's death, and his positions on various issues after 1925. These issues bring out the interesting nature of Sokolnikov's centrism. As Robert Daniels has pointed out, "almost no one attempted an intermediate position combining the best features of both Left and Right programs. The only important exception was Sokolnikov, who though a Rightist in economic outlook and in his fiscal policies ... joined the Zinoviev Opposition and espoused the Leftist platform on political reform and party democracy". His eventual defeat in the political struggle led to his posting to London in 1929 as the first Soviet ambassador to that country. In these years he became part of the flotsam of Soviet history: first, as a diplomat removed from the Soviet Union, in Louis Fischer's words,"in accordance with Stalin's practice of getting opposition leaders out of the country until he could try them for treason", then, after he had returned, as a victim of the 1937 Show Trial who was convicted, sentenced to prison, died there in 1939, and was, then, forgotten.5 In this article I shall try briefly to trace the effect of Sokolnikov's very important work on Soviet economic development in the 1920s.

Sokolnikov had his work cut out for him. The Russian Empire had made solid economic progress in the decades before the war, including the years after the 1905 Revolution. For instance, coal production increased 41.7 per cent between 1909 and 1913, and iron and steel production increased 51.5 per cent in the 1909-1912 period. Buttressed by increased imports of mineral fertilisers and agricultural machinery (up 189 per cent and 60.5 per cent between 1907 and 1913), agricultural production also increased significantly. Accompanying the solid industrial growth was a stable financial system; thus, at the beginning of 1914 92 per cent of the money in circulation was backed by gold. Finally, although the country's favorable balance of trade was declining, it was still positive, going from 522,000,000 rubles in 1909 to 365,000,000. 429,000,000, 347,000,000 and 146,000,000 in the following four years.6

The Bolsheviks are not responsible for the end of that progress: it began during the war. On 27 July 1914 (os) the government suspended gold payment for credit notes and permitted the printing of up to 1.5 billion paper rubles that were not backed by gold. In fact, by the time of the February Revolution the government had issued 6.5 billion unbacked rubles, and the deficits had increased from 39.1 per cent of the government's budget in 1914 to 76 per cent of that budget in 1916. Not surprisingly, the amount of currency backed by gold declined from a high of 98.2 per cent just before the war began to 14.8 per cent on 1 March 1917 and then to 6.8 per cent at the time the Bolsheviks came to power in October. Prices also rose; the general index of commodities at the beginning of 1917 was three times higher than it had been in 1914, and 7.5 times higher by 1 October I9l7.7

As bad as the situation had become by October 1917, it deteriorated even further in the ensuing four year, affected not only by the exigencies of war communism (foreign intervention, civil war, and so forth), but by party ideologues who wished to destroy the old financial system. Indeed, the Bolsheviks resorted to the same financial methods as the people whom they had replaced. This fact is not surprising, for, as John Kenneth Galbraith has said, "all modern revolutions -- American, French, Russian -- have been paid for by issues of paper money." Thus, if the tsarist government issued 6.5 billion unbacked rubles between 1914 and 1917, and the Provisional Government issued another 10 billion between March and October, the Bolsheviks, in their first printing of money in October 1918, issued 33.5 billion. They then issued 164 billion in 1919, 943 billion in 1920, and 16.3 trillion in 1921. The budget deficit expressed as a percentage of total state expenditure, 76 per cent in 1916 and 81.7 per cent the following year, increased to 86.9 per cent and 84.1 per cent in 1920 and 1921. Finally, the general index of commodity prices, which on 1 January 1917 stood at 3.0 (with 1914 as the base year of 1.0) increased to 7.55 on 1 October 1917, 9070 on 1 August 1920, and 288,000 on 1 January l922.8 The general economic decline exacerbated this situation. Thus, in 1921 gross industrial output was at 31 per cent of the 1913 level, and large-scale industrial output was only 21 per cent. Agricultural productivity was 60 per cent of the 1913 figure, and imports and exports (in 1913 rubles) were 15.1 per cent and 1.3 per cent of those in l9l3.9 Sokolnikov informed the Tenth Congress of Soviets in early 1922 that the state essentially had no monetary income, and that 98 per cent of what the government spent had been printed without any kind of backing. It is not surprising, then, that, when he presented a forty-page Soviet budget to the July 1922 conference in The Hague, the New York Times correspondent reported that it "impressed the other delegates as fantastic and based on dreams rather than realities.10

Writing about tax policy in Pravda at the end of 1921, Sokolnikov might as well have been speaking about financial policy in general when he said, in a statement almost anyone but an economist could appreciate, that "tax policy is the most boring prose ... and never kindles that revolutionary enthusiasm and stormy crests that a policy of confiscation raises so high."11 Yet Sokolnikov's key role was repeatedly to hammer home to party and state officials the need for changes. Sokolnikov was clearly the forerunner for spreading the new economic approach during the l920s.

