Tikhonov and Gregory. Central Planning and Unintended Consequences

Economic History Association
Central Planning and Unintended Consequences: Creating the Soviet Financial System,
1930-1939
Author(s): Paul R. Gregory and Aleksei Tikhonov
Source: The Journal of Economic History, Vol. 60, No. 4 (Dec., 2000), pp. 1017-1040
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Central Planning and Unintended
Consequences: Creating the Soviet
Financial System, 1930-1939
PAUL R. GREGORY AND ALEKSEI TIKHONOV
We use the Soviet state and party archives to study the creation of the Soviet finan-
cial system. Although its framers intended to centralize all emission and monitoring
of money and credit, in practice the system was characterized by informal mecha-
nisms involving multiple players, soft budget constraints, and massive moral hazards.
Enterprises issued "illegal" commercial credits and surrogate monies, causing
liquidity growth to far outpace real economic activity. When confronted with the
choice of solvency versus plan fulfillment, firms always chose the latter: credit risks
were passed on to solvent enterprises, the state bank, and the state budget.
The framers of the Soviet financial system began with what appeared to
be a simple principle: All money and credit operations were to be con-
centrated in a single monopoly bank. This bank would be privy to all finan-
cial transactions, and would have the power to ensure that they were in
accordance with administrative plans. Currency and bank money would be
strictly segregated: inter-enterprise transactions would be cashless, whereas
household budgets would be purely cash based. Thus credit needed only
follow the output plans, and cash needed only follow labor-staffing plans.
Wage incomes would be kept in balance with the supply of consumer goods
at prevailing prices. The important decisions, therefore, could be made by
the physical planners, who would build balances of capital, raw materials,
and labor based upon general directives from the communist party.
The framers began to build this "simple" system in 1930. Nine years later,
those who survived the Purges must have been astonished by the discrep-
ancy between intentions and outcomes. On the principle that "money fol-
lows the plan," money and credit should have expanded at the same rate as
real economic activity. Between 1932 and 1936 real GDP expanded by 50
percent at most, and the supply of consumer goods scarcely increased, if at
all; but over the same period the narrow money supply tripled, while the
currency stock and liquidity as a whole both doubled. Thus the Soviet mone-
tary system, which had been conceived as the passive handmaiden of central
The Journal of Economic History, Vol. 60, No. 4 (Dec. 2000). C The Economic History
Association. All rights reserved. ISSN 0022-0507.
Paul Gregory is Professor and Aleksei Tikhonov is graduate student, Departnent of Economics,
University of Houston, Houston, TX 77204-5882. E-mail: pgregory@uh.edu, tihono@aol.com.
This research was funded by the Social Science Division (Economics) of the National Science
Foundation and by the Hoover Institution. The authors wish to thank Polly Hardee and Joel Sailors of
the University of Houston, as well as Robert Davies and Mark Harrison for their comments. Any errors
are the fault of the authors.
1017
1018 Gregory and Tikhonov
planning, turned out to be highly inflationary in pract

would have to be rationed, by various ad hoc devices, for as long as the
Soviet system lasted.
THE SOVIET ARCHIVES AND THE SOVIET FINANCIAL SYSTEM
The Soviet administrative-command economy was created by trial and

error, but not without certain organizing principles. Heavy industry and
defense were to have priority over other branches; the economy was to be
as self-sufficient as possible; private ownership was to be abolished; a one-
party dictatorship was to set the economic course; administrative methods
were to replace market forces; and inflation was to be avoided. These princi-
ples were debated over the course of the Industrialization Debate of the
1920s and became accepted doctrine when Stalin became dictator in the
early 1930s.'
These organizing principles did not, however, explain how resources were
to be allocated. The main institutions of administrative command, which
were largely in place by the rmid-1930s, were the product of lessons learned
from 1917 to 1929, and of the experiments of the early 1930s. The lack of
theoretical underpinning is apparent in the fact that even the "mature" Soviet
system could not identify a "theory" of the administrative-command econ-
omy,2 beyond the ad hoc material balancing which constituted Soviet
"scientific" planning.3
The formative years of the administrative-command economy have been
studied intensively, with considerable attention to collectivization and indus-
trial planning.4 This article describes the creation of the Soviet financial
(money and credit) system. It deals only peripherally with the state budget
and with long-term investment finance. The literature has neglected money
and credit relative to physical planning because financial variables were
supposed to assume a secondary role in the administrative-command
system.5 This inattention is evident in the fact that the most widely used text
on Soviet economic history devotes only a few pages to the financial
system.6 The Soviet financial system lacked a strong theoretical foundation,
but it did feature two overriding goals. First, it should prevent inflation.
Second, it should be subordinate to physical planning; money and credit
were to always follow real flows, never the other way around.
' Erlich, Soviet Industrialization; and Spulber, Soviet Strategy.

2 Gregory and Stuart, Soviet and Russian Economic Structure.
3 Gosplan, Metodicheskie ukazaniia.
4 Carr and Davies, Foundations; Davies, Crisis and Progress, Soviet Economy, and Industrializa-
tion; Rees, Decision Making; Zaleski, Stalinist Planning; and Lewin, Russian Peasants.
s Garvy, Money, Banking and Credit; and Gekker, "Banking System."
6Nove, Economic History.
Soviet Financial System 1019
There is a surprisingly rich literature on Soviet mone

New Economic Policy (NEP) period to the start of the Second World War.
Leading Soviet authorities, such as I. N. Tsipkin, V. K. Sitnin, V. M.
Batyrev, M. N. Bogolepov, and M. S. Atlas published monographs and
textbooks on this subject.7 Western specialists have also dealt with Soviet
finances, but with a greater focus on budgets and long-term capital forma-
tion.' Arthur Arnold's 1937 study of Soviet money and credit is the most
authoritative and complete, covering tsarist times to the mid-1930s and
providing a massive bibliography of Soviet publications.9
Fortunately, we are beginning to see archivally based research on this
topic as well. Oleg Khlevniuk and R. W. Davies have used the Soviet state
and party archives to shed light on the role of Gosbank [the state bank] and
the Ministry of Finance in ending rationing in 1934-1935.1 S. Tsakunov has
used the archives to study the Ministry of Finance in the 1930s.'1 We too use
the newly opened Soviet state and party archives to supplement the pub-
lished literature on the origins of the Soviet financial system.12 These ar-
chives provide an insider's view of the efforts, begun in 1930, to create an
administrative-command system of money and credit. Do "insider" accounts
yield a different picture from published sources? What value, if any, do the
archives add to our understanding? We believe the answers are "Yes" and
"A great deal."
MONEY AND CREDIT IN THE 1920s
The administrative-command financial system, which began with the

