Soviet Russia: Anatomy of a Social History

Part III: The Early New Economic Policy

Chapter X: The Contents of the New Economic Policy

The abandonment of War Communism by the Soviet government was the beginning of a new chapter in the history of revolutionary Russia. However strong the social and economic causes promoting it, this change was the result of conscious deliberation by the ruling power, and its implications can be deduced from the legal and economic measures themselves.

I: The Agricultural NEP Laws

When the original measures of the NEP were announced to the delegates of the Tenth Congress of the Communist Party in March 1921, they came completely as a bombshell. Most of the delegates were unprepared what to think of the new course when it was outlined by Lenin. The remarkable acceptance of this sudden change without opposition worth mentioning proves not only Lenin’s overwhelming authority but also the fact that the Communist Party had already ceased to be a party and actually represented the government and its local executive and controlling organs.

The NEP started as a series of concessions to the peasants whose resistance against requisitioning threatened the whole country with famine. At first these concessions were very small indeed; Lenin expected that unlimited free trade would inevitably lead to political counter-revolution.

Free trade, even if at first not so closely linked up with the White Guards as Kronstadt was, will nevertheless inevitably lead to the rule of the White Guards, to the victory of capital, to complete restoration. [1]

The ‘quota system’ was replaced by a fixed tax in kind which was to furnish in a normal year 240 million pood of grain (about 3 900 000 tons). After having paid their tax, the peasants should be free to sell their surplus produce, though at first only in the local market. The Communists hoped that this trade would be monopolised by the cooperative societies whose village connections were to be greatly extended. Nevertheless Lenin was rather pessimistic about the implications of the step he was about to take:

We must not close our eyes to the fact that the substitution of a tax for quotas means that under the present system the kulaks will grow more than they have up to now. [2]

In March 1921 it would have been nothing short of criminal to advocate more far-reaching changes. The Communists wanted to satisfy the peasants’ wishes only as far as was necessary to avoid famine. In view of the bad prospects for the 1921 harvest further concessions were inevitable. The limitation of grain sales to the local markets was abolished on 19 July 1921. On 9 August 1921, the expansion of trade with the countryside was particularly stressed as a means of alleviating the consequences of the crop failure. Shortly afterwards comparatively independent agricultural cooperative societies were re-established and united in the ‘Selskosoyus’.

The frequently repeated partitions of land had already been provisionally forbidden by the Sovnarkom on 30 April 1920. Now the peasants were protected for a certain number of years in the possession of the land actually cultivated by them; this should induce them to improve their farms and increase their output. Finally the whole system of agricultural NEP laws was codified in the agrarian law of 1922; it contained safeguards against the reappearance of kulaks in the revolutionary village, particularly by the discouraging of the employment of labourers and the renting of land, although these institutions were not forbidden outright but permitted under special circumstances.

II: The New Industrial Policy and Organisation

In spite of their original misgivings the Soviet leaders were quickly convinced by the facts that the new policy could not be restricted to agriculture. The industrial system of War Communism very soon proved incompatible with the new order in the villages. Under War Communism industry worked directly for the needs of the state; the government supplied it with raw materials and fuel and with food for the workers, and took over the output of finished goods without the nicety of exact accounting. This system was no longer tenable under the radically different conditions of the NEP. The peasants could either sell or store their surplus produce; they would sell it only in exchange for manufactured goods and industry therefore had to work for the peasant market if it wanted to get raw materials and foodstuffs.

Under War Communism industry had been run by the state for the state. NEP industry, on the other hand, had to learn how to buy its own raw materials, to pay its workers money wages, and to sell its output in the market at remunerative prices. This basic difference between the conditions of War Communism and the tendencies of the NEP compelled the Soviet power to adapt its industrial policy to the rule of the market and to develop a new system of industrial administration and of distribution.

Requisitioning, the sole certain, though small, source of agricultural produce, had to be abandoned for political reasons. Industry was in future dependent for its supply of raw materials on exchange with the peasants who parted with their products only if they could get manufactured goods in exchange. Even those branches of industry which did not use agricultural raw materials were in the same condition concerning the foodstuffs needed for their workers. After a temporary period of transition, during which industry fed its workers directly and bartered manufactured goods for food and raw materials, money came into the field again.

These developments were irreconcilable with the obligation of War Communist industry to hand over its output to the government. On 9 August 1921, most branches of industry were, therefore, permitted to sell part of their output in the free market, and this permission was extended in October to their whole production. Thus the basis of War Communist economic policy was replaced by a new system, and a thorough change in Communist industrial policy was only a question of time.

Under War Communism industry neglected (both by necessity and free will) any control of its costs; the NEP introduced new aims and new standards of necessity. The distribution of the industrial output was no longer decreed by the government but effected through the market. As in capitalist countries, market conditions became decisive for the volume of production, for industry had to avoid losses and to make profits. For this reason it was imperative that first of all the accumulation of industrial losses should cease. Industry had to pay its way, that is, to cover its costs by the proceeds of its sales. This condition of simple industrial reproduction was called the ‘economic principle’. Industry was no longer permitted to work at a loss, without consideration of production costs. When unfavourable market conditions threatened to involve the concern in loss, production costs had to be cut or plants had to be closed for the time being; the workers lost their jobs and had to look to unemployment insurance for support.

However, even the maintenance of industrial production on the starvation level of the famine year 1921 could not be regarded as a permanent aim of Communist economic policy. After the decline of industry was brought to a halt, the problem of reconstructing it and increasing its output had to be tackled. Being, on principle, dependent on its own resources, NEP industry could do this only by increasing its working capital either by accumulating profits or by borrowing. Credits (either in the form of bank credits or, very frequently, in the guise of wage arrears and tax debts) played a considerable part in this process, but the Soviet government justly believed that the only sound basis of industrial recovery was to be found in the accumulation of profits. The authorities preferred the name ‘commercial principle’ as not smelling of capitalist practices, and initiated a vigorous campaign for its application by the managers of state economy. This desirable result could be achieved by either of two different methods, by raising selling prices or by reducing costs. When practically applied, the former roused the peasants to a dangerous form of passive resistance, whereas the latter was responsible for numerous industrial conflicts between the workers and the managers of state industry.