At the end of 1921 Sokolnikov wrote a pamphlet entitled Gosudarstvennyi kapitalizm i novaia finansovaia politika (Moscow, 1922). He sent it to Lenin, who on 24 December replied, "I have just read your brochure I consider its immediate publication unconditionally useful."12 Sokolnikov was aware of its educational goal; in the foreword to a collection of his articles that appeared in 1923, Finansy posle oktiabria, he wrote that "it is absolutely necessary to achieve a correct evaluation of the change from the 'old' economic policy to the 'new'." He also delivered "the word" at numerous party and state meetings, speeches that were frequently issued in brochure form and in the press and journals. The message seldom changed. He did not say war communism was absolutely bad; rather, he consistently argued that the economic policies of war communism were appropriate to their time. He had argued in a 1918 article in Pravda entitled Poor Finances. Good Revolution that the old financial order had to go and that fiscal chaos helped cement the revolution. In victory, however, poor finances equalled a poor revolution, so now the slogan was that good finances equalled a good revolution. He said that those old economic policies, while politically justified, were bad for the economy, and he called the economic policies of war communism "red economic terror" and "primitive economic revolution". Theoretical efforts to justify those economic policies, as he claimed Nikolai Bukharin was trying to do in 1925, were incorrect. Thus, the New Economic Policy was, in reality, a return to the old economic policy, state capitalism.”13

Sokolnikov's positive policy was stated for the first time in Gosudarstvennvi kapitalizm i novaiafnansovaia politika. In essence, he pointed out that state capitalism requires the use of capitalist methods, at least in the transition period, for the benefit of the proletariat. In a capitalist world, he said, the proletariat had to fight capitalism with its own weapons. The Soviet proletarian government needed to export and import, but this required a firm currency and gold reserves. Mixed companies (joint Soviet-foreign concerns) would be important in this process, for they could earn income for the state while bringing in needed goods. Likewise, to avoid a crisis in supply. the state would have to end some of its monopolies (such as salt and kerosene) and turn internal trade over to private entrepreneurs. although subjecting them to general state regulation. All the above required a new financial policy, one that would establish a firm monetary system, restructure the budget for a money economy (and monetary taxes), and resur-rect banking and credit institutions.14

At the Moscow Party Conference in March he continued his attack. While understanding certain comrades' concerns that the new policies posed a potential threat to the working class, he nonetheless dismissed these fears and referred to those comrades as "the group of Communist reaction". The state's resources, he pointed out, were simply insufficient to develop the economy; markets, credit, stable finances and the like were also necessary for this task. Furthermore, those Communists who opposed the use of money failed to realise that the depreciation of its value does not reduce its significance: You simply have to print more; you cannot annul money without annulling its role, which had not occurred. He pointed out that the regime could not do everything, a problem that faced any revolutionary regime. Finally, tying the reforms to the world movement, he argued that reform was not a concession to political events in Europe but rather a policy to strengthen Russia so that the European proletariat would be able to avoid another world war.15

He pointed out some weeks later at the Eleventh Party Congress (March-April 1922) that it was the first congress specifically to discuss financial matters. Delivering the report on financial policy, he pointed out that for years the Bolsheviks had sought merely to annul money rather than to resolve the problems generated by a monetary system. They no longer had that luxury, for the country was on the verge of an unprecedented financial crisis and only a rational economic policy could help. That policy included stemming the flood of unbacked printed money, reducing the budget to a sane stze, decentralizing budgets and letting local areas levy their own taxes to assure collection, and taxing the NEPmen to make sure they did not undermine the revolution. He repeated all his earlier formulas for success.16 Evgenii A. Preohrazhenskii gave a co-report on finances in which he criticized Sokolnikov's report. While saying that he agreed with Sokolnikov about the printing of money in general, he thought more money would have to be circulated in the autumn. Sokolnikov, in his concluding words, disagreed with Preohrazhenskii and, paraphrasing a well-known individual, said that "printing money is the opium of the people". The congress set up a commission to prepare a final resolution, based on Sokolnikov's theses. The resolution was accepted and approved Sokolnikov's positions.17

The Left Communists continued to attack the new reforms and proposals. At the Fourth Session of the Central Executive Committee (TslK) of the Soviets in October 1922 Sokolnikov defended the PCF against the attacks of Iurii Larin, whom Sokolnikov characterized as wanting life to adapt to the PCF's desires, instead of the PCF adapting to life. Sokolnikov pointed out that the PCF simply printed money, it did not give value to it. The market gave value, and that was the issue. The market would react to a firm line on printed money and state expenses and to a rational state organization. A healthy economy, he said, would create a healthy money. And he added that, while the country had become used to living beyond its means, people had to realize that such a situation was no longer possible.18