reforms of 1930, can be viewed as a reaction against practices of the NEP
era (1921-1928). Physical planning was relatively weak during NEP. In-
stead, the economy was regulated by a "dictatorship of finance," whereby
Ministry of Finance "limits" on credits were the major planning instrument:
to avoid inflation, these were set at the value of commodity circulation at
established prices. The currency-the chervonets-was regulated by a 25-
percent reserve requirement of gold or hard currency.
7 Sitnin, Kontrol rublem and Vospominaniia; Tsipkin, Sovetsky kredit; Batyrev and Sitnin,
Planovaia kreditnaia sistema; Bogolepov, Finansovy plan; Bogolepov, Sovetskaia finansovaia
sistema; and Atlas, Razvitie. This literature is surveyed in Davies, "Short-Term Credit."
8 Davies, Development; and Holzman, "Financing" and "Soviet Inflationary Pressures."
9Arnold, Banks, Credit, and Money.
'?(Khlevniuk and Davies, "End of Rationing."
Tsakunov, "People's Commissariat."
12 For descriptions of these archives see State Archival Service, Research Guide; Khlevniuk et al.,
Stalinskoe Politburo; and Kratki putevoditel', Fondy. The two main archives used in this study are the
Russian State Archive of the Economy (RGAE) and the State Archive of the Russian Federation
(GARF). The archives are valuable not only for official records, but also for limited-circulation publica-
tions and newspaper clippings found in the files.
The distinguishing feature of the NEP economy was t

of industry and wholesale trade. Enterprises merged into vertically and
horizontally integrated trusts, whose products were sold by syndicates.
Syndicates also provided member enterprises with resources, including
money and credit. "By the end of the 1920s," according to Tsipkin, "syndi-
cates turned into centers of credits and accounts, which took on planning,
supply, distribution, and even construction."'3 Purchasers circumvented state
credit limits by offering "friendly" promissory notes (veksel), which sellers
then discounted (monetized) at Gosbank or, if refused there, at other credit
institutions."4 When necessary, syndicates assumed responsibility for the
IOUs of their less-than-creditworthy enterprises. 15 With the confusion of the
multiplicity of accounts, enterprises and trusts could pyramid commercial
instruments against the same goods.'6
Figure 1 shows that currency in circulation and short-term credit both
increased by nearly identical factors (1.6 and 1.7, respectively) between late
1925 and late 1928, although money had grown more slowly than credit
between mid-1924 and mid-1926. Judging from Ministry of Finance and
Gosbank complaints, money and credit were growing faster than the finan-
cial authorities wished. The equivalent growth rates of credit and money
suggest a transmission mechanism from credit to monetary emission, which
we explain as follows. Syndicate forbearance towards insolvent enterprises
meant that the latter's budget constraints were soft.'7 As economic agents
issued one another credits, Gosbank was forced to monetize them, and thereby
expand the money supply willy-nilly; if it refused, other banks would step in.
13Tsipkin, Sovetskiy kredit, p. 56.

"4During the NEP period, Gosbank had a competitive advantage over other financial institutions
through its access to the state budget and its ability to emit money. The accompanying table shows that
Gosbank attracted about half the economy's deposits.
DEPOSITS AND CURRENT ACCOUNTS IN BANKS
(million rubles)
1 October 1925 1 October 1926 1 October 1927
Gosbank 420.9 470.6 576.6

Prombank 228.8 189.2 155.6
Municipal banks 144.9 188.3 197.6
Vsekobank (cooperation) 52.0 56.8 72.4
Vneshtorgbank 41.2 30.9 18.9
Ukrainbank 19.5 21.6 25.3
Electrobank 15.3 15.8 13.7
Far-East Bank 7.5 5.5 8.1
Middle-Asia Bank 6.3 4.9 6.2
Source: Yurovsky, "Banki," p. 413.
" We know little about the working relationships among syndicates and their member enterprises
duringtheNEP period (see Bogomolova, Upravleniesovetskoi; and Kantorovich, Sovetskiesindikaty.)
16 Amold, Banks, Credit, and Money, p. 348.
17 Komai, Economics of Shortage.
4,000
Short-Term Credit
3,500 - Currency
3,000
2,500-
rA 2,000-
1,500-
1,000
500-
0 , - ,
Jan-24 Jul-24 Jan-25 Jul-25 Jan-26 Jul-26 Jan-27 Jul-27 Jan-28 Jul-28 Dec-28
FIGURE 1
CURRENCY AND SHORT-TERM CREDIT, 1924-1928
(monthly data)
Source: Biulleten koniunkturnogo instituta.
Without the threat of insolvency, credit expansion was automatically con-

verted into monetary growth. The lesson of NEP was that the combination
of soft budget constraints, commercial credits, and commercial banks com-
peting for deposits can together -cause the state bank to lose control of the
money supply. In effect, commercial credits were automatically translated
into monetary growth, even when the state bank was pursuing tight credit
*policies.'8
THE GREAT FINANCIAL DEBATE
Two competing views of money and credit were placed be

decision makers in the late 1920s and early 1930s. The "leftist
that banks, money, and credit would not play an active role
economy characterized by administrative- allocation.'9 Budge
"4planned" credit allocations would replace bank and commer
Financial authorities needed engage only in social accounting
8 Amold (Banks, Credit and Money, p. 279) shows that although Gosbank reduc
discounts in 1926/27 and 1927/28 by 243 and 817 million rubles, respectively, its not
and 337 million rubles. Even though Gosbank was refusing promissory notes, its comp
19 Arnold, Banks, Credit and Money, pp. 358-63.
money and credit would simply follow materials, out

prises fulfilled their plans. According to Yury Pyatakov, the chairman of
Gosbank and an advocate of the leftist view, "such [is the] degree of organi-
zation of relationships among different sides of the collectivized sector, that
nonfulfillment of [plan] responsibilities by one of the sides would happen
only in exceptional cases;"20 thus "the question of credit discipline is a ques-
tion of plan discipline."21
The alternate view, expressed by those with practical banking experience,
argued that money and credit would continue to be necessary to provide the
liquidity for transactions and to redistribute resources via taxes, credits, and
other means. Sitnin, a seasoned Soviet banker, wrote that such ideas were
born "in the -minds of young people who came into Gosbank at the end of
the 1920s and were influenced by the notion of the cult of the plan [kult
plana]."22 Preobrazhensky-himself a leftist in the debate over "super-
industrialization"-stated that the administrative-command economy must
have financial instruments to redistribute resources to priority branches
(such as heavy industry) from low-priority ones (notably agriculture).23 And
Bogolepov argued that it should be used "as a nonpriced instrument to
achieve the goals of Gosplan [the State Planning Commission]."24
FINANCE FROM ABOVE: INTENTIONS vs OUTCOMES
The 1930 Reform
With the introduction of administrative planning (the First Five-Yea

was adopted in April 1929), the Soviet Union required a new financial sy
tem. The first credit reform of the new era, drafted by the proponents
leftist view of money and credit, was enacted on 30 January 1930. This
banned the sale of goods or services on the basis of commercial cred
unified all enterprise accounts into a single current account; it made Go
the monopoly supplier of bank credit; it decreed that Gosbank credit the
selling enterprise's account automatically, without the buyer's permission,
and whether or not the enterprise had sufficient funds; and it required that
all transactions among enterprises be made on a cashless basis from the
enterprise's single current account. It lasted less than a year because it as-
sumed, naively, that every enterprise director would faithfully fulfill the
20 Vestnikpravleniia Gosbanka (VPG), 1930, nos. 15-16, p. 11.