The renaissance of the market effected a complete transformation of Communist policy in less than a year; but the new policy could not be applied by the economic organisations of War Communism. The centralisation of economic power in the hands of the Supreme Economic Council was primarily a move in the game of power politics between the government and the workers, and not an administrative measure. Under the NEP this organisation proved preposterous and, having served its primary purpose, it was quickly abolished. Instead of the management of industry by the ‘Glavki’, management by state ‘trusts’ became the rule.

These trusts were combinations of a number of plants belonging to the same branch of industry and obtained great power over their component parts. On the other side, their management was hardly more dependent in its routine work on the state than the management of capitalist concerns depends on the meeting of shareholders, and could freely dispose of the liquid (working) capital of the enterprise. These new units of state industry were in a similar position towards the market as capitalist business firms. Their success depended on the state of the market and they tried to influence market conditions in order to make higher profits, sometimes with considerable success. An interesting development was the further concentration of trusts to ‘syndicates’ closely resembling the earlier cartels of Russian industry and animated by exactly the same spirit as their pre-revolutionary predecessors.

At the same time, a considerable part of small-scale industry was denationalised. After the introduction of the NEP the suspicions of the government against the capitalist businessman proved weaker than its desire for a quick increase in industrial output, and it was decided to re-establish a kind of carefully regulated capitalist industry. Many of the small-scale firms nationalised in November 1920 were now simply to be returned to their owners, if it was possible to find them (10 December 1921). Another bunch of small shops had been leased out already to cooperative societies, municipal authorities, but also to private individuals (5 July 1921). For the exploitation of natural resources or the running of large-scale enterprises requiring more capital than the government could dispose of, foreign capitalists were invited, but this policy of ‘concessions’ was a failure, in spite of Lenin’s sanguine expectations.

After all these surgical operations there remained still more factories than the economic bureaucracy could manage and the impoverished country could use according to NEP principles. The newest and best plants were handed over to the trusts, which had to run them according to ‘commercial principles’. The remainder was closed, but their machinery was kept intact for later use, or, as the Communists said, they were conserved. This policy was certainly sound and farsighted, and during the later years of the NEP it helped the Soviet government to surmount the growing difficulties of the ‘prewar level’ in industry.

III: The Struggle for the Currency

The return to a market economy, the decentralisation of state industry and the readmission of the private manufacturer and trader were serious obstacles to the direction of the economic system by the government. In this situation money, which had been proclaimed to be ‘dying’ a long time ago, assumed again unexpected importance.

The alliance or ‘smychka ’ between peasants and workers, who were assumed to be represented by the Soviet power, was to be expressed by the state of the market. Market conditions determined the rate of production in different industries, and their development was frequently not quite in accordance with the wishes of the government. The rule over the market was, therefore, a fundamental condition of successful direction of the economic system by the state and the first step to acquire power over the market was the re-establishment of a stable and, at the same time, flexible credit system. The private trader was permitted to do business without administrative interference; he had to be kept in hand by economic and particularly by financial measures. Last but not least, the Soviet government had been compelled to retreat, but it did not renounce its aim of constructing a Socialist system of society. It needed economic power, and this meant first of all bringing order into the existing chaos, balancing the budget, and accumulating reserves.

Thus the termination of inflation was the most urgent task of the hour. Inflation was in full swing at the time of the October Revolution, and the chaos of civil war, supported by the childish financial policy of War Communism, completely destroyed the rouble. This process was not simply stopped by the transition to the NEP. Inflation grew further, and the more it advanced the more difficult it was to fight. It destroyed the basis of economic calculation, favoured speculators and profiteers, engendered a general feeling of recklessness and insecurity, and was a terrible obstacle to economic and social recovery.

The first step which had to be made to end inflation was the balancing of the budget. The exhaustion of the country through the famine of 1921, on top of the previous privations, excluded the sudden introduction of a balanced budget, and this aim was only reached in 1924, when the use of the printing press for government expenditure was for the time being abolished: [3]

A new system of taxation was created which at first depended very strongly on direct taxes, particularly the agricultural taxes in kind; later on, however, the importance of indirect taxation increased very quickly: [4]

This return to financial orthodoxy was a very painful but a very salutary reform; and after two or three years of economy the budget was once more in order. But Russian economy could not remain such a long time without a stable currency. Number and volume of market transactions increased, and the need for a stable and generally accepted measure of value and a means of payment permitting the establishment of credit institutions became imperative while the Soviet rouble depreciated from day to day.

But the government still had to use the printing press to ‘balance’ income and expenditure, and its financial strength was insufficient to replace the Soviet rouble by a new currency. A temporary solution, which satisfied the need of industry and trade for a stable currency without depriving the government of its cheap source of income, was found in the ‘double currency’ of Soviet rouble and Chervonets; the legal tender, the Soviet rouble, was left to its fate and a new bank money, the Chervonets, was issued for industrial and commercial purposes, through the new State Bank (Gosbank).

Its essential aim was the granting of working credits to state institutions which could no longer be subsidised from the budget and needed additional resources. But at first the rapid progress of inflation frustrated the intentions of the government. Its capital was rapidly lost, and the Ministry of Finance had to replenish it almost completely. Since the autumn of 1922 the State Bank issued Chervontsi notes which were not legal tender, but which were prevented from rapid depreciation by the normal safeguards used by modern issue banks. The currency unit and the smallest note issued was the Chervonets, an imitation partly of the old Tsarist sovereign and partly of the English pound sterling; this high unit was expressly chosen in order to prevent the rapid use of the new currency by the people at large. During 1923 the Chervonets rapidly replaced the Soviet rouble in circulation. Its value abroad was well maintained owing to the strict control of the stock exchange by the government, but its intrinsic value fell during the year 1923 in the wholesale trade by one quarter, in the retail trade by not less than four-tenths of its nominal value.

The reason for this strong depreciation was, of course, excessive issue of money by Gosbank. It was compelled to adopt this obviously dangerous policy by the commercial methods of state industry, which used its new credit facilities to raise prices in order to increase profits and starved the market of manufactured goods. In view of the lack of working capital of its own, industry could do this only by not repaying loans to the State Bank, which had to grant new loans in order to avoid a crash.

The Soviet government put the (real or supposed) interests of state industry above everything else, not even the fate of the new currency excluded. With this exception, however, the Chervonets was defended by all means at the disposal of the state whether fair or foul. But in spite of avoidable hardships for the population the policy pursued by Gosbank was essentially sound, and probably the best that could be adopted in the circumstances.