Sokolnikov had to navigate carefully between the Charybdis of orthodox Marxism, which decried his reversal of the financial policies of war communism, and the Scylla of "capitalist" financial policies, which led people in the west to charge that communism could not work unless it was really capitalist. Sokolnikov attacked the former forcefully and heaped scorn on the latter indignantly. As late as 1924 and 1925 he had to defend his policies, although much success already had been gained; he had to point out, again, that banks and exchanges are a part of socialism, not an anomaly and that a non-money economy is a failure. In 1927 he pointed out that socialist theory on money had been but weakly developed and that money would be around for a long time.19 He wrote articles in the press against such critics as Preobrazhenskii and S. G. Strumilin. He once countered a press attack from Preobrazhenskii by saying that "Comrade Preobrazhenskii cites in his article a series of perfectly correct figures: however, he draws from them perfectly incorrect conclusions." Strumilin he at one time dismissed as a financial "alchemist" and "quack". He inveighed against the so-called "productionists", who said that production came first and should take priority over everything else, including financial reality and sanity.20

All the while Sokolnikov was moving along the technical path of reform. Since Lenin essentially ceased to play a role in Soviet affairs after his stroke in May 1922, Sokolnikov and other Soviet leaders were charting new waters: They had begun a technical restructuring of the financial system. Indeed, in his autobiographical sketch in the encyclopedia Granat, Sokolnikov said that his main jobs were these nine technical tasks:

the organisation of the commissariat of finances, the institution of which had been subjected to almost complete liquidation in the epoch of war communism; the creation of a firm nondeficit budget; the liquidation of the natural tax and the organization of a system of monetary taxes and incomes; the introduction of firm currency; the creation of a system of banking institutions headed by the state bank, the organization of state credit operations (short-term, and long-term loans); differentiation of state and local budgets; the introduction of financial discipline and accountability.21

Of course, it was necessary to have not only a finance commissariat that existed on paper and was staffed, but also one that actually fulfilled its assigned duties. Apparently neither was the case in early 1922. Upon becoming people's commissar of foreign affairs, Trotskii had said that he "took this job so I would have more time for party work. All there is to do is to publish the secret treaties. Then I will close the shop." That quotation might more appropriately have been attributed to the actions of the finance commissars. Sokolnikov pointed out to the Tenth Congress of Soviets in December 1922, that, whereas other commissariats had continued functioning during the civil war years, "Narkomfin, on the other hand, was liquidated by almost 90 per cent." Perhaps because of this shortage of personnel, the finance ministry did not even collect most taxes. At the Second Congress of Financial Workers in October 1922 Sokolnikov pointed out that the labor commissariat collected the labor tax, the food commissariat collected the produce tax, the trade commissariat tariffs, and so forth. The finance ministry only collected a few money taxes. The PCF could do its work, he argued, only when it was able to concentrate all the state's finances under its control, not just a small portion of them.22

In rebuilding the commissariat, however, Lenin wanted to emphasize practical matters, not the reorganizational. When Sokolnikov argued for reorganising the State Depository of Valuables, Lenin wrote back, on 22 January 1922:

I am in mortal fear of reorganization. We are always reorganizing things, instead of getting on with the practical business. You will do well to bear my words in mind: If the Cornmissariat for Finance does have a bitter enemy, it is the overdoing of reorganization and the underdoing of the practical business What I mortally fear is that you ... will be carried away with restructuring, reorganization, and the theoretical line (you do have a weakness on this score) -- instead of practice, practice, and practice ... Really and truly I am in mortal fear of this; do not succumb to this weakness, otherwise we shall collapse.23

Since it was during this period that Krestinskii had been appointed to Germany and there was technically no people's commissar. the Politburo proposed that a triumvirate made up of Sokolnikov, Preobrazhenskii. and A.M. Krasnoshchekov (a Bolshevik who had lived and studied for fifteen years in the United States) run PCF affairs. Lenin wrote Molotov that Preobrazhenskii threatened to resign if Krasnoshchekov became a second deputy commissar and that only Sokolnikov approved of him. Three weeks later Sokolnikov, perhaps because his views were so different from those of Preobrazhenskii, rejected the same trio. After he learned of Sokolnikov's action Lenin expressed his “horror” and added, “this is chaos! This is a scandal!” The Politburo's decision was enforced, however.24