21 VPG, 1930, no. 8, p. 8.
22 Sitnin, Vospominaniiafinansista, p. 29.
23 Preobrazhensky, New Economics.
24 Bogolepov, Sovetskaiafinasovaia sistema, p. 40. Bogolepov, a well-known specialist in finance
before the revolution, proposed the system of financial planning used during the First World War. In
the 1920ss, as chairman of Gosplan's Department of Financial Planning, he was responsible for
preparing the financial program for the First Five Year Plan.
plan. In a setting of perfect plan discipline the automa

termed "planned automatism," would result in credit f
out the active monitoring of transactions by Gosbank.
Pyatakov argued that traditional banking control instr
tances (aksept) were unnecessary in the new setting: ".
would mean discrediting the major idea [ofthe credit r
commodities."25
Gosbank's automatic crediting of seller accounts constituted an offer of
unlimited credit, which enterprises enthusiastically accepted. Enterprises
opportunistically altered their behavior to over-demand credit, as a report of
the Worker-Peasant Inspection Committee (Raboche-Krestianskaia
Inspektsia) sardonically pointed out: "The first period of credit reform is t
period of complete money saturation and satisfaction of clients."26 Anothe
internal report by the same committee reported "large abnormalities" and
"direct distortions," such as shipments of out-of-season and unordered com
modities; invoicing at inflated prices; shipments of higher volumes than h
been ordered; submission to Gosbank of old, uncollectible debts; and pay-
ments for future deliveries.
In its new monopoly role, Gosplan was overwhelmed by administrative
burdens and starved of information. A 1930 Gosbank publication complained
that it was not receiving information on credit refusals, stating that "Any
association or trust that refuses credit directly to the enterprise could provide
the bank with information about the weakness of the self-financing mecha-
nism at that enterprise."27 According to Gosbank's chairman "relations of the
industrial and sales enterprises with the rest of the enterprises in the economy
have become so complicated that, in the end, none of the institutions (indus-
trial, sales, financial, or Gosbank) has a full picture of the financial situation
of any particular enterprise."28 With all the automatic crediting and debiting
by its various branch banks, Gosbank itself did not know which enterprises
were overdrawn. A newly created centralized clearing system (mez-
dukontornie rascheti or MKR) not only "lost" many payments, but unpro-
cessed accounts grew by a factor of ten in the first two months of the cred
reform, reaching at one point an acknowledged total of 40,000. In addition
the "float" associated with the time difference between Gosbank's automati
payment of sellers and collection from buyers living in different regions, t
"float" created by funds caught in interbank clearing accounts represented
substantial stock of money beyond the control of any central authority.
25 VPG, 1930, nos. 15-16, p. 11. The aksept was a quasi-promissory note, acknowledging the p
chaser's responsibility to pay. Despite official restrictions, accepts circulated as instruments of pay
ments.
26 GARF, 374/ 7/943, 31-32.
27 VPG, 1930, no. 15-16, p. 10.
28 VPG, 1930, no. 8, p. 3.
The intent of the 1930 credit reform was to place G

oly supplier of credit, in firm control of both money and credit. In fact,
Gosbank quickly lost control of both.29 Gosbank records show that its credits
rose by 87 percent and banknote issue rose by 78 percent in the course of the
1929/30 economic year alone, echoing the NEP experience that credit
growth leads automatically to an equal amount of monetary growth.30
"Planned automatism" permitted the transmission of responsibility from
uncreditworthy customers to creditworthy ones, and ultimately to Gosbank
and the state budget.3"
The NEP taught that soft budget constraints, competing commercial
banks, and an official lender of last resort meant a loss of control over the
money supply. The misconceived January 1930 credit reform taught further
that automatic crediting would be abused by economic agents, who would
take advantage of their soft budget constraints and over-demand credit.
Together, these lessons convinced the Soviet leadership that administrative-
command methods were as necessary in finance as in physical planning:
Gosbank would have to use "administrative measures" just as did Gosplan.
The 1931 Reforms
The failure of the 1930 credit reform was signaled by a change in Gos-
bank's administration at the end of that year. As the new administration
embarked upon a second credit reform, "automatism" and "crediting by the
plan" became watchwords of failure. The foundations of the new credit
regime were announced in decrees signed by the Council of Ministers on
24 January and 20 March 1931. As in the 1930 decree, Gosbank was
named the monopoly supplier of bank credit, commercial credits were not
permitted, and financial transactions among enterprises were to be on a
cashless basis. Its innovations were fivefold. First, Gosbank was to set
credit limits based upon approved credit plans. Second, Gosbank was to
provide supplemental credits only in special cases, primarily to facilitate
trade rather than production. Third, Gosbank was to actively monitor trans-
actions to ensure that suppliers were observing the terms of contracts, and
to settle invoices only with the agreement of buyers.32 Fourth, a supple-
29 The financial crisis of 1930 has been described in some depth by Davies, Soviet Economy, chaps.
9-11.
30 VPG, 1930, nos. 30-31.
31 The linkage to the budget worked as follows: The state's prime revenue source in 1930 was the
enterprise excise and similar taxes, which were paid into the state budget irrespective ofthe availability
of funds in the enterprise's account. If enterprise funds were insufficient, excise taxes were paid by
Gosbank credits, which translated directly into an increase in the money supply.
32 The framers also assumed that the active intervention of Gosbank would have a positive effect:
"Economic organizations would be freed of managing commercial credit operations, and they could
concentrate on production." GARF, 374/7/943, 30.
mental decree signed by the Committee of Labor and Defense on 23 July