Towards the end of 1923 it became possible and, at the same time, even necessary to replace the inflated Soviet rouble by the new Chervonets currency. Inflation reached such a pitch that the printing of new notes was practically useless. Banking, industry and wholesale trade went over to the Chervonets as early as spring or summer 1923. In the autumn the peasants grew restive, and many of them refused to accept Soviet roubles, and during the winter months many important enterprises started to pay wages in Chervontsi.

Thus the Soviet rouble became practically useless for the exchequer, and the last reason for maintaining the ‘parallel’ currency disappeared. On 14 February 1924, the printing of new Soviet roubles was stopped, and after 1 June 1924, the old currency was no longer accepted as legal tender. The rate of exchange between the new currency and the old was 50 000 millions to one, and this extent of inflation was surpassed only in Germany.

Although the Chervonets afterwards became the basis of Soviet Russia’s currency system, the Soviet power was not yet strong enough financially completely to renounce the use of its monetary power for budget purposes. It took care once more to realise a big monetary profit and to retain a small but pleasant source of revenue for the future. Whereas Chervontsi and higher notes were issued by Gosbank which had to observe the precautions and conditions laid down in the Bank Act, smaller notes and coins were still issued by the Ministry of Finance (Narkomfin) without any cover whatsoever, but only up to a total of one-half the amount of banknotes in circulation. [5] As the outstanding banknotes totalled 374.3 million Chervonets-roubles, the exchequer at once realised a profit of about 190 millions.

In view of the gigantic technical difficulties and the poverty of the exhausted country, the stabilisation of the currency was certainly an important achievement. The attitude of the Communist Party towards this problem is a good example of the elasticity with which the party, in former years completely absorbed by underground work and then by the leadership of a long and terrible war, tackled its new tasks.

This medal has, however, its reverse. The backwardness of the Soviet Union, as it is called since 1923, whose effects were further increased by civil war and intervention, compelled the Communists, in the field of financial policy as elsewhere, to play a part which was not in harmony with their revolutionary ideals and intentions. They acted under the compulsion of objective necessities, and their policy was probably the only one which could be successfully applied. But leaving the Soviet rouble to its fate and establishing a new currency system required serious sacrifices by the masses of the people. By compelling the masses to make these sacrifices, the government separated itself still further from the people than had happened already during War Communism. This grave development strengthened the bureaucratic forces within the dictatorship, until the last few drops of ‘Soviet oil’ completely vanished from the ‘workers’ state with bureaucratic deformations’.

Chapter XI: An Outline of Economic Developments, 1921-1924

I: The Peasantry During the Early NEP

When the Communists at last decided to introduce the NEP, the agrarian crisis had already entered on its tragic final stage. The sown area was greatly reduced in the most fertile parts of the country, and these very provinces were visited by a serious drought. The combined effect of these two factors was a terrible crop failure which caused famine throughout a large part of Russia. Exact estimates are, of course, not available, but the number of famine deaths must have amounted to several millions.

However grave the situation created by this event, the very backwardness of Russia’s agriculture made a comparatively quick and complete recovery possible. Although the sown area still continued to fall in 1922 because many peasants had eaten their seed grain in order not to die of hunger, favourable weather conditions and the renaissance of the market for agrarian produce were responsible for a crop which was comparatively plentiful. Although the sown area was only 68 per cent of that of 1913, the gross harvest amounted to 2867.6 million pood (about 47 million tons) as compared to certainly less than 2000 million pood in the previous year. [6] Although the weather was not so good in 1923, the sown area increased considerably and balanced this disadvantage, leaving the level of grain production practically unchanged. The harvest of 1924, on the other hand, resulted in a serious crop failure which severely handicapped the economic activities of the government.

The other branches of agricultural production showed a similar or even a better picture. Particularly the cultivation of technical crops which were of vital importance for many branches of Russian industry made excellent progress, and the rising demand for cotton, wool, flax, oil seeds, sugar beet and tobacco quickly increased the output of these goods. Cattle breeding, too, showed signs of improvement, although its decline could be stopped only by much more intense efforts. 1922 marked the lowest point of a long descent, and in 1923 recovery set in. [7]

These pleasing tendencies of agrarian development were of great importance, but in the beginning of 1924 the absolute level of agricultural output was still very low. Thus the output of grain in 1923 was only two-thirds of the 1913 crop, and the average production of technical plants reached hardly one-half of the prewar figures. The Russian village had lost one-half or at least one-third of its farm animals, and the gross value of agrarian production at the end of this period, in the economic year of 1923-24, was certainly not more than 79.6 per cent of the 1913 figure [8]—and probably considerably less. The state of agriculture was much better than that of industry, but it was still bad enough. Russian farming had still a long way to go within the new framework of agrarian society before touching the prewar level, low as this had been. But the NEP certainly formed a suitable environment for the stimulation of production up to this point, which was, indeed, reached in the course of the next few years.

II: Industrial Recovery and the Market

The end of civil war and intervention and the introduction of the NEP brought about a complete change in the industrial situation. Under the NEP the enforced production of means of destruction was both unnecessary and impossible because the NEP state had no money and reduced credits and subsidies to a bare minimum. Heavy industry was, therefore, as far as ever from recovery, and for the time being its state deteriorated even further. Consumption goods industries and handicraft production, on the other hand, now found a ready market for their goods, although the prospective and eager buyers were at first too poor to buy as much as they needed.

An approximation to the real condition of Russian industry during these years may be gleaned from the following figures: [9]

The slow growth of extractive industry (comprising fuel, ores and minerals, etc) was due to the continuing crisis of the metallurgical industry. The working up of agricultural raw material made impressive headway, and the most important branches of this group (textiles, leather, food, etc) were obviously consumption goods industries. The comparatively slow growth of industries using industrial raw materials, particularly metals, was clearly a consequence of the depressed state of capital goods industries.

The production of fuel grew comparatively quickly because oil and coal were used in practically every branch of economic life. Metal industry, on the other hand, was almost completely depressed. The only exception was the construction of agricultural machinery whose value rose quickly from year to year. At the beginning of the NEP it was only about 10 per cent of the prewar figure, but during the next two years production more than trebled, and in 1923-24 it was already 25.6 million gold roubles as compared to 67 million in 1913. [10]

Most branches of light industry considerably increased their output, as may be gathered from the following specimen figures: [11]

However modest these results may appear, they reveal a strong upward tendency, and these figures must be supplemented by a considerable allowance for the contribution made by small-scale industry and handicraftsmen to the total supply of consumption goods.

