Russian Finance – Part 2 – “Homeland First, You Second”

By Sergey Pakhomov. Doctor of Economic Sciences

Part 2 – The era of the “Great turning point” in the USSR. General mobilization of the population’s resources.

Prelude. The ideological roots of the “great turning point” in the field of domestic loans in the USSR

The cancellation by the Bolsheviks of the external and internal debt of the Russian Empire and the Provisional Government, confirmed during the Genoa Conference, saved the USSR from debt payments and, at the same time, made it impossible to attract new foreign loans, which were urgently needed to restore Russia, ravaged by wars and revolutions. As a result, the USSR was cut off from international credit for decades. “After all, we are standing alone. We have not received and are not receiving any loans. … In backward countries only long-term loans of one hundred million dollars or gold rubles could be a means of developing heavy industry. We did not have these loans, and we still have not received anything, “Lenin admitted with a tinge of melancholy at the end of 1922.

In search of a way out of this impasse, Lenin put forward the idea of ​​the primacy of the “correct class” policy of the victorious proletariat over the economy. Hence, the policy of economic development of the USSR arose through the mobilization of internal sources of capital accumulation by the state. “If we retain the leadership of the peasantry for the working class (read: the Communist Party), then we will be able, at the cost of the greatest and greatest economy in our state, to save the slightest savings for the development of our large machine industry, for electrification … and only this will be our hope. ”

From this ideological embryo arose soon the Stalinist policy of reliance on “socialist accumulation”, the source of which should be the expropriation of the income of the peasantry and the rest of the working population of the USSR.

In April 1926, Stalin clearly outlined the way to search for sources of financing for the accelerated industrial development of the USSR through the transition of the NEP (New Economic Plan) to the mobilization model of the Soviet economy: the only way to industrialize our country … We have such a weapon as the state power, which manages the state budget … for the further development of the national economy. … It is necessary that the surplus accumulation in the country should not be scattered, but collected in our credit institutions, cooperative and state, as well as in the form of internal loans, for their use for the needs, first of all, industry. It is clear that depositors should receive a certain percentage for this. … The task of organizing the business of internal loans, undoubtedly, is before us as the next task, and we must solve it at all costs ”.  The case of internal loans was soon put on stream, and the policy outlined by Stalin remained unchanged until 1966.

Campaign poster condemning investors who sold USSR loan bonds

Radical course change. Industrialization loans.

The course taken by the Stalinist leadership at the XIV Congress of the All-Union Communist Party (Bolsheviks) in December 1925 to curtail the NEP and the forced industrialization of the USSR introduced fundamental changes to the policy of allocating domestic government loans. By 1927, the fate of the NEP and the internal party opposition, which was trying to preserve its remnants, represented by the “Bukharin-Rykov group”, had been decided. Indicative in this respect is the publication in 1927 by the “ideological father” of the 1918 decree “On the Cancellation of State Loans” by Yu. Larin of the book “Private Capital in the USSR”, recommended by Stalin from the rostrum of the 15th Congress of the All-Union Communist Party of Bolsheviks for mandatory reading by all communists. The spearhead of ideological criticism was directed against the People’s Commissar of Finance G.Ya. Sokolnikov, who belonged to the “Bukharin group.” Larin harshly attacked attempts to market loans placed among the population, especially among the Nepmen and private entrepreneurs. He especially disliked the provision of high yield on loans, the ability to use “financial leverage” and purchase bonds by contributing 30% of its value (the rest was given in a loan by the bank), the practice of obtaining bank loans secured by bonds and attempts to give liquidity to the market by early repurchase of a number issues. All this Larin regarded as the creation of opportunities for additional enrichment of the “Soviet capitalists”, which give practically nothing for the cause of industrialization. “In relation to private capital, voluntary loans carried out by Comrade Sokolnikov would be more correctly called … not state loans from private capital, but state gifts to private capital.” (Yu. Larin. Private capital in the USSR. In the book. Anthology of economic classics. T. Malthus. D. Keynes. Yu. Larin. M., 1993, pp. 473-477). Larin’s words, fully supported by Stalin, sounded the death knell of the market practice of placing loans in the NEP era and the role of private capital in the economy of the USSR.

Conscientiousness, discipline, and advocacy are key to the success of a compulsory loan subscription.

A propaganda poster calling on the workers of Crimea to give their monthly wages for loans

The defeat of the right-wing opposition and the transition to forced industrialization led to a fundamentally new practice of allocating domestic government loans, which were now intended for a specific purpose. The economy was subordinated to politics, and the market placement was replaced by a voluntary-compulsory subscription by workers to a loan with an installment plan to pay for the purchased bonds. Given the low incomes of Soviet workers, the practice of placing “fractional bonds” arose, when investors were offered to purchase certificates for 1/10 of a large-denomination bond. It should be noted, however, that winning loans were placed among the workers, on which lottery-like draws were regularly held at an annual interest rate. The winning bond was withdrawn from circulation with the payment of the par value and coupon yield to the lucky Soviet investor.