193 1 granted enterprises their "own" working capital (oborotnie sredstva)
to make them self-financing except in special cases.33 Fifth, insolvency
procedures were set in a decree of July 1932, although the full con-
sequences of insolvency were not spelled out.
The intent of these credit reforms was as follows: Gosbank, the sole sup-
plier of bank credit, was to strictly limit credit expansion. The limited vol-
umes of bank credit were to go to trading organizations. Enterprises engaged
in production were to rely on their own working capital; a hard budget con-
straint was to prevent the opportunistic behavior of earlier periods. To pre-
vent abuses, Gosbank was to become an "administrative-command" center
for monitoring individual transactions. These measures, it was hoped, would
ensure that credit did indeed follow the plan, that plan discipline was en-
forced, that enterprises improved the efficiency of their operations, and that
the growth of the money supply would be moderate.
Figure 2 shows that the results for the period 1932-1936 were far re-
moved from the overarching goals of the credit reform, namely the disap-
pearance of commercial credit and limited growth of Gosbank credits. In
fact, Gosbank credits more than quadrupled over this period, whereas com-
mercial credits remained stable in nominal terms; by 1936, Gosbank credits
exceeded commercial credits by 50 percent.34 This raises two key questions.
First, why did commercial credits persist despite official opposition? And
second, why did Gosbank credits rise so substantially despite official com-
mitments to limit their growth?
The Persistence of Commercial Credits
Arnold's analysis of the discussions leading up to the 1930 reform sug-

gests that the intent was to improve the old commodity-credit system, not to
eliminate it. Contradictory regulations were approved, some appearing to
ban all commercial credit, others apparently condoning it, and all leaving
observers confused as to the legality of different types of enterprise-to-enter-
prise credit (promissory notes, bills of exchange, seller-to-buyer credits,
buyer-to-seller credits). This ambiguity remained in the wake of the 1931
reforms, and enterprises were not slow to capitalize on it in the years to
follow.35 Gosbank's frustration with the persistence of "illegal" commercial
33 This was done by legalizing the credits received during 1930, and by making provisions for some
growth of working capital in accordance with plan requirements.
34 The large difference between receivables (debitori) and payables (kreditori) is simply the result
of the accounting practice, of the period to include turnover taxes and payments of profit taxes in
receivables but not in payables. On this, see Debitorsko-kreditorskaia zadolzhennost' v 1935 gody,
RGAE, 7733/14/900. Also RGAE, 2324/20/637.
35 Arnold, Banks, Credit, and Money, p. 349-5 1.
25,000 -
-Gosbank Credits
Receivables
--- Payables
20,000 -
*0 15,000-
,0
*E 10,000
5,000:-
0-
1932 1933 1934 1935 1936
FIGURE 2
GOSBANK CREDIT AND COMMERCIAL CREDIT, 1932-1936
(1 January)
Source: Special report by Sitnin prepared in 1936 (RGAE, 7733/14/900).
credits is seen in a 1938 statement by its new head: "Although our laws
forbid enterprises from crediting one another, in fact nothing has changed
as a result of these laws ... .."36
The 1931 reforms instructed Gosbank to grant credits principally to orga-
nizations engaged in trade (including agricultural procurement), not to those
engaged in industry, transportation, or agriculture per se. The first three lines
of Table 1 confin that trade organizations, which accounted for just 10
percent of national income in 1930,37 received more than half of Gosbank
credits in the mid-1930s. Trade, food supply, and procurement were the
prime beneficiaries, while production organizations (heavy industry, light
industry, agriculture, and transport) received little. Table 1 does show, how-
ever, that production enterprises were not cut off entirely from bank credits.
Table 2 ranks organizations by receipts of commercial and Gosbank cred-
its. It suggests that production enterprises substituted commercial credits for
Gosbank credits. Trade ranked first in both Gosbank and commercial credit,
while heavy industry (the dominant industrial employer throughout the
36RGAE, 2324/20/4489, 30.

37 Davies, Soviet Economy, p. 489.
TABLE 1
DISTRIBUTION OF GOSBANK CREDITS, 1933-36
(percentages)
Agency 1933 1934 1935 1936
Trade organizations 23 29 34 28
NKPP (food industry) 17 16 17 20
Komzag (delivery committee) 16 15 12 11
NKTP (heavy industry) 9 9 11 11
Agriculture 8 6 5 5
NKLP (light industry) 7 6 6 10
NKPS (transport) 4 3 3 3
NKLes (forestry) 4 4 3 3
Prom Kooperatsia (cooperation) 4 2 2 1
Vneshtorg (foreign trade) 3 4 2 1
Source: RGAE 1562/16/74.
1930s) ranked second in commercial credits and fourth in Gosbank credits.

Transport ranked eighth in Gosbank credits, but fourth in commercial cred-
its. These discrepancies could be interpreted either as the perverse use of
commercial credits to thwart central directives, or as an essential source of
credit for production enterprises, without which they could not have fulfilled
their plans.
Sitnin, one of the intellectual framers of the Soviet financial system,38
used the example of three firms-"Ore," "Coke," and "Machinery Manu-
facturer"-to demonstrate that an administrative-command economy auto-
matically generates commercial credits. Each time a delivery of raw materi-
als is made, a credit is created, whether advanced deliberately by Gosbank
or "spontaneously" by the firms themselves. It is not possible for clearing
payments to be made with every movement of materials. Moreover, accord-
ing to Sitnin, such credit operations may redistribute resources. If Ore and
Coke are paid expeditiously at prices that reflect their resource costs, no
redistribution takes place; but if they are paid late, not at all, or at prices
below their resource costs, resources are redistributed to Machinery Manu-
facturer. In cases of nonpayment or delayed payment "the party that suffers
is not the party that receives resources and is unable to pay for them, but the
party that supplies those resources-the creditor."39
Commercial credits are likely to substitute for bank credits in an economy
with few financial intermediaries and an overworked central bank. Parties
that deal with one another regularly (as do Ore, Coke, and Machinery Manu-
facturer in Sitnin's example) are better able to evaluate credit risk than a
38 Sitnin's official biography reads as follows: Graduated Moscow Institute of Economics; worked
as a consultant for Gosbank, 1931-1941; member of staff of Ministry of Finance, 1941-1950; Army,
1950-1960; Deputy Minister and 1st Deputy Minister of finance, 1960-1965; Chairman of State
Committee on Pricing USSR Council of Ministers, 1970-1974.
39 Sitnin, "Payments in Ferrous Metallurgy." EZ, no. 69, 1933.
TABLE 2
MAJOR SECTORS, RANKED BY VALUE OF CREDITS
Sector Commercial Credits Gosbank Credits
Trade 1 1
Heavy Industry 2 4
Food Products 3 2
Transport 4 8
Supplies 5 3
Agriculture 6 6
Light Industry 7 5
Foreign Trade 8 9
Cooperation 9 10
Forestry 10 7
Source: RGAE, 7733/14/900.
centralized grantor of credit. In the Soviet Union, enterprises, trusts, minis-

try departments, and the ministries themselves were better positioned than
Gosbank to deal with the information asymmetries associated with borrow-
ing and lending.40 Commercial credits also could be tailored to unusual
circumstances, such as nonstandardized production (proizvodstvo
shirpotreba). Out of a hundred heavy-industrial enterprises producing no
standardized linens in Leningrad, only five were credited by Gosbank.
Yet another explanation for the persistence of commercial credits is th
some enterprise managers actually preferred commercial credits to Gosban
credits as a way of avoiding official scrutiny. We cannot determine the
prevalence of such preferences; we can only cite isolated examples. The
newspaper Economic Life cited the following case: "Moscow Bread Factoty
Number 4 was supposed to receive 800,000 rubles from Gosbank. In reality
only 136,000 were provided. Instead of demanding additional funds, the
bread factory chose to negotiate with Souzmuka Food Corporation that it not
post bills for the produce it delivered. The commercial credit received by
[Moscow Bread Factory] in 1931 and 1932 [from its suppliers] reached 1.7
million rubles." The author of the article concluded that enterprises preferred
such credits because "it is safer. You can spit on all the bank's demands for
balance of the enterprise budget, for improvement of responsibility ....42
Concealment of sales and profits was widespread, hence freedom from
scrutiny often yielded real benefits. Enterprises avoided paying turnover
taxes (nalog s oborota) by being paid in IOUs: two enterprises in the Lenin-
grad Combinat Trekhugol'nik, for example, concealed their revenues for
nine months and thereby saved more than a million rubles in taxes.43 The
40 RGAE, 7733/14/900, 13.