The different development of capital goods and consumption goods production was, of course, a consequence of the state of the market. The initial cause of the industrial recovery was the demand of the peasants for manufactured goods in exchange against food and agricultural raw materials. Heavy industry, on the other hand, always very largely depended on the demand by the state, the railways and the army. The financial policy of the early NEP strictly prohibited all capital expenditure which was not completely unavoidable. Machine construction was likewise idle—with the exception of agricultural machinery—because the NEP factories had more machines and tools than they could profitably use.

Yet the Soviet government was fully aware of the fact that a strong iron and steel industry was necessary for the future development of the economic system of Soviet Russia. For this reason it justly broke its financial rules and subsidised heavy industry in order to prevent its complete collapse. For the time being it could do no more, and the leaders of the Soviet power had to acknowledge the melancholy fact that the Soviet Union was still a peasant country whose economic development depended in the main on the rhythm of agricultural production.

III: From the Beginning of the NEP to the Scissors Crisis

After the stress and tension of War Communism the comparative freedom of the early NEP was the signal for a rapid ‘flight into real values’ offering great opportunities for speculators and profiteers. Everything was bought and sold, regardless of the chances of final realisation. But this first intoxication was quickly over. The NEP was for state industry a period not only of greater rights but, above all, of greater obligations. It had to pay its own way, and could not look to the exchequer for help if its resources were exhausted.

The economic experts of the Soviet regime based their policy on the undeniable desire of the peasants to exchange their surplus produce for manufactured goods. But in the year of famine and distress, 1921, the peasants did not dispose of a surplus product. They could hardly, or not at all, feed themselves, and were neither able to pay their taxes in kind nor to buy textiles, boots, kerosene and matches, however urgently they needed all these things. During the winter and spring months of 1921-22 industry had to look for other customers than the peasants, if they could be found.

The speculative fervour of the autumn of 1921 strongly supported the erroneous idea that the ‘free market’ contained mystical, inexhaustible possibilities. During the following months the fallacious character of this idea was exposed by the hard fact of a grave economic crisis; state trusts closed their factories, dismissed their workers, and practically in all respects they imitated the capitalist entrepreneur faced by a glut in the market and a sudden fall in prices.

After the beginning of the crisis, during the last fortnight of April 1922, the number of unemployed registered in fifty unemployment exchanges rose by 12 per cent. [12] During May things grew from bad to worse. At the end of May the Supreme Economic Council ordered the restriction of output in the glass and porcelain, textile, paper, leather and salt industries. A depression of formidable dimensions seemed to be the sole palpable result of the NEP.

The commercial crisis produced a serious capital crisis in state industry. By closing down factories and dismissing workers, the trusts reduced their current costs, but they did not get rid of the liabilities which they had incurred in order to and maintain business under NEP conditions. During these summer months of 1922 the situation appeared almost hopeless; sales fell off and heavy debts fell due for payment. The worst consequences of this crisis were, again, shouldered by the state, which could do nothing but grant new credits; but there is widespread evidence that this help was given in too cautious and hesitating a manner, and events occurred which ought to have been avoided at any price. In order to pay their debts, many state trusts were compelled to sell everything for which they could find a market, whether legally or illegally. Their raw material stocks were sold at ruinous prices, and not even legal prohibitions were strong enough to prevent the sale of machinery and other pieces of fixed capital. Speculators and profiteers flourished, but valuable state property was thrown away. The Communists had been clearly worsted in their first encounter with the forces of a ‘free market’.

Famine in the villages and shortage of foodstuffs in the towns caused a rapid increase in agricultural prices; the comparatively excessive supply of manufactured goods and the grave defects of industrial organisation (which had proved unable to prevent the ruinous sale of important industrial assets) caused a sudden drop in industrial prices. At a moment when the purchasing power of the peasants was below zero, the relative value of agricultural products was greater than at any time since the outbreak of the Great War. In April 1922 one pound of rye could buy about three times as much salt, four times as much oil, and more than twice as much sugar or cotton cloth than three months earlier. [13] But the peasants could make no use of this opportunity because they had no grain to sell, whereas speculators were busily buying up manufactured goods in order to sell them later on at enormous profit to the peasants.

This experiment, though certainly risky, proved completely successful owing to the comparative prosperity of the autumn of 1922. The spring crisis was a direct consequence of the famine of 1921, and the good harvest of 1922 brought a remarkable trade recovery. The grain balance of 1922-23 was the most encouraging economic sign since the October Revolution. For the first time in many years towns and villages had bread enough and to spare, stocks were replenished, and there remained commodities enough to permit a modest exchange of goods between the towns and the country.

Under the impetus of this demand the winter of 1922-23 was a period of real, though limited, prosperity for state industry, which quickly increased its output as far as raw material supplies permitted. But during these very months a new and more dangerous disturbance of the economic equilibrium was in preparation, the scissors crisis. During the spring of 1922 the peasants were unable to buy the manufactured articles they needed, but could not pay for, and the market was ‘flooded’ with industrial goods. After the good harvest of 1922 the peasants had a real surplus of grain and technical crops, of meat and milk. But then the famished towns were too poor to eat their fill. Supply widely surpassed demand, and agricultural prices fell.

Thus the peasants found it extremely difficult to sell their market produce, but it was even a greater problem to buy manufactured goods, whose supply was still very limited, and industrial prices rose quickly until the autumn of 1923; the gap between the rising chart of industrial prices and the falling chart of agricultural prices was graphically called the opening of the ‘scissors’ (Trotsky). [14]

Nevertheless the sales crisis of 1922 differed in essential points from the scissors crisis of 1923. Between October 1922, when the grain market felt the effects of the good harvest, and October 1923 agricultural prices dropped by 22.5 per cent—a development which may be simply explained by the play of supply and demand. During the same time industrial prices rose, however, by not less than 81.2 per cent, the effects of monetary changes in both cases discounted. The reason for this enormous price increase cannot be found in the rise in wages, the effect of which on prices was largely balanced by the increased productivity of labour; even less can it be found in price changes of raw materials because agricultural raw materials actually fell in price during 1923. Overhead expenses were reduced for the unit of industrial output by the general increase in production, and it can be safely assumed that the enormous increase in industrial prices was not caused in the sphere of production.