As the functions of the commtssariat expanded, Sokolnikov clearly must have dealt with structure and increasing personnel. One clear area of expansion, and one necessary for rational work, was the dissemination of information. Given his journalistic background, Sokolnikov was probably behind the inauguration, on 1 March 1922, of Vestnik finansov, a valuable source of financial information and opinion throughout the decade. It remained a weekly through 1923 and became a large monthly publication in 1924. (Its last issue under Sokolnikov's reign. no. 11/12 (1925), had 295 pages, with sections for major articles [pp. 1-104], ocherki i obzory [pp. 105-188], finansovaia statistika [pp. 189-236]. V institute ekononicheskikh issledovanii [pp. 237-252], inostrannyi otdel [pp. 253-286], and bibliografiia [pp. 287-295].) As Stalin swept away the former leaders in the late 1920s, he changed even the names of their publications, and with no. 3 (1930) the journal began to appear as Finansovye problemy.25

One of Vestnik finansov's major concerns, and a major achievement of Sokolnikov's, was restoration of the banking system. Before the revolution the banking system included a state bank, mortgage banks, joint stock commercial banks, and mutual credit companies. A decree of 14 December 1917 nationalized the private banks. The joint-stock commercial banks, the mutual credit banks, the mutual credit companies, and other private institutions were united with the state bank, which in 1918 was renamed the People's Bank. In January 1920 that bank was abolished and merged with other PCF institutions into the Budget Accounting Department. For all intents and purposes, banking operations had come to an end in Bolshevik Russia.26 Sokolnikov had worked on, and perhaps headed, the nationalization of the banking system and defended it in early 1918. He then argued that only nationalization of the banks permitted the proper use of their funds for the national economy; that it was a perfectly socialist mechanism to give the workers control; that, since private banking had acquired a large stake in stock companies, their nationalization was a way for the state to control industry without direct nationalization; and that the system of capitalist banking was gone forever.27

As an economist, Sokolnikov had not foreseen the abolition of the entire system. If capitalist banking was dead then socialist banking had to take its place. In late 1921 Sokolnikov argued that "state capitalism ... can and is obliged to utilize the banking system as one of the most powerful levers" ; "the state bank," he said, "must strive to become the central bank, the 'bank of banks'." Private banks were not permissible, but "mixed banks, 'controlled' by the Soviet 'bank of banks', would significantly ease the latter's work."28 He would also argue regularly that bank credit was an important mechanism for helping both industrial and agricultural development, since allocations from the budget would be insufficient. As late as 1925 he was quoting Marx to the effect that a credit system is a significant lever in the transition period to socialism.29

In October 1921 the Sovnarkom established a state bank, Gosbank RSFSR, that began operations in Moscow and in January 1922 opened twenty-one local offices and branches throughout the country; by 1 October 1924 Gosbank had 389 branches and offices. In addition, over the next two years trading and industrial banks appeared; chief among them were Prombank; the Central Agricultural Bank; the All-Russian Co-operative Bank or Vsekobank; municipal banks, the most important of which was the Moscow Municipal Bank; and mutual credit societies. In terms of assets, however, Gosbank predominated: In April 1924 the assets of all other credit institutions were only 27.8 per cent of those of Gosbank.30 In time Gosbank became even stronger in conjunction with other technical reforms, such as controlling the printing of money, stabilizing the currency, and encouraging the growth of a gold reserve. Sokolnikov's position that the monetary system was a primary source for the financing of industry was borne out. He reported in 1927 that in the 1926-1927 economic year the balance of industrial accounts from the state budget was 103 million rubles, but the growth of bank credit in industry during that year was 221 million, or 68 per cent of the total.31

Perhaps one of the most difficult problems of these years was to control the government's propensity to print more money. The printing presses were running almost out of control, yielding numbers of zeroes normally more appropriate to astronomical calculations of distant galaxies than to this planet. Sokolnikov was at first unable to stop the mad presses. In 1921 the government printed 16,375,300,000,000 (trillion) unbacked rubles; in 1922 the figure increased to 1,976,900,000,000,000 (quadrillion) and in the following year to 176,505,500,000,000,000. Indeed, looking back on those days from the perspective of 1927, Sokolnikov recalled that PCF employed 17,000 people in five factories (Leningrad, Moscow, Penza, Perm, and Rostov-on-Don) just to print the new money!32