41 EZ, no. 8. 1933.
42EZ,no. 8, 1933.
43 Minister of Finance Grinko cited this example in his inaugural address. EZ, no. 24, 1933.
Soyuzmyaso Association hid profits of 71 million rubles

government grants "to cover losses" in the amount of 54 million rubles.44
Another enterprise diverted funds to local construction.4
The press duly complained of self-seeking, of a "couldn't-care-less"
attitude towards the fiscal interests of the proletariat as a whole, and that
"the budget can wait" had become the slogan of the day. Sitnin concluded
a 1936 internal report with a similar finding that enterprises were using
commercial credits to their own advantage: "A large part of unplanned
financial resources are used by enterprises to hoard inputs, to create float
(immobilize monetary funds), and only a small part is used to restore mone-
tary reserves. These facts show the harm of commercial credit; it allows
enterprises to cover up their inability to properly organize their monetary
funds."46
The Growth of Official Credits
Despite the intent to limit Gosbank credits to special cases, Figure 2

shows a fourfold increase in Gosbank credits between 1932 and 1936.47 Let
us consider the factors behind this increase.
With a monopoly supplier of bank credit, it would appear that the defini-
tion of the narrow money supply (Ml) would be the sum of currency and
Gosbank credit. The other means of exchange would be commercial credits,
which we add to MI to create an aggregate "liquidity" measure, which we
call LI. Figure 3 plots the various measures of aggregate money and liquid-
ity supply between 1932 and 1936, showing that LI more than doubled, Ml
more than tripled, and currency almost doubled. Only commercial credits
did not expand. Clearly, such rapid expansion was not what the framers of
the 1931-32 reforms had in mind. The monetary and liquidity aggregates
were outgrowing the real economy.48
Figure 4 provides four measures of velocity: Ml and LI velocity relative
to GNP, and Ml and LI velocity relative to trade turnover (all in current
prices). Because trade turnover and nominal GNP grew at slightly different
rates, the velocity measures yield different patterns: Ml velocity relative to
4EZ,no. 24, 1933.
45 This case went to the Worker-Peasant Inspection Committee and to the local procurator, w
concluded that "the plan of repair of bridges was fulfilled-we'll not bring the guilty to their re
bility." EZ, no. 22, 1933.
46 RGAE, 7733/14/900, 13.
47 This is a good period for studying the effects of rising prices on the supply of liquidity. In 1932
the prices of basic industrial goods were often set below costs, and consumer goods were sold at ration
prices. Between 1932 and 1936 the prices of industrial goods were increased (to reduce subsidies) and
consumer rationing was abolished, both of which meant large increases in consumer prices.
48 Bergson (Real National Income, p. 261) cites an average annual growth rate of 12 percent from
1928 to 1937. If we take this rate for 1932 to 1936, this suggests a growth factor of approximately 1.6,
well below the growth rates of money and credit aggregates. If we take Bergson's estimates in "late"
prices, the growth factor is only 1.27.
80,000
LI
-ml
70,000 - -Commerical Credits
- - - Currency
60,000 -- Gosbank Credits
50,000
40,000 -
30,0
20,000 .
0^
1932 1933 1934 1935 1936
FIGURE 3
MONETARY AGGREGATES, 1932-1936
(1 January)
Sources: Khlevniuk and Davies, "End of Rationing," tables 2 and 4; Arnold, Banks, Credit and Money,
table 62.
GNP fell from 7 to about 6.5; Li velocity relative to GNP rose modestly
(because of the lack of growth of commercial credits). Both velocities rela-
tive to trade turnover rose substantially, with the trade velocity of Li rising
most rapidly (from 1.8 to slightly less than 3).
The rising velocity of Li suggests either that Soviet financial practices
were evolving very quickly (which we consider unlikely), or that commer-
cial credits were underreported. If we assume constant velocity of Li, then
an annual average of 5. 1 million rubles of commercial credits were not
reported in the period 1932-1936 (equivalent to one-third of the reported
total).49 We suspect that there were ample opportunities to underreport such
credits, especially those that could be cleared within a ministry or a region.
Soft budget constraints cannot persist over the long run without a lender
of last resort. During NEP, Gosbank served this function. In the "planned
49 We have no assurance of correct reporting of commercial credits. In fact, given their uncertain legal
status, organizations probably underreported them, especially when they were cleared internally out of
sight of Gosbank officials. We estimate the maximum value of underreporting by assuming that liquid-
ity actually rose at the same rate as nominal GNP. With this assumption, we calculate that commercial
credits could have been understated by an average of 5.1 million rubles per year between 1932 and
1935 versus the actual annual average of 12.4 million rubles.
_- -_ _ _
4 ----- - - --- --- --- ---
- - -- --MI Velocity (Relative to GNP)

--MI Velocity (Relative to Trade)
1 - LI Velocity (Relative to GNP)
- - - LI Velocity (Relative to Trade)
1/1/32 1/1/33 1/1/34 1/1/35 1/1/36
FIGURE 4
MONETARY VELOCITY, 1 January 1932-1936
Notes: Our rough calculation of nominal Soviet GNP interpolates Bergson's 1928 and 1937 nominal GN
figures, assuming a constant rate of growth. The GNP ratios must therefore be regarded as veiy crude. We
chose this interpolation over inflating real GNP series because of our uncertainty about the GNP deflator.
Sources: Khlevniukand Davies, "End ofRationing," tables 2 and 4; Amnold, Banks, Credit andMoney
table 62; and Bergson, "National Income," p. 36.
automatism" experiment of 1930, Gosbank offered unlimited credit. The 1931