Fractional bond of the winning 3rd “loan of industrialization” in 1/10 of the bond with a face value of 50 rubles.

This practice continued until 1957, then resumed in 1966, so it cannot be said that Soviet loans were completely free for the state. The opportunity to win has been skillfully used in subscription advertising. Later, in the 40s and 50s, this gave rise to a kind of illegal entrepreneurship, when individuals bought up a large number of bonds of winning loans from those in need on the cheap and received quite a decent income from their regular payments. Back in the 1930s. illegal bond turnover has become a prominent sector of the shadow economy. Buyers became more active with the end of World War II. Small speculators “earned” 1–2 rubles. on each 100-ruble bond, supplying them to the “wholesalers”. In the course of the implementation of the Millionaire agent case, the employees of the OBKHSS of the Sverdlovsk Region seized securities worth 1 million 314 thousand rubles from one of these dealers, 133 thousand rubles, and deposits on savings books . all astronomical sums at that time in the USSR.

Many “wholesalers” were associated with even larger holders. Arrested in January 1953 in Leningrad, Captain 2nd Rank Grigoriev (a member of the CPSU) since 1945 has been buying bonds from fellow citizens in need of money for 6-10 rubles each. for a 100-ruble denomination. During the search, he was found to have securities worth 618,250 rubles. By his own admission, the monthly income from winnings reached 10 thousand rubles.

“We won!” A poster calling for winning loans. Potential winnings from 400 to 100,000 rubles.

For the first time, the practice of voluntary-compulsory subscription was applied when placing 10% of the winning loan of 100 million rubles, issued in February 1927 for a period of 8 years. The loan has had a high coupon, which was paid every 6 months. It was only a “test swallow”.

Bond “Winning loan 1927” with coupons.

Loans then poured out like a horn of plenty. On a large scale, voluntary-compulsory subscription was carried out during the placement of the “First, Second and Third Industrialization Loans” issued in 1927-29 for a maturity of 10 years and for a total amount of 150 million rubles. Income was paid in interest-winning form,  as a 6% fixed coupon and 6% in lottery winnings on loans. The number of subscribers by 1929 increased to 10 million people. Starting with the Second Industrialization Loan, all issues were intended to be placed among both urban and rural populations. The practice of issuing loans specifically for peasants was discontinued.

Bond of the 2nd winning “loan of industrialization”

Since the funds were intended for long-term capital construction and the implementation of huge industrial projects, the idea immediately appeared to restructure past loans by compulsory exchange for new bonds, increasing the maturity and lowering the coupon yield. With references to the “workers’ initiative” in 1930, a 6% winning loan “Five-Year Plan in Four Years” was issued in the amount of 1.2 billion rubles for a period of 10 years, for which the bonds of the First and Second “loans of industrialization” and loans were exchanged to strengthen the peasant economy. This was only the first step on the long road of turning Soviet loans into “perpetual” loans.

Fractional bond of the consolidation loan “Five-Year Plan in Four Years” in 1/20 of the bond with a face value of 50 rubles

At the same time, public control over the sale of bonds was introduced through the creation of the “Commissions for promoting the savings business and state credit”, aimed at stopping the practice of mass “dumping” bonds and obtaining loans secured by them in savings banks. From 1931 to 1935, five more loans for industrialization were issued annually and sold by subscription among the working population to complete the fourth year of the first five-year plan and the implementation of the second five-year plan. The nominal volumes of loans rose sharply and reached 3-3.5 billion rubles each. The success of the loan exchange in 1930 and the growing needs for further industrialization required a new stage in the mobilization of funds from the population. There was a new conversion and consolidation of previously issued government loans through the issue in 1936 of 4% of the “State internal loan of the 2nd five-year plan” (issue of the 4th year) in the amount of 4 billion rubles and a circulation period of 20 years. The bonds of the Third Industrialization Loan, of all the issues of the Five-Year Plan in Four Years loan and the first three issues of the Second Five-Year Plan Loan were exchanged for this issue. That is, almost all previously issued internal loans. The terms for the exchange of bonds are set from September 1, 1936 to March 1, 1937, then until September 1, 1937 the exchange will be continued in savings banks, after which the unchanged bonds will lose their validity and cannot be exchanged. A year later, 41.8 million people exchanged bonds for a total of 13.7 billion rubles. With this operation, the state saved a significant amount, since in the hands of 50 million citizens of the USSR were about 860 million bonds of various loans and different denominations.

“Second Five-Year Plan” Consolidation Loan Bond

From that moment on, only uniform loans with a maturity of 20 years and with a coupon yield of 4% were issued in the USSR. In 1937-41, similar loans were issued by subscription: the State Domestic Loan for Strengthening the Defense of the USSR (4 billion rubles) and four annual issues of the State Loan of the 3rd five-year plan totalling more than 29 billion rubles at par. The subscription amount for 1941 alone reached 10.9 billion rubles. Soviet internal loans, thus, became practically “eternal”. It became clear to the working subscribers, whose number has already reached tens of millions, that they will never be repaid and there will only be new loans ahead with the hope of winning the lottery.

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