Change, however, was strongly resisted. Sokolnikov told the Tenth Congress of Soviets in December 1922 that "people's commissariats, industry, local authorities, etc come to us in Narkomlin and demand that the printing presses work more quickly." Printing more money, he said at that time, was a terrible tax on workers, even though the state could actually earn money from the rapid devaluation of the ruble that such printings caused. Knowing it was impossible to stop printing money, he simply wanted, at first, to reduce its importance as a percentage of the state budget. By the end of 1922 (although new printings would rise in absolute terms dramatically the following year), Sokolnikov felt progress had occurred and wrote in Pravda that the situation in Germany was worse than that in the RSFSR.33 In conjunction with other measures and general economic recovery, the situation improved in relative, if not immediately in absolute, terms. Whereas in January 1922 newly printed money covered more than 95 per cent of state expenditures, by the second half of 1922 that figure was reduced to 30 per cent to 35 per cent. and by May 1923 it was only 16 per cent. Still, when in July 1923 he asked the All-Union Central Executive Committee (VTsIK) to reduce the printing of more money, Preobrazhenskii objected, although VTsIK supported Sokolnikov. Already by the end of 1922 Sokolnikov claimed the problem was improving and by October 1924 he was able to report that in the first quarter of the 1924-1925 economic year no new money had been printed. While printings might continue in the future, they were no longer to cover budget deficits, he said, but rather were to be a method of expanding credit, which was not a drag on the economy.34 That the printing of money was no longer a problem, of course, was the result of the success of the 1924 currency reform.

In the ten years preceding the currency reform of 1924 Russian currency depreciated 50,000,000 times. This was a step toward the abolition of money, which is what many Marxists wanted. Thus, the TslK decree of 1920 that merged Gosbank with the PCF's bookkeeping department said this was an attempt "to establish moneyless settlements with a view to the total abolition of the system," and at the Eighth Party Congress a resolution spoke of "widening the sphere of moneyless settlements" "to pave the way for the abolition of money."35 Sokolnikov spoke of such views as an "illness". Currency was important. Indeed, he told an all-union financial meeting that, while "in wartime the fate of a state is determined by its army, in peacetime the fate of a state is decided by its currency. This is a most simple truth, which, unfortunately, is sometimes forgotten." Sokolnikov argued that financial stability was essential for the country's political and economical survival. A firm currency was central to retaining the peasant-worker smychka, preventing a drain on gold reserves, and maintaining foreign trade, all of which were important.36

Although the 1924 currency reform is very important, it was the culmination of a two-year struggle. A new currency could appear in 1924 because Russian money had already stabilized. Sokolnikov argued that changing immediately from paper money to gold-backed money would cause real problems and that, therefore, a second, intermediary. currency was necessary. He would say in 1927 that the issuing of this money. the chervontsy, was the result of the failure of the Genoa Conference to help resolve the RSFSR's economic problems)37

The first step, the issuing of chervontsy, began in late November 1922. Chervontsy were bank notes (sometimes referred to as sovznaki) issued by the government in larger denominations and, according to law, had to be backed at least 25 per cent by gold. Furthermore, the ratio of the chervontsy to the old rubles (also referred to as kaznaki and not really backed by gold at all) was to be two to one. Further, no exchange rate was established between the two currencies, so the gold-backed currency would eventually prevail).38 Sokolnikov defended the two systems of money because the government wanted the small money to be in kaznaki instead of chervontsy and because it felt the government could not move too quickly. Sokolnikov never doubted that the chervontsy "are our future".SUP>39 And the chervontsy did drive the old paper money away. Whereas at the beginning of 1923 the chervontsy represented only 3 per cent of all money in circulation, the percentage increased to 50 per cent by 1 August, 75 per cent by 1 January 1924, and to 83.6 per cent in February, on the eve of the final act of currency reform. At the last date the old paper rubles were circulating primarily as small change. Sokolnikov noted, as late as December 1923. that "all of the forces of conservatism speak out against abolishing the sovznak". He pointed out at the same time that the currency had essentially been stabilized and that the government was ready for the final step.40

The final steps took place in a series of decrees dating from 5 February 1924. PCF was authorized to issue gold-backed currency notes good for all transactions. The government was to stop printing chervontsv by 15 February and to destroy the unused ones. After 10 March the old rubles were to be exchanged for the new ones at a rate of 50,000,000 old for 1 new. Finally, the old paper rubles, the chervontsy, would cease to be legal tender after June 1924.41

Such people as Preobrazhenskii and Leonid Krasin opposed aspects of the reform; Sokolnikov spoke out and wrote against these individuals, and the party supported the currency reforms, in Sokolnikov's words, "against desperate storming from all sides". Sokolnikov argued that the reform solved, once and for all, in conjunction with other actions, the problem of a weak currency and that it helped to improve monetary cir-culation, to lower prices, and to get the state bank on a more solid footing.42 He was essentially correct and deserves much credit for this reform.

