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Inflation: The Soviet Tool For Destroying Money

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Inflation: The Soviet Tool For Destroying Money

by Tyler Durden
Mon, 06/17/2019



Authored by Chris Calton via The Mises Institute,

In March 1919, the Communist Party headed by Vladimir Lenin stated in its newly drafted program that among the party objectives was the complete abolition of money. The State Bank of Russia would be “abolished and turned into the central bookkeeping office of the Communist society.” In theory, the ruling party could have simply decreed money out of existence, but this would fail to eliminate the circulation of currency throughout a vast country that the Bolsheviks did not fully control in 1919.



Instead, their strategy was to resort to the printing press. The banks were among the first institutions the Bolsheviks seized, and control over the money supply allowed them to pay salaries to the recently formed secret police and Red Army that were used to consolidate Bolshevik control following the 1917 revolution. But the rapid printing of money was also part of a deliberate strategy to usher in the inevitable moneyless economy of communism.

The strategy worked, but it did not bring about the outcome that Marxist theory predicted. By the time the Party adopted its program calling for the abolition of money in 1919, the Bolshevik regime was already adding between two and three billion rubles to the circulating money supply every month. But this was far too modest. In May, the regime authorized the State Bank (renamed the “People’s Bank”) to issue as much new currency as it saw fit. When the Bolsheviks took power, there were less than 20 billion rubles in circulation. By the end of 1919, the money supply had grown to 225 billion rubles, and by the middle of 1921, it reached a whopping 2.3 trillion. The following year, the money supply was counted in quadrillions.

As the country sank into famine, the emission of “colored paper” stood as the only growing industry in the economy. The only limitation to the regime’s ability to print even faster was the need for ink and paper. The gold they seized from bank vaults was useful for the purchase of printing supplies from foreign economies. The presses ran nonstop, and by the end of the 1919, the mint employed nearly 14,000 workers.

Two years after the first Party platform was drafted, the attendees at the Party Congress were ecstatic about their success in inflating the currency out of existence. Evgenii Preobrazhenskii, a leading Bolshevik economic planner, noted that the French revolutionaries had only depreciated their currency to 1/500th of its original value, whereas the ruble had been reduced to 1/20,000th of its 1917 value. “This means that we have overtaken the French Revolution 40 to 1,” he bragged.4 The goal of inflation was the abolition of money, and the ruling elite was proud of their success. The peasantry, struggling to survive, resorted to using salt and bread as media of exchange.

Shockingly, the destruction of money failed to bring about the rational economic order that the communists believed to be inevitable. Instead of orderly production, the result was mass starvation and peasant uprisings. The Bolsheviks, with their unflinching faith in Marx’s predictions, had to contend with this mystery before they lost their tenuous control of the Russian economy.

While Russia was inflating its economy to literal death, many western intellectuals viewed the failing Soviet experiment through rose-colored glasses. This is the backdrop in which Ludwig von Mises wrote his groundbreaking essay “Economic Calculation in the Socialist Commonwealth,” with Socialism—his second major work—following shortly thereafter. For Mises, the chaos of Russia’s economy was no mystery: market prices formed through the voluntary exchange of private property were necessary for the rational allocation of resources.

At least one leading Bolshevik begrudgingly acknowledged Mises’s great insights as a basis for the modest market reforms known as the New Economic Policy. In 1925, Nikolai Bukharin wrote:

Although bourgeois critics of the policy of the proletarian dictatorship in Russia have offered mainly nonsense and foolishness, some of their comments were not so stupid and contained a relative truth. One of the most learned critics of communism, the Austrian Professor Mises, presented the following propositions in a book on socialism written in 1921-22. . . . So long as the communists attempted to arrange production by commands, with a stick, their policy would lead, and already was leading, to an inevitable collapse.​
It is hardly high praise to say that Mises’s critiques of socialism “were not so stupid,” but for a Bolshevik ideologue, it was a profound concession. Although Bukharin was unwilling to denounce socialism, he recognized that market reforms—albeit modest ones—were necessary to prevent the collapse of the nascent Soviet state. These reforms included the reintroduction of functional money

At the end of 1922, the Party turned to a “bourgeois” banker, Nicholas Kutler—an advocate of liberal reforms prior to the 1917 revolution—to solve their fiscal crisis. Kutler’s solution was the return to a gold-based currency. The new banknotes, known as chervonets, were backed by gold bullion and foreign reserves. Over the next two years, Russian currency was stabilized as the worthless rubles were replaced by gold-backed bank notes. Lenin, embarrassed by the socialist backpedaling, insisted that the measure was only temporary, and as soon as communism became global, money would disappear (successfully, this time) and gold would only be used for the construction of toilets.

It is important not to overstate the reforms of the New Economic Policy. Although the currency reforms and opening of markets prevented the complete implosion of the Russian economy, the Party continued to control the majority of the country’s industry. The result of the modest economic liberalization was a concomitantly modest recovery, coupled with an increase in political terror to reinforce Party rule. The Bolsheviks loosened their grip on the economy just enough to let the people breathe for a brief period. Instead of learning the lessons of their original failures and the subsequent gains achieved by mild reforms, the Party—under the leadership of Joseph Stalin—turned back to uncompromising economic controls by the end of the decade. The result would be the most severe economic calamity the world had yet experienced.

The lessons from the Bolshevik policy of inflation are still relevant today. The arguments in favor of inflationary policy may no longer be justified by Marxist theory and the pursuit of a moneyless economy, but the consequences of inflation operate irrespective of the theorist’s intentions. As the inflationary doctrine of Modern Monetary Theory grows increasingly popular, Bolshevik history should not be forgotten. Regardless of the policy’s purpose, inflation serves only to distort economic signals and, ultimately, destroy the currency and whatever economy the currency is attached to.
 

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#2
Destroy the existing money and replace it with our own. Kill the old bosses and replace them with our brethren. It's about control.