Prices may have been somewhat increased by the expensive bureaucratic organisation of industry and trade. Towards the end of 1922, Moscow was already flooded by headquarters of economic organisations which had to be maintained by industry, although they had nothing to do with industrial production:

Syndicates—87 offices with 2574 employees.

Trusts—589 offices with 14 448 employees. [15]

The Russian counterpart of the Wholesale Cooperative Society, the Centrosoyus, employed in Moscow alone not less than 8500 people, and it may be said that the overhead expenses of all economic institutions were inflated by the building up of new gigantic directing and controlling organisations.

Even more important were the activities of private trade which used the emergency of April 1922 for buying in the cheapest market, and did not fail to grasp the opportunities of 1923 to sell in the dearest market. The existing divergences between the various parts of Soviet economy were exaggerated by profiteering and the unscrupulous exploitation of the market situation; this was part of the price which the Soviet government had to pay for its rash and unorganised ‘retreat’ in the beginning of the NEP.

Finally it is certain that the economic policy of the government was largely responsible for the scissors’ crisis. During the early NEP, profits could be made in the line of least resistance by raising prices. This application of the ‘commercial principle’ was too simple to remain unknown to the leaders of state economy. The object-lesson of 1922, when speculators and the free market seriously defeated the Communist managers of industry, had not been forgotten, and the Communists were convinced that drastic measures had to be taken against their unscrupulous competitors. Their counter-offensive was prepared by the creation of cartels (syndicates) embracing most or all the trusts in a trade, and thereby ending the ruinous competition between them, which ruled the market instead of being ruled by it. After the stabilisation of the market in the autumn of 1922 the syndicates proved effective instruments of state economy against the NEP-man.

But the following period of prosperity was too great a temptation for the industrial leaders who were themselves infected by the speculative spirit of the NEP. The rising demand for manufactured goods and the speculative activities of private trade raised industrial prices very quickly, and state industry participated in this plundering of the consumer. Industry did not concentrate on increasing production and satisfying the rising demand because its Communist captains hoped for still higher prices to come, and refrained from selling as much as they could. Being themselves too poor to finance this speculation, they borrowed heavily from the State Bank and thereby caused a dangerous inflation of the new currency and created a general situation which already during the early summer of 1923 threatened to get out of hand.

The real beneficiary of this policy was not state industry but the private trader, the typical representative of the NEP bourgeoisie. The low level of stocks, the slow supply of industrial goods by state industry, and the growing demand for manufactured articles enabled the most skilful and unscrupulous NEP speculators to make large fortunes in very short periods. Prices rose rapidly, and the new bourgeoisie collected in the course of a few years a capital of several hundred million Chervonets-roubles.

The scissors crisis was not, as the Communists asserted, the inevitable result of the disproportion between industry and agriculture. It is, of course, true that industry had suffered more from war and revolution than agriculture, and the crisis was certainly partly caused by elemental economic factors, but these would not have had the grave consequences which actually ensued but for the fact that state industry, with the active support of Gosbank, used the occasion for driving a very hard bargain with the peasants.

But then the dangerous law of ‘over-success’, which governed the relations between the Soviets and the peasants since the days of War Communism, came into its own. The manoeuvres of state industry were intended to get the largest possible quantity of agricultural produce for a minimum of manufactured goods. But the fall in agrarian prices was so severe that the purchasing power of the peasants fell too low to absorb the volume of industrial supplies and made them unwilling to sell their goods for a song. For the second time since the introduction of the NEP markets were seriously disorganised and industry suffered from depression.

The spring crisis of 1922 was dangerously intensified by the Communists’ lack of understanding of the elemental forces of the market; the autumn crisis of 1923 produced a similar result by an opposite policy. In 1922, the Communists completely subordinated themselves and their policy to the rule of the market, in 1923 they used their newly-won bargaining power as ruthlessly as possible. Their share in the crisis may be gauged from the fact that it was very soon overcome by a change in official policy. The fall in agricultural prices was stopped almost overnight by permitting the export of grain; only three months after the dangerous climax of the scissors crisis agricultural prices had risen by 50 per cent and continued to climb. To reverse the price increases in industrial goods was a much more difficult problem, and the attempt caused serious conflicts between the Soviet government and the workers. Nevertheless it made some headway, and in the course of the next economic year wholesale industrial prices fell by almost 30 per cent, retail prices, however, only by about 10 per cent.

Chapter XII: The Soviet Power and the Tendencies of Social Growth

I: The Reappearance of the ‘Capitalists’

The admission of private business was partly an unavoidable consequence of the NEP, partly a deliberate measure of the government, which desired to stimulate industrial production by all means. But whereas private trade, the elemental result of the ‘free’ market, became in a remarkably short time a first-class economic power, private handicraft and industry, in spite of their historical importance, continued to play a subordinate part.

Private trade under the NEP originated in peasant trade which was permitted at first locally and, later on, generally. The millions of small peasant-farmers could not directly sell to the urban consumers, nor could they directly buy from trusts and syndicates. As state and cooperative trade was unable to supply the required facilities, a vacuum existed which was rapidly being filled by private business men. A large part of the foodstuffs and the industrial commodities needed by the town population was supplied by private traders, and peasant trade was practically a monopoly of the same class of people.

In wholesale trade the position of the private trader was naturally weak because state industry bought and sold largely through its own trading organisations (trusts and syndicates). Retail trade proper, on the other hand, remained largely in the hands of the NEP-man. Hawking, which was more important in Russia than it is in more advanced countries, was completely occupied by private traders, who were also very numerous as keepers of stalls and shops: [16]

This strength of the private businessman in trade was a source of constant worry to the government. The Soviet power had no need to be afraid of the political aspirations of the new ‘bourgeoisie’, but the economic position of the NEP-man prevented a stabilisation of the delicate and important relations between the towns and the peasants. The ‘alliance’ (smychka ) between the workers and the peasants was to be maintained, according to official explanations, primarily by the state of the market relations between towns and countryside. Theoretical understanding and practical necessity alike urged the Communists to control the state of the market, and this need was greatly increased by the effects of their bureaucratic shortcomings. Their bureaucratic apparatus suffered from extreme short-sightedness which from time to time compelled it to change its policy almost overnight in order to avoid the worst consequences of official blunders. In the social and economic circumstances of the NEP these blunders were registered by the market and resulted in more or less violent disturbances; thus the government needed full elbow-room for rapid changes in its market and price policy in order to maintain an equilibrium of interests between the towns and the peasants. The position of the private traders was therefore a serious obstacle to Soviet economic policy.