Toward the end of 1924 Sokolnikov attributed the PCF's successes since 1922 primarily to improved gold reserves, another integral part of his program. To him, gold was a commodity, like any other, with a price that, therefore, fluctuated in relation to other commodities. At the same time, it had several important functions. First, it could serve as a backing for Soviet currency. Second, gold paid for foreign purchases.43

How was gold to function? On 26 January 1922 Lenin sent a note to Sokolnikov eliciting his views "concerning the free circulation of gold". Sokolnikov did not believe that gold should circulate freely, and his view prevailed. He wrote later that throughout the world "the system of gold circulation was giving place to a system of gold backing", and he argued that the primary function of gold in Russia was to back currency and give it stability. If gold were to circulate, he said, it would be "the most evil enemy of our paper money circulation". He believed in gold backing for two primary reasons: First, gold circulation would lead to gold being held privately, whereas gold backing meant that people could only accumulate hank notes and the gold would remain in Gosbank. Thus, the state would ultimately control the money market. Second, if gold circulated, the country would have to buy gold on the world market and import it, whereas with gold backing less gold would be needed and resources could be used abroad for purchasing goods instead of gold.44

As usual, Sokolnikov's chief opponent was Preohrazhenskii, who argued that Sokolnikov emphasized gold too much and who championed a variant of the "goods ruble", which would tie the calculation of the gold ruble to goods as opposed to gold. Sokolnikov argued that it was world gold prices that dictated and would dictate Soviet gold prices, not goods. Preobrazhenskii's view, he argued, was the kind of war communist-moneyless economy thinking that had prevailed earlier. At one point he said Preobrazhenskii sought a midpoint between the two poles, "but, I think, he tried to put it [Preobrazhenskii's mid-point] in there unsuccessfully", and he referred to Preobrazhenskii's position as a form of mysticism.45

Sokolnikov's view prevailed, but he also sought greater gold reserves by reviving the Russian gold industry. In 1914 the Russian gold industry mined 4056 puds of gold. Extraction declined to 1,885 in 1917, 1268 in 1918, and only 84 in 1921. He was not averse to private entrepreneurs doing this work, as had occurred before the war. Gold was to back currency, and an expanding economy would need more currency, which required more backing. Soviet gold production did begin to increase, reaching about 2000 puds by the 1925-1926 economic year. As late as 1927, though, Sokolnikov was arguing that gold reserves must be expanded to keep the entire economic system in balance.46

Another technical step essential to financial stability was a satisfactory system of taxes -- the primary tax during NEP was the natural produce tax. Sokolnikov said its abolition was essential to the success of monetary reform but also said its achievement was his most difficult task as commissar. He derided those utopians whose goal was to eliminate, in Sokolnikov's words in 1925 (after he had restored a workable tax system), "direct taxes today, indirect taxes tomorrow, and all taxes the day after tomorrow". Tax policy, he said, was important to carry out the class policies of the state and was designed to aid economic growth. Those who attack a rational tax system when there is a workers' state display a "petit-bourgeois anarchic underestimation of the state and its methods of action". Unfortunately, he practically had to start from scratch: During the first nine months of 1921 taxes brought in only 5 per cent as much revenue as they had under the tsar.47

The main concern was taxation in the countryside, where most people lived. In his co-report to the Twelfth Party Congress (April 1923) on tax policy. Sokolnikov called for a two-part change: first, the produce tax should become a single, unified rural tax. Second, it should be transformed into a monetary tax. The next month he told party workers in Moscow that this reform would take two years but was worthwhile. A unified tax would not only help the peasant know what he owed but was more efficient and would, therefore, save the state money. A monetary tax, by placing a premium on money, would help to stabilize it and make it firm. The next year he said that the transformation of the prodnalog into a united agricultural tax "is the most important step in making the Soviet tax system more orderly".48

In 1922 the peasant labored under four taxes. The largest by far was the produce tax. Much smaller were property and poll taxes, but the localities also levied arbitrary, or illegal, taxes. Sokolnikov told the Twelfth Party Congress that one district charged a tax for marriage and for birth and drew laughter when he said they declined to tax a person after his or her death. Although some adjustments and improvements occurred, as late as 1925 Sokolnikov still called for a more equitable tax system in the countryside. He had more success in transforming rural taxes into money. After 1 January 1924, during a transition period, the peasant could pay taxes either in kind or in money; by 1925 the peasant was expected to pay the entire tax obligation in money.49

Sokolnikov, however, also sought an overall tax system, one both equitable and supportive of socialist goals. Thus, he wished to tax the NEPmen in such a way that the state would control both the individuals and the system of private trade. In the village, he thought tax policy should be a tool of class struggle against the wealthy peasants. He also wanted to level a general tax and property and income taxes on "doctors, lawyers, writers, etc, in general on the urban bourgeois intelligentsia who heretofore have not paid taxes", on middlemen operating on commissions, and on workers who received salaries above a certain level.50