reforms did not provide for a lender of last resort and, in fact, made an abortive
attempt to impose hard budget constraints to ensure that none was needed. A
decree of 20 January 1932, "On the Order of Registration of Insolvent and
Defective Enterprises and Farms," set procedures for declaring enterprise
insolvent, without spelling out the consequences.50 The 1932 insolvency decree
resulted in the creation of an "unplanned" wholesale market.51 Buyer refusal of
goods suggests that this decree was taken seriously, at least for a time.
50 According to this order, an enterprise could be put on notice if it failed to pay invoices on time, or if i
failed to repay bank loans. If it failed to pay within ten days, the enterprise could be declared to be in defaul
and in case of a second failure in the same quarter, also in ten days, the enterprise could be declared insolvent
si Enterprises could avoid payment obligations if they refused delivery of goods. Such refused good
ended up under thejurisdiction of local branches of Gosbank. Newspapers of the time often announced
sales of manufactured commodities. An example: "The Chudov branch of Gosbank, because of the
failure of due payments, is announcing the sale of insulators, owned by the Komintem factory. All
questions should be directed to the Chudov branch of Gosbank." EZ, no. 36, 1933. In some instance
such "sales" were used to contravene the planners' preferences. For example, the Middle Volga loc
Gosbank branch, under pressure from the local government, forced a chain of cooperatives to sell suga
that was intended for delivery to other regions. As a result, there was enough sugar for a year and a half
in this area, while other regions were experiencing shortages.
Records from the 1930s reveal no enterprises withdrawing from produc-

tion due to bankruptcy; clearly, hard budget constraints were not imposed.
According to a frustrated Gosbank chairman, writing in 1938, "If one
enterprise is sitting on an overdue payment, it can be complacent. It will
receive money for wages and other needs."52 Industrial ministries, their
branch departments, and even central authorities realized that enterprise
closure would deprive them of planned output. They therefore tolerated
insolvencies and developed mechanisms, such as commercial credits or
profit redistributions, to preserve production. The state could not afford to
go without the output of the insolvent plant, and the plant in turn could not
produce without material deliveries. The state's losses from a firm's bank-
ruptcy would outweigh the state's benefit from enforcing its debt. Eco-
nomic agents, obviously, were aware of the state's cost/benefit calculation,
and acted opportunistically.
Production enterprises, lacking ready access to Gosbank credits, had to
rely primarily on commercial credits to carry out their transactions.
Although we do not know the operational details, commercial credits were
arranged by ministerial and trust departments, as well as by enterprises
themselves, with established suppliers. As long as commercial debts were
offsetting, no lender of last resort was necessary. If clearing took place
periodically, arrears would grow until the clearing occurred. Indeed,
throughout the 1930s there would be bursts of rapid growth of arrears
(neplataezhi), followed by clearing operations to reduce their magnitude
(Figure 5). Overall, overdue commercial credits were the "growth industry"
of the 1930s, expanding at 27 percent per annum between 1934 and 1939.53
The "failure of payments" was noted with alarm in reports issued through-
out the 1930s. More than half of outstanding credits consisted of unpaid
bills.54 Financial authorities conceded that such debts "directly violated the
major rules of the credit reform."55 According to the Ministry of Finance, on
52RGAE, 2324/20/4489, 54.

5 RGAE, 23741201637.
54According to a report prepared for the Ministry of Finance, slightly over 50 percent of commercial
credits-and some 70 percent of enterprisedebts-were classified as illegal between 1932 and 1936. "Legal-
ity" was defined by payment status, with seriously overdue payments placed in special ledgers (called
kartoteka 2 and 3 accounts) which the ministry could freeze at will. For example, on 1 January 1937, 525
million rubles of enterprise accounts were classified as frozen (aresty), out of a total anrears of 3,625 million.
Gosbank Credit Receivables Payables Illegal Receivables Illegal Payables
01.01.32 4600.9 12285.5 7048.6 6338.2 5125.7
01.01.33 6981.1 13166.9 7001 7411.8 5092.6
01.01.34 10214.1 10643 5961.5 5734.3 4032.8
01.01.35 13226.8 11937.6 6800 6328.7 4676.4
01.01.36 20492.6 13902.6 7851.2 7472.8 5388.6
Source: Debitorsko-kreditorskaia zadolzhennost' v 1
in RGAE, 7733/14/900.
55 RGAE, 7733/14/900, 4.
6.0-
5.0
4.0-
3.0-
2.0-
1.0 -
0.0A
1/1/33 1/1/34 1/1/35 1/1/36 1/1/37 1/1/38 1/1/39
FIGURE 5
INTER-ENTERPRISE ARREARS, 1933-1939
(monthly, millions of rubles)
Source: RGAE, 2324/20/637.
1 January 1936 unpaid bills on delivenres that were unaccompanied by invoices,

or not ordered at all, constituted 16 percent of the raw-material, coal, and
internediate-good inventories of all enterprises, varying from 25 percent in
heavy industry to 10 percent in light industry. In 1934 and 1935 deviations from
the creditplanwere as much as 3-35 percent.56 Butunlike contemporaryRus-
sia's "virtual economy,"57 arrears did not reach large proportions of GNP in the
1930s: at their peak (in 1937) they amounted to only about 2 percent of GNP.
Financial authorities were not pleased with the industrial ministries'
tolerance of such indiscipline. A 1938 report by the new Chairman of
Gosbank, N. Bulganin, declared: "Nonpayments have become a system-
atic feature with which we have to come to terms."58 He also noted that
because of commercial credits "there is a massive redistribution of re-
sources from account to account, from healthy to unhealthy organizations
by order of the ministry. When authorities wish to hold someone respon-
sible, nothing happens."59
56 Atlas, Razvitie, p.159.

57 Gaddy and Ickes, "Russia's Virtual Economy."
58 RGAE, 2324/20/4489,28
59 RGAE, 2324/20/4489, 30. Italics added.
To the extent that arrears were mutually offsetting with

a region, the clearing would simply reshuffle financial
parent organization from profitable to unprofitable e
lender of last resort-namely, Gosbank-was required to
ences. In his memoirs, Sitnin wrote that "every year Go
failures to pay of different industries via the extensive use of Gosbank's
credit."60 These settlements constituted only short-term palliatives, as Gosbank
report of 1933 attested: "The one-time program to eliminate mutual arrears in
the Ministry of Heavy Industry was the main administrative measure last year.
It had only a short-term effect, and after a short period of time the debtor-
creditor relationship returned to its original condition."61
Figure 5 shows the development of arrears from 1932 to 1939. Gosbank's
clearing operations resulted in substantial reductions in the volume of arrears
in 1937, 1938, and 1939. Each time, these operations had only a temporary
effect on arrears. According to a Gosbank report from 1937, "At the end of the
year, Gosbank carried out an artificial amortization of overdue credits and
unpaid bills of suppliers. This amortization is not reliable and will lead to the
growth [of credit arrears] in the coming year."62 The average increase in over-
due credits equaled one-quarter of the average increase in bank credits (reported
in Figures 2 and 3); hence, Gosbank's lender-of-last-resort function must have
played a prominent role in the rapid expansion of its credits.
Although many credits and debts were offsetting (within a ministry or minis-
try branch departrnent), clearing them proved to be a difficult problem, one that
could not be handled by central financial authorities. Clearing of mutual debts
called for deal-makers with knowledge of local conditions. By the late 1930s,
most clearing was accomplished via regional or ministerial settlement organiza-
tions. As of 1939 the 108 active Bureaux for Mutual Settlements (Biuro
vzaimnykh raschetov or BVR) established by Gosbank were handling only 11
percent of total payments turnover.63
The reversion of clearing to local and industrial authorities signified a serious
loss of central control over transactions. Decentralized clearing did, however,
offer a major advantage: only net arrears had to be financed by periodic Gos-
bank loans.
The Spread of Money Surrogates
Unlike modem market economies, where demand deposits and cash are
interchangeable, the Soviet administrative-command economy drew a strict
60 Sitnin, Vospominaniia, p. 40.