The reverse of this medal was, of course, the fact that under the NEP, which reserved all economic ‘commanding heights’ for the state, private initiative could express itself only in trade and handicraft. The latter could not become a serious danger for the state, even if completely dominated by private businessmen. During the early NEP it was extremely useful and even necessary, but it was easily controlled by the power dominating the trade system of the country. Apart from that it was not an attractive field for really capitalist elements, because profits were rather low, whereas risks were extremely high.

On the other hand, trade promised, in the conditions of the sordid and hectic years of the early NEP, what Russian postwar capitalists coveted above all—high profits in a short space of time. The NEP speculator did not want to risk the remnants of his capital on long-term transactions which exposed him to the suspicious eye of the GPU. Inflation, the disproportion between industry and agriculture and, last but not least, the grave blunders of the government promised the skilful and unscrupulous trader high profits in next to no time.

After the abolition of War Communism the Soviet power had no choice but to permit the free market, but it did not want to leave it permanently to the care of the NEP-man. The government patiently built up a new state and cooperative trade which gradually encroached upon the preserves of the private trader. State trade was more or less confined to wholesale operations, and the leading part in the struggle against the NEP-man in retail trade was reserved for the cooperative societies. This struggle was not a problem of economic competition, but a political question of power. From a merely economic point of view, public trade in backward Russia was certainly not superior to private trade. On the other hand, the consumers could be reasonably satisfied with the growth of cooperative trade because the shortage of goods enabled the NEP-man to retain as net profit the full margin of his commercial superiority. Instead of reducing prices, the private trader raised them over the level of public trade, and his competitive power was exclusively based on his ability to supply ‘deficit’ goods which service was generously remunerated by an unwilling public.

The dangers of this position of the private trader were demonstrated by the scissors crisis; the private traders occupied a strategic position and opened fire on state economy in spite of its entrenchment on the ‘commanding heights’. The answer by the government, though formally within the limits of the law, violated the spirit of the NEP. The assessment and payment of the numerous taxes imposed on the business man was arbitrarily changed according to the latest political ‘line’ and after the stabilisation of the currency steeply rising taxes and the newly-developed weapon of forced loans furnished the government with effective instruments against the new bourgeoisie.

During the early NEP Soviet commercial policy did not as yet aim at the destruction of private trade, but only at its stabilisation on the level reached during its first onslaught. As long as the government was unable to expand its own trade system sufficiently, private trade was indispensable; as it was, Soviet Russia had only about one-half the number of selling points possessed by Tsarist Russia, and their further reduction had to be avoided. But the automatic increase in trade turnover which could not fail to materialise after the recovery of national economy was to accrue only to public trade and not to the NEP-man.

II: The Resurrection of the Working Class

The NEP was a concession to the peasants without being a sacrifice to the workers. War Communism in its bureaucratic perfection was equally intolerable for either class. Its abolition was equally in the interests of both of them, although they wanted different things from the future.

The market necessitated the transformation of state industry into an aggregate of semi-independent trusts ruled by the commercial principle, and thereby finally destroyed the idea of working-class influence on the management of industry. The trade unions, too, lost their say in the direction of industry, and the appointment of the ‘Red Directors’ and the trust managers was monopolised by the economic authorities. In this sphere the NEP completed the tendencies of War Communism.

Under the economic conditions of the early NEP the independence of the leaders of industry was no material hardship for the workers. On the contrary, the NEP inaugurated a time of considerable material progress for the industrial workers. Conditions improved, and the material power of the management over the employees decreased.

The renaissance of the trade unions as more or less independent, though bureaucratic, organisations does not date back to the heated ‘nationalisation’ debate of December 1920, but to the material and social conditions of the NEP period. The NEP deprived the unions of their influence on industrial management, and they returned to the task of securing the gradual and orderly improvement in working-class conditions, a task for which they were well fitted by tradition and organisation. They did not cease to be bureaucratic parts of the Soviet power, and remained first and foremost a bureaucratic machine; its dimensions may be gauged from the number of their employees which in 1921 comprised 27 100 elected and 20 492 fully-paid officials, not less than 1.13 per cent of their enormous membership. [17] Though they were not permitted to become independent working-class organisations, they were allowed, and indeed even compelled, to look after their members’ material interests even if this meant conflicts with the managers of state economy.

On 28 December 1921, the Central Committee of the Russian Communist Party appointed a commission of inquiry into trade union policy, amongst whose members were the leaders of the trade union movement and Lenin; their final report contained the following interesting sentences:

The automatic enrolment of all paid workers in the trade unions has resulted in a certain element of bureaucracy in the unions, and has to some extent contributed to the alienation of their members. For this reason it has been necessary to return to voluntary membership, whether individual, or collective. [18]

This change was, of course, connected with the reintroduction of membership dues which had to suffice for the financial needs of the union organisation and it was a strong incentive for the leaders and officials of the trade unions to do their best for the protection of the workers who now could show their dissatisfaction at least by leaving the unions.

There was no more urgent task at the beginning of the NEP than the improvement in the standard of living of the workers. A radical increase in the general wage level was imperative, and in the course of 1922 the unions gained important advantages for the industrial workers which were embodied in collective agreements with steadily rising wage scales. Unfortunately a considerable part of these successes remained on paper because the unions were rarely able to protect the workers adequately against the consequences of inflation and the frequent delays in the payment of wages. The industrial working class could not continue to exist as such without a quick and thorough increase in wages, and this important condition was comparatively quickly fulfilled: [19]

In spite of the very low starting-point the doubling of real wages in the course of nine months may be considered a very good effort, which was, however, supported by the fall in food prices. The income of the average worker’s family again approached its normal structure, and an even clearer symptom of the general improvement in living conditions was the slow transition to a better diet: [20]

Even the improved diet of April 1924 was clearly still very unsatisfactory, but the tendency was certainly favourable. The share of carbohydrates in the whole diet was falling, and the supply of fats and proteins was slowly increasing, but there was an appalling lack of vitamins. In any case the Russian worker had again somewhat more and somewhat better food, and this enabled him to work with a much higher degree of intensity than during the years of civil war and famine.