If these taxes did not ruffle Communist feathers too much, Sokolnikov's other positions did. For instance, he argued in 1922 that "all services provided by the proletarian state should be on a paying basis", since the workers could be compensated in other ways. He saw free services as being supported by state budgets and that this support required increased circulation of money and increased prices and a worse position for the workers, who would wind up paying anyway. Instead, he argued that the "workers' expenses for state and communal services should be calculated into wages". Higher education should he free only to children of workers and peasants.51 He strongly believed that state enterprises should pay taxes, since the state could best decide to what purposes profits of state enterprises should go.52 All the while he believed that increases tn services should be paid by gains in the national economy rather than by high taxes. A rational tax system based on such an economy would do away with irrational and arbitrary taxes.53 By the end of Sokolnikov's tenure as people's commissar in early 1926, budgets, to which we shall turn next, rested on a much more solid tax base than had the 1921 budget, and no longer relied on deficits and the printing of unbacked currency.

The final technical area that deserves consideration is budgets. Sokolnikov made solid progress but did not fully succeed in this area. Of course, he started from what was really a survival non-budget base. Indeed, in January 1922 Lenin wrote Sokolnikov to forget budgets, since "it is impossible now, right away, to have a tolerable budget".54 Sokolnikov persisted, however. Reason, he said, must underlie any budget. He told TslK in October 1922 that budgets must be built not from needs, but from possibilities, from realities, however unpopular this was. The state must be able to meet its budget, even if sights must be set lower to accommodate the budget. Further, "the basic line must be raising the effectiveness of those budget resources which the country has".55 His budget goals were, in general, to develop local budgets, to reduce the deficits of the national budget, and to create a real budget at the national level. He succeeded in the first two areas and came close in the third.

Sokolnikov supported local (republic, volost, municipal) budgets because he believed they could help reduce the deficit of the state budget, could help strengthen the smychka, and were closer to the masses. He argued in 1923 that "without the creation of a volost budget, in general the entire financial edifice of Soviet Russia remains to a significant degree built on sand". In 1922 he had told the Eleventh Party Congress that expenses which are closest to the population, most understandable to it, such as, for example, expenditures on health, education, social services, party justice, etc, we ought to transfer to the local budget" and had suggested that "all direct monetary taxes be shifted to local areas, and, at the same time, local areas should develop their own system of direct taxes." Although hesaid in September 1923 that the process had just begun and he continued to urge augmentation of local budgets, these budgets did begin to develop during his tenure: Local budgets as a percentage of the combined (net) budget of the country ranged from a low of 29 per cent in 1923-1924 to a high of 36 per cent in 1925-1926, with the other years through 1927-1928 being over 30 per cent.56

NEP itself helped eventually to reduce budget deficits, a goal toward which Sokolnikov worked very hard. Development of local budgets, he said, helped to reduce deficits, as did the reduction in the government payroll from 6,000,000 at the beginning of 1922 to 3,000,000 by the end of that year. Economic accountability of industrial enterprises was another step forward. He proposed reducing the military budget by 50 per cent, admitting this would be a "difficult, heavy" cut. Also, "we must sharply reduce ... expenditures on education. health ... All these expenses are absolutely necessary, but they are not those on which the existence of the proletariat depends”. If the government did not have the strength to succeed, he said, the country would drown in a sea of printed money and lose everything. He did not want to terminate all programs that lost money. Transportation. for instance, on which he blamed much of the budget deficit, should, he thought, be covered by regular budget expenses57 Since foreign loans were generally unavailable, by 1925 the government was issuing internal loans to tide the government over as the economy strengthened. All of these technical changes and economic improvements made it possible to have a deficit-free budget by 1925.

Deficit-free did not mean firm, however. And there were budgets and budgets. The state adopted a "firm" budget for 1921 but had to abandon it after two months and then turned to "oriented" budeets, which, in essence, were budget aspirations subject to frequent revision. The budget proposed by PCF for 1923 was not accepted. In 1923 the state had a regular and an extraordinary budget. The former covered regular government expenses, cultural needs, and similar matters, and the extraordinary budget of about 320 million to 350 million (prewar, gold) rubles covered government losses in such areas as industry, transport. and agriculture.58 Sokolnikov reported in June 1924 that within the overall, oriented, budget, "we are still living this year on a regimen of monthly budgets." He considered it a solid achievement the next July (1924) when he could report the first firm quarterly budget, but he admitted in December 1925, soon before his ouster, that the country was still unable to construct a firm annual budget, although it could begin to think about semiannual budgets.59