61 RGAE, 7733/12/332, 50.
62 RGAE, 7733/15/325, 56.
63 Davies, "Short-Term Credit," p. 23.
line between cash, which was to be used for wage paym

of consumer goods, and bank money, which was the sole legal medium of
inter-enterprise exchange. In the 1930s financial authorities feared the infla-
tionary effects of wage growth and, accordingly, sought to limit enterprise
wage funds; this became a durable feature of the Soviet system.64 Although
more research needs to be done on this subject, we suspect that Khlevniuk
and Davies are correct in arguing that Gosbank and Ministry of Finance
officials were judged on one simple criterion: adherence to the monetary
emission target.
The fact that currency almost doubled between 1932 and 1936 suggests
that Gosbank and Ministry of Finance officials found it difficult to restrain
emissions. Clearly, the cash needs of the economy were growing as indus-
trial employment expanded and industrial wages were bid up.65 But Gosbank
credits more than quadrupled, suggesting that currency growth was actually
relatively slow. And indeed, despite the doubling of currency stocks, wage
arrears grew in the mid-1930s. Unpaid salaries amounted to 359 million
rubles on 1 January 1936, about one-fifth the size of commercial debt.66
Just as market economies respond to currency shortages by creating sub-
stitutes, Soviet enterprises and organizations produced money surrogates
(surrogati) to deal with wage arrears. The use of money substitutes was
already sufficiently widespread during NEP to require official action: On 29
February 1924 the Committee for Labor and Defense (STO) issued a special
decree prohibiting "all government, cooperative and private organizations,
and enterprises from producing any kind of monetary substitutes, without
special permission of the Ministry of Finance .... ."67 Under this decree, the
ministry could even liquidate organizations that illegally issued money
substitutes. Centralization of financial administration in 1930 and 1931 was
supposed to put a stop to money surrogates, but they did not disappear. On
3 June 1930 the Central Executive Committee and the Council of Ministers
published a special decree, according to which "other forms of payment"
were allowed only with agreement of People's Commissariat of Finance.68
Unlike the 1924 decree, the punishment for producing unauthorized money
substitutes was not specified.
The use of money surrogates peaked in the years 1934-1935. Investiga-
tions conducted in the summer of 1935 uncovered 1,340 cases of substitute
monies.69 A Ministry of Finance report showed that in July and August 1935
the monetary authorities were focused on the fight against emission of self-
6 Granick, Job Rights.

65 Holzman, "Soviet Inflationary Pressures."
66 This calculation was made in a report prepared by Sitnin, in RGAE, 7733/14/900, 7.
67 Denezhnoe obrashenie i kredit v SSSR, 1938, p. 112.
69 RGAE, 7733/13/764, 39.
printed money.70 The battle against money surrogates was intensified by a

special decree of the Central Executive Committee and the Council of Min-
isters of 31 May 1935, which provided criminal punishments for "unlawful
making of securities and money substitutes." Managers of printing establish-
ments that took orders for money surrogates, and managers of stores that
accepted them, were to be prosecuted as well.7"
The archives provide ample examples of money surrogates in the 1930s:
In the Urals, substitute money was widely used for payments to orphanages,
which passed it on as salaries to their workers, who then spent it in local
stores. Workers became accustomed to vouchers (taloni) as a normal means
of local exchange.72 A local newspaper article entitled "Who Outlawed
Money in the Irtish Area?," a clipping of which landed in the hands of au-
thorities, explained that in many areas of Eastern Kazakhstan salaries went
unpaid for five to six months. As a result, village govenments and machine
tractor stations printed vouchers for advance wage payments. One worker
was quoted as saying "We need money, but instead we get vouchers.
Whether you want to or not, you have to use the vouchers to buy the garbag
they call food."73 Some vouchers circulated widely, and some even changed
hands at a premium (such as those of the Molokov Machine Tractor Sta-
tion). In most cases, though, vouchers exchanged below face value.74
The state's battle against money surrogates paralyzed public services in
some cases, because full compliance meant that all potential money surro-
gates-including tickets for student lunches, bus tickets, and movie tick-
ets-had to be approved by the Ministry of Finance. A high party official
warned the Minister of Finance in 1935 that "It is difficult to see the current
tickets as money substitutes. On top of that, in many cities, such substantial
numbers of tickets are in circulation that their exchange would require a
couple of tons of paper."75
Despite administrative threats, local courts typically refused to take on
"money substitute" cases. Lacking the threat of punishment, on 21 August
1935 the Central Executive Committee granted an amnesty to issuers of
unlawful money surrogates printed prior to 31 May of that year. Ministry of
Finance officials tended to view money surrogates and arrears as two sides
of the same coin. In both cases, enterprises lacked the liquidity to pay. In the
one case, they accumulated arrears vis-'a-vis suppliers. In the other, they
printed money surrogates to pay workers. Their superiors were confronted
with the same choice-toleration or bankruptcy. When faced with such a
70 RGAE, 7733/13/761, 22.