Otherwise he would not have been able to meet the demands on his work made by the managers of industry. The problem of the productivity of labour was quite as urgent for national economy as the problem of wages was for the worker. In 1921 the average worker produced in one hour only one-third of the output reached in 1913, and owing to the reduction in working hours the yearly production was only a little more than one quarter of the prewar figure. But during the early NEP conditions in this field improved considerably, and in the year of the currency reform the output per man-hour was almost as high as before the war: [21]

The methods by which these moderately satisfactory results were achieved were, again, rather varied. At first the government tried to induce the workers to higher efforts by increasing their rations in proportion to the results obtained—an attempt which was distinctly born from the spirit of War Communism. Later on substantial wage increases were promised for better work. Piece wages were adopted wherever possible, and premiums for special achievements were freely given. The primitive system of rationing was replaced by elaborate wage scales of eight or even sixteen categories, and considerable differences in earnings between the individual groups.

An interesting and important feature of the wage policy of these years was the influence of the market. Light industry and private employers were ready to increase wages because they were eager to exploit the favourable market conditions for consumption goods by expanding production. The unions saw their chance and pressed for wage increases; and in this they were fairly successful. But this wage policy of the trade unions increased the plight of heavy industry which could not afford wage increases and, therefore, lost its very best workers to light industry. On the other hand, the government did not want to spend the larger part of the profits made by some branches of industry on higher wages instead of electrification and the development of national economy as a whole, and ordered the leaders of the trade unions to stop.

Already on 9 November 1922, the government prohibited excessive wage demands, and ordered the fixing of maximum wages as well as of minimum wages for state industry. (Private employers could, of course, pay as much as they cared, but their workers had to forgo many benefits and had to work much harder than in public enterprises.) The central trade union authorities were compelled to fall into line with the official policy, and to restrain their subordinates from pushing pay demands too hard. In the autumn of 1923 the Central Committee of the trade unions demanded the stabilisation of wages in light industry, that is, the termination of wage increases, and the gradual adaptation of wages in heavy industry to this higher level. It expressly declared that further wage increases could be granted only in consequence of a previous increase in the productivity of labour. Wage statistics for 1923 show the complete success of this policy: [22]

After the scissors crisis more radical measures were required than the slowing down of wage increases. The reduction of production costs had been put on the order of the day, and this could be achieved either by a rise in the productivity of labour, a reduction in wages, or a reduction in overhead expenses at the expense of the economic bureaucracy. There was unanimity concerning the need for better and more efficient work, but a violent quarrel developed about the applicability of the other methods. The unions emphatically asserted that the expensive and inefficient management was the biggest obstacle to cheaper production, whereas the leaders of industry regarded the rise in wages without corresponding increase in the productivity of labour as the source of the evil.

The position of the government was most unenviable; it wanted to increase profits without antagonising the workers. Formally it decided for the maintenance of the status quo and its authoritative spokesman (Rykov) explained that wage increases were economically impossible, wage reductions, on the other hand, politically intolerable. As a matter of fact wages were, however, reduced during the following months—although by methods which cannot be proved by statistical means.

For this purpose the government used the convenient instrument of its monetary influence. The abolition of the Soviet rouble required the transition to wage payments in Chervonets-roubles. Owing to the depreciation of the new currency as compared with the ‘index’ or ‘prewar’ rouble, the unions were filled with justified apprehensions about the abandonment of price indices as the basis for wage payments. Their endeavours to retain the old system were formally endorsed by the highest authority of the Soviet Union, the Soviet Congress (January 1924), but its decision was simply reversed by the Council of Labour and Defence on 1 March 1924, by a decree ordering the application of the Chervonets in wage payments and the termination of wage payments on the basis of ‘index roubles’. The temporary bonus granted to the workers as a contribution to higher living costs covered only a fraction of their loss in real wages.

The formal endorsement of the working-class point of view by the Soviet Congress in January and its unceremonial rejection by the authorities in March reflects the insignificance of the forms remaining of Soviet democracy six years after the October Revolution. The painful discrepancy between appearance and realities, between official declarations and official actions, expresses the growing gulf between the Soviet power and the working class.

III: The Social Significance of the Scissors Crisis

According to Trotsky’s assertions, the years of the early NEP witnessed the transformation of the dictatorship of the proletariat into the dictatorship of the bureaucracy; actually it was only the adaptation of the bureaucratic Soviet power to its new surroundings which happened during these years. The reshuffle within the Communist Party and the reorganisation of relations between leaders and party members was an important part of this process, but it was not more than a part. It is prima facie clear that already the famous division of party leadership into the ‘Orgbureau’ and the ‘Polbureau’ was more than a technical change, that the not less famous ‘chistka ’ (purge) of 1921 served not only for the elimination of NEP-men and careerists, but, above all, for the exclusion of political opponents of the ruling group, and that, finally, the concentration of overwhelming, though as yet not despotic, power in the hands of the general secretary had deeper reasons than Stalin’s demoniacal personality or Lenin’s illness.

The inevitable result of this process was the strengthening of the bureaucratic party machine as a whole and the disappearance of the system of democratic centralism. It was replaced at first by a curious balance of power between the various leaders (Stalin, Zinoviev and Kamenev, Trotsky), and later on by the concentration of full power in the hands of the general secretary which made it comparatively easy to reduce the internal friction of the machine and to coordinate its different parts. On the other hand, the very perfection of the bureaucratic machine widened the gulf between its members and the social forces of the country. The rulers of Russia found it increasingly difficult to bear in mind, or, indeed, even to see the elemental material interests of the social classes, the workers and the peasants. Social interests were brought to the attention of the government only when they became ‘difficulties’ hindering or endangering the normal routine of administration and the smooth working of the party machine. Whenever this happened, it was already too late for a gradual change of administrative policy and technique: a drastic change of the course had to be decreed, the vessel had to be steered round by 180 degrees, many things true and almost sacrosanct till yesterday were wrong and even treacherous today. Bureaucratic leadership may, or may not, have been a method of improving the deplorably low technical efficiency of the Soviet state and administration, but this potential advantage was heavily overpaid by the loss of social understanding and political foresight incurred in the operation. This was true already of the first and most tragic case of this kind, the belated introduction of the NEP, and an analysis of the scissors crisis from this angle furnishes interesting results.