Overall budgets did continue to grow, however. Using prewar gold rubles as a measure of account, the state budget grew in the five years from l92l-l922 to 1925-1926 from 1.1 billion to 1.3, 1.9, 2.6 and 3.8 billions. If one included the local budgets for 1925-1926, the figure was about 5.0 billion. Sokolnikov claimed that the figures for 1925-1926 were 90 per cent of the old tsarist budget, taking into account equivalent territory. Just as importantly, the budget priorities reflected new political realities (see table). When one speaks of the enduring achievements of Sokolnikov, the technical restoration of a sane, stable financial system is uppermost. Lenin fell ill in May 1922, before Sokolnikov had been in office long. Although he had worked with Sokolnikov for many years, Lenin in March 1922 referred to "our kind, talented and most valuable Comrade Sokolnikov" as a person whose "mistake is abstract enthusiasm for a scheme (something of which Sokolnikov has always been guilty, as a talented journalist and politician)," and who "knows nothing at all about practical commerce". Two months earlier he had told Sokolnikov that he had a proclivity for theoretical matters as opposed to the practical, adding, in a parenthesis, "you do have a weakness on this score".60

Table. 1913 Tsarist and 1924-1925 Soviet Budget Allocations (Percentage of total budgets)

CategoryTsaristSoviet Defence 26.816.9 Transportation 3038 Industry 16 Agriculture3.98 Social-cultural needs5.911 Internal administration20.316.7 Debt, loan payments11.93 Total99.899.6,

Source: Sokolnikov, Finansovaia politika revoliutsii 3:67, 2 I 7; Tret'ii s'ezd sovetov SSSR 427-429

Lenin's opinion, had he lived longer, might have changed as Sokolnikov mastered, one after another, a long series of technical challenges. Trotskii later referred to Sokolnikov as a person with "original ideas" and "a very inventive mind." One of the earliest American entrepreneurs in Russia, Armand Hammer, looking back on the l920s from the vantage point of sixty years, cited Sokolnikov as one of two people (along with Shanin, president of the state bank) who achieved "one of the miracles of modern finance" and, unlike Germany, without outside help. Alec Nove has described Sokolnikov as "energetic and competent," and the commissariat he headed as "devoted above all to financial soundness", (certainly more than a theoretical goal).61

Sokolnikov himself was never satisfied. While describing the road the regime had traversed, he repeatedly pointed out from 1924 on that much remained to be done, although he, too, was proud that the country had achieved so much on its own, without outside help.62 Even without Lenin's presence, Sokolnikov worked with moderate Communists who supported his policy. He had capable colleagues in the PCF. NEP created conditions favorable to economic restoration. Yet it is difficult not to recognize that Sokolnikov played an important role and that, if conditions helped make his work more successful, his work also helped to create a financial environment in which economic restoration could more easily occur.

If in technical matters we may credit Sokolnikov with energetic leadership, in other areas, those I term ideological, his positions were more clearly part of the ideology of the right communism of Bukharin, Aleksei I. Rykov and Mikhail Tomskii, which dominated the thinking of the mid-1920s. Although many of these ideas would later be swept away, they were important and deserve at least passing mention.

A firm supporter of NEP, Sokolnikov believed private trade and moderate rates of growth would last a long time. He said in late 1921 that "of two evils: permitting private trade or reaching a supply crisis, it is necessary quite decisively to choose the choose the former”. For him, state capitalism meant controlling the economic heights, subordinating private intereststo the state, but not destroying them. Furthermore, at least during the transition period, capitalist forms must be used in the interest of the proletariat. He also believed that, since the state controlled credit, private trade did not pose a grave threat. He said in 1925 that “we must strive gradually, unceasingly but also very, very slowly to broaden the sphere of the state and socialized sector at the expense of the private”. Regarding tempos, “experience ... forces one decisively to insist that a more restrained but more measured tempo of industrial expansion ... guarantees both the interest of workers and enterprises, and guarantees higher productivity and a better result of the enterprise's work.63

Further, Sokolnikov rejected autarky. In 1921 he said that “the economic and financial resurrection of Soviet Russia is possible in the near run only if it can economically join to the world market”. The next autumn he said “we cannot close our eyes to the enormous danger which stands before us ... But we have no other path than connection with the world market. He who thinks another way is ... completely utopian”. Similarly at the Twelfth Party Congress in 1923, he said, "the idea that we can exist in isolation from the world market is ... the most reactionary utopia".64 Sokolnikov championed foreign trade. “Our entire economic future," he told Moscow workers in October 1922, “must be wholly built on the development of our exports to the foreign market.” That month he told TslK that “the salvation of our industry is to be found in the resurrection of exports of raw materials.” He was not above openly threaening economic retaliation, as he did against Germany in an article in Ekonomicheskaia shizn in December 1923.65