72 RGAE, 7733/13/764, 36.
73 RGAE, 7733/13/764, 59.
74 RGAE, 7733/13/764, 73.
7 RGAE, 7733/13/764, 63.
choice, they typically looked the other way. Under the circumstances of
harsh limitations on credits, the enterprises preferred to lose creditworthi-
ness rather than forego production.
CONCLUSIONS
This article has shown that the Soviet framers did not solve what was
actually an insoluble problem: crafting a system of tight money and credit
within a context of soft enterprise budget constraints. The 1932 flirtation
with hard budget constraints was short-lived; all participants understood that
bankruptcies would disrupt production and deprive planners of materials
needed for material balances. Enterprise managers and ministerial officials
knew that production would not be sacrificed for financial discipline, and
acted accordingly. Hence the budget, the state bank, and unfortunate "sol-
vent" enterprises served as inadvertent lenders for those who could not pay
their bills. Economic incentives were turned on their head: the supplier of
goods became the "agent," the buyer (who might or might not pay) became
the "principal." Soft budget constraints meant that risks were transferred
from buyers to sellers, that financially prudent enterprises ended up subsi-
dizing insolvent ones, and that there would always be a lender of last resort,
typically located relatively high up in the economic hierarchy. When the
usual lenders of last resort-the central bank or the state budget-acted, the
money supply expanded.
Last-resort lending, risk transfers, and soft budget constraints were not
part of the de jure Soviet financial system of the 1930s. Students of the
administrative-command economy have had to resort to nontraditional
sources to understand its defacto nature. Interviews with former managers,
conducted in the 1950s, have proved a rich source on the unofficial enter-
prise supply system operated by "pushers" (tolkachi).76 Insights into the
workings of the "second economy'" were gained from interviews with
former Soviet citizens in the 1 970s. Such informal structures thrived be-
cause they introduced the flexibility without which the system would have
collapsed.
We have examined the formal and informal sides of the Soviet money and
credit system using both published sources and the previously secret records
of the Soviet state and party. The latter provide valuable insights into how
well Soviet authorities themselves understood the informal side of the finan-
cial sector. Formally, all credits were to be disbursed by the monopoly state
bank. In practice, illegal commercial credits provided vital liquidity for
producers. Formally, commercial banks were abolished; in practice, enter-
prises and ministries became the defacto commercial banks of the 1930s.
76 Berliner, Factory and Manager.
When the formal system provided too little currency, enterprises created
their own surrogates.
Much, but not all, of the informal side of the Soviet financial system and
its abuses would have been missed in a study that used only the official
literature. This literature provides examples of bad debts, slow payments,
and "struggles with illegal indebtedness,"77 but it implies that such problems
were caused by poor decrees or intentional "wrecking" rather than by sys-
temic factors such as soft budget constraints. Arnold's authoritative survey
of the Soviet literature barely mentions commercial credits, arrears, and
money surrogates after 193 1-matters of great concern to financial authori-
ties, the archives now show. They reveal that the work of the Ministry of
Finance was dominated by the battle against surrogates in 1935, and that
futile clearing operations dominated Gosbank's agenda in the late 1930s.
The published literature captures some of the official disappointment at the
opportunistic behavior of enterprises following the offer of unlimited credit
in 1930, but this was explained as an error of idealistic people who lacked
necessary banking experience.
Why Soviet enterprises misbehaved is well known from the classic works
of Joseph Berliner and David Granick: managers were judged on the basis
of plan fulfillment, and they could insure'themselves against failure by mini-
mizing their output targets and maximizing their resources, including money
and credit resources.78 The demand for resources, including financial re-
sources, was not restrained by hard budget constraints because the state or
one of its agents stood by as a lender of last resort. This article has revealed
the surprising fact that economic agents faced soft budget constraints already
in the NEP period, although we do not yet understand why. It appears to
have been a characteristic of the entire Soviet era.
The framers ofthe Soviet system experienced yet another disappointment:
their failure to create a center for monitoring financial transactions. The
administrative burden of handling all financial transactions at the center
proved excessive, especially as enterprises had an incentive to provide false
information or to avoid central scrutiny by granting each other commercial
credits, or by posting bills late. Even centralized clearing of arrears proved
elusive, as it required knowledge of local circumstances. It was not difficult
for a Stalin to interpret such massive opportunism as deliberate sabotage,
rather than as endemic behavior in a system of soft budget constraints, and
to conclude that terror was the proper instrument to combat it.
" Davies, "Short-Tenn Credit," p. 22.

78 Berliner, Factory and Manager; and Granick, Management.
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Tikhonov and Gregory. Central Planning and Unintended Consequences

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Tikhonov and Gregory. Central Planning and Unintended Consequences

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Economic History Association

planning, turned out to be highly inflationary in pract

THE SOVIET ARCHIVES AND THE SOVIET FINANCIAL SYSTEM

The Soviet administrative-command economy was created by trial and

' Erlich, Soviet Industrialization; and Spulber, Soviet Strategy.

There is a surprisingly rich literature on Soviet mone

MONEY AND CREDIT IN THE 1920s

The administrative-command financial system, which began with the

The distinguishing feature of the NEP economy was t

13Tsipkin, Sovetskiy kredit, p. 56.

1 October 1925 1 October 1926 1 October 1927

Gosbank 420.9 470.6 576.6

Source: Biulleten koniunkturnogo instituta.

Without the threat of insolvency, credit expansion was automatically con-

THE GREAT FINANCIAL DEBATE

Two competing views of money and credit were placed be

money and credit would simply follow materials, out

FINANCE FROM ABOVE: INTENTIONS vs OUTCOMES

The 1930 Reform

With the introduction of administrative planning (the First Five-Yea

20 Vestnikpravleniia Gosbanka (VPG), 1930, nos. 15-16, p. 11.

plan. In a setting of perfect plan discipline the automa

The intent of the 1930 credit reform was to place G

The 1931 Reforms

mental decree signed by the Committee of Labor and Defense on 23 July

The Persistence of Commercial Credits

Arnold's analysis of the discussions leading up to the 1930 reform sug-

1932 1933 1934 1935 1936

Source: Special report by Sitnin prepared in 1936 (RGAE, 7733/14/900).

36RGAE, 2324/20/4489, 30.

Agency 1933 1934 1935 1936

Source: RGAE 1562/16/74.

1930s) ranked second in commercial credits and fourth in Gosbank credits.

Sector Commercial Credits Gosbank Credits

Source: RGAE, 7733/14/900.

centralized grantor of credit. In the Soviet Union, enterprises, trusts, minis-

40 RGAE, 7733/14/900, 13.

Soyuzmyaso Association hid profits of 71 million rubles

The Growth of Official Credits

Despite the intent to limit Gosbank credits to special cases, Figure 2

1932 1933 1934 1935 1936

- - -- --MI Velocity (Relative to GNP)

- - - LI Velocity (Relative to Trade)

1/1/32 1/1/33 1/1/34 1/1/35 1/1/36

automatism" experiment of 1930, Gosbank offered unlimited credit. The 1931

Records from the 1930s reveal no enterprises withdrawing from produc-

52RGAE, 2324/20/4489, 54.

Source: RGAE, 2324/20/637.

1 January 1936 unpaid bills on delivenres that were unaccompanied by invoices,

56 Atlas, Razvitie, p.159.

To the extent that arrears were mutually offsetting with

The Spread of Money Surrogates

60 Sitnin, Vospominaniia, p. 40.

line between cash, which was to be used for wage paym

6 Granick, Job Rights.

printed money.70 The battle against money surrogates was intensified by a

70 RGAE, 7733/13/761, 22.

76 Berliner, Factory and Manager.

" Davies, "Short-Tenn Credit," p. 22.

Granick, David. Management of Industrial Firms in the USSR

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