The tasks confronting the Communists during the early NEP were certainly extremely difficult. During the first few months after the introduction of the new policy, the government ‘retreated’ (Lenin) so quickly and so far before the elemental forces of the market that for some time it seemed to lose hold of its essential aims. The result was the pernicious spring crisis of 1922, the devastating results of which were largely a consequence of the absence of clear official guidance and control.

After the formal framework of the NEP had been completed, about a year after the beginning of the ‘retreat’, Lenin, in the last phase of his practical activity, called on the Communists to come back to the attack. The sketches of a Socialist victory over the individualistic anarchy of the peasants and the transition to Socialism may have been exaggerated in their theoretical importance by Stalin and his friends, but there can be hardly serious doubt of the fact that they were a powerful stimulus for the theory of ‘Socialism in one country’. For the time being, however, the Soviet power had to solve less exalted but practically very difficult problems. State industry had to collect its working capital from the market, and this was rendered particularly difficult by the catastrophic sale of state property during the spring crisis; the making of profits by state trade and industry was, however, the prosaic condition for the most idealistic programmes. The government could do very little to help the economic authorities from above, and the managers of trusts and syndicates tried to get their capital as quickly as possible out of the pockets of their workers and their customers. Their problem was simply to pay as little as possible for raw materials and labour, and to get as much as possible for their goods.

The achievement of these pious purposes depended on the economic state of the country, and the relations of power between the state and the social classes. As far as the workers were concerned, two important aims of Communist policy appeared to come into collision with one another. The restoration of industry and the improvement of working-class living conditions required opposite measures. The workers received higher wages, but they had to relinquish part of their higher earnings to industry which charged them higher prices for its goods.

In their relations to the peasants, on the other hand, the Soviet power was completely free from scruples. Here the so-called ‘law of Socialist accumulation’, whether publicly proclaimed or publicly disclaimed, was practically adhered to. High industrial prices enabled industry to increase wages, to pay higher taxes, and to accumulate capital for the struggle against Russia’s economic backwardness. Cheaper agricultural raw materials and foodstuffs meant higher real wages and lower production costs, and therefore, again, higher profits for state economy.

The Soviet power and the workers were, to a certain extent, both interested in the exploitation of the peasants; but the latter were economically independent of the Soviet government, and moreover they were a power which, only a few years ago, had proved formidable enough to compel the government to a headlong ‘retreat’. The object-lesson of 1921 was not yet forgotten, and the Soviet power was not sufficiently strong for a renewal of the struggle with the village. This meant that the theory of the ‘alliance’ between town and country was still valid, although the Communists did not mind interpreting its terms in their favour whenever the relations of power seemed to permit of it. After the good harvest of 1922 they saw their chance and used it. But there they blundered again; the ‘racing’ of their clumsy and noisy bureaucratic machine drowned the grumbling of the peasants, until the government found the country in the throes of a violent crisis.

This crisis was, however, merely a temporary ‘tight place’, and it was quickly overcome by a readjustment of policy. The final solution was extremely simple and satisfactory to almost all the parties concerned. The prices of agricultural produce went up, and industry balanced the increase in costs by raising the productivity of labour. The workers were, in their turn, partly reconciled by minor wage increases which could be easily borne by industry because shortly after the change of policy, though retarded by a crop failure in 1924, demand increased by leaps and bounds, and industrial production rose correspondingly and brought about a fresh increase in the productivity of labour.

This crisis had nevertheless its serious theoretical implications. It was overcome by an all-round increase in the productivity of national economy which then had large prewar reserves unutilised for years. How should its recurrence on a higher level, and with greater force, be prevented after these resources had been mobilised and exhausted? Here was room, indeed, for a consistent and far-sighted social and economic policy, but it was just such a policy which lay beyond the ken of the bureaucratic rulers of the country. Not in time but in historical significance the scissors crisis lies half-way between the failure of the planned chaos of War Communism and the destruction of the NEP in the struggle between the Soviet power and the kulaks .

Notes

1. Lenin, Selected Works, Volume 9 (Moscow), p 99.

2. Ibid, p 118.

3. L Jurowsky, Die Waehrungsprobleme Sowjetrusslands (Berlin, 1925), p 97.

4. P Haensel, Das Steuersystem Sowjetrusslands (Berlin, 1926), p 25.

5. This purely technical point would not be worth mentioning for its own sake; it should not be overlooked, however, because it was the starting-point for the second inflationary wave during the First Five-Year Plan.

6. Segal-Santalov (ed), Commercial Year Book of the Soviet Union (London, 1925), p 53.

7. P and I Petroff, Die wirtschaftliche Entwicklung der Sowjetunion (Berlin, 1926), p 55.

8. The Soviet Union Looks Ahead: The Five Year Plan of Economic Reconstruction (London, 1930), p 10.

9. Itogi diesiatilietiya sovetskoi vlasti v tsifrakh, 1917-27 Results of Ten Years of Soviet Power in Figures, 1917-27 . (Central Statistical Office, Moscow), p 223.

10. Soviet Union Year Book (London, 1929), p 122.

11. Figures taken from Itogi … pp 244ff; The Soviet Union Looks Ahead , p 2; Soviet Union Year Book, 1929, pp 110ff.

12. Russian Information and Review, 15 July 1922, p 464.

13. Vestnik Statistiki, 9-12/1922, quoted by J Kretschmann, Moneta e prezzi nella Russia dei Soviet (Citta di Castello, 1929), p 17.

14. Itogi… , pp 412ff.

15. Russian Questions, 8 December 1922, p 6.

16. Itogi… , p 366.

17. Industrial Life , p 246. Strauss does not give the full reference to this source—MIA.

18. Russian Questions, 3 March 1922, p 3.

19. Industrial Life , p 173.

20. Itogi… , p 361.

21. BL Marcus, ‘The Stakhanov Movement and the Increased Productivity of Labour in USSR’, International Labour Review, July 1936, p 7.

22. ILO, The Trade Union Movement in Soviet Russia (Geneva, 1927), p 157.

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