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THE BANK STRUCTURE OF THE U. S. S. R.

A Monetary Science Publication

CENTRAL  BANKS  . . .

It might be of interest to note that, contrary to a widespread idea, the central banks are not owned by governments. As a matter of fact, neither the English, French, German nor the United States government owns any stock in the central bank of its country. The Bank of England is run entirely as a private corporation, the stockholders elect the board of directors, who rotate in holding the governorship office. In the United States the Federal Reserve banks are run by the stockholders, the commercial banks, which elect the boards of directors, who in turn govern the respective Federal Reserve banks.
From a 1908 assay by Paul Warburg, reputed author of 1913 Federal
Reserve Act; updated 1991 by Peter Cook, M. Sc.


Compiled and edited by: Peter Cook,  M.   Sc,  C.M.E.

THE BANK STRUCTURE OF THE U.S.S.R.

From an "Official Paper" published in American Affairs
January 1946 — Edited and updated by Peter Cook

This statement about banking in the Soviet Russia is from the Information Bureau of the Embassy of the U.S.S.R. What it describes  is  a  conventional  and  necessarily  solvent  banking system under  a regime  of  absolute  State  Capitalism.  Marxian ideology has nothing to do with it. The principles, the methods and technique, even the terms are all from the book of capitalism
— for example, central bank, gold reserves, note issue, cash balances, working capital, long and short-term credit for industry and  agriculture,  savings,  surplus,  profit  and  loss.  Almost  you might think you were reading an elementary text on banking in a system of free private enterprise banking; and in fact the only
technical difference is that here the State is everything. It owns the bank, all the cash balances, all the reserves, all the working capital. Industry belongs to the State-Bank. All profits go to the State-Bank. When there is borrowing and lending at interest, it is the State borrowing from itself and lending to itself. And, when you read, that the funds, with which the State Bank finances the
economy "are chiefly derived from labor and the free resources of the economy" you need a moment's thought to make the translation. What it means, that the State monetizes its abundant labor and its natural resources. It means that whatever is intellectually possible and physically feasible is never financially limited to the State — because, the domestic ruble derived from
monetizing labor  and  natural resources  can  mobilize  the total Soviet economy behind any State-targeted plan,   project   or endeavor.

The basis of the present banking and currency mechanism of the Soviet Union was laid at the end of  1921, when the State Bank of the U.S.S.R. was

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founded and authorized to issue State Bank currency notes. By a separate law passed at the same time, the new bank of issue (similar in power as the Federal Reserve's) was endowed with the monopoly-right  to  acquire  both  home-produced  and  imported gold, as well as silver and foreign  legal tender currencies.
The foundation of the State Bank was the first step toward the reform of the currency,  which  was completed in  1924  ... Subsequently, when the currency had been definitely stabilized, the State Bank took over the old state treasury issue, maintaining
the  regulation cover  for  the  joint  issue.  The  State  Bank  thus became the sole repository of currency-stock and the responsible regulator of the entire Soviet  money and currency system.
Once the currency had been firmly stabilized, it became possible to proceed to introduce a more effectual organization of short-term and long-term credit. Of the two, short-term credit was
the more important problem to tackle; fore, the management of production,  largely  depended  on  the  short-term  credit  and currency stability.

The First Decade . . .
In the first ten years or so of its existence, the State Bank
was only one of the banks engaged in the economic financing. ... Furthermore, in addition to bank loans, there was a system of financing by bills of exchange drawn by one business concern on another. The existence of this system naturally interfered with the utilization  of  the  bank's  ...  rigid  control  over  the  financial activities of the business organizations.
Accordingly,  in  1930,  steps  were  taken  to  reform  the whole credit-money system. The reform was based upon two underlying principles: (1.) All short-term financing was an exclusive prerogative of the State Bank (note: not of the Communist Party), and (2.) bills of exchange were abolished and no business had the right to grant credit to another.     All short
and long-term financing thus

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became bank financing, concentrated in the State Bank, of which all the business organizations in thecountry became direct clients of the State Bank.

Financing Of Business . . .
Simultaneously there was begun the gigantic undertaking
of reconstructing the working capital of business enterprises. Its effect was to set limits to bank financing. Every enterprise was assigned definite working funds essential for the fulfillment of its production program. These funds formed part of its assets and were at its full disposal and management. The funds originally provided to the production enterprises were/are derived from the
State Bank's power of issue, to issue new State "Bank Credit" denominated   in   "rubles"   to   the   credit   of   the   production enterprises' checking accounts (much like when the Federal Reserve in the U.S. creates "reserve account credits" to the credit of the commercial banks reserve accounts). And it is from the same source, that the State Bank of issue provides additional
ruble-credit   capital,   when   the   production   program   of   an enterprise is increased.
Although the producing enterprises may have sufficient working capital to insure normal operation, nevertheless, at times the need for additional funds arises, which need the enterprises are unable to meet out of their allotted working capital. This is
due   chiefly   to   expenses   involved   in   seasonal   production processes, or in the accumulation of seasonal stock of raw material, fuel, semi-manufactured goods and the like. These sporadic and seasonable expenses are also financed by the State Bank. Furthermore, the State Bank finances the producing enterprises to the full value of the finished goods between the
time they leave the factory to the time they are delivered and sold. Thus the working funds of the enterprise are not tied up while its goods are in transit  to the market.

Production Loans . . .
Lastly,  the  bank  comes  to  the  aid  of  a  producing enterprise, when, there is a deviation from its targeted program,
by which level the financing was determined, providing the deviation was not the fault of the enterprise itself. However, if the deviation from the production program are due to the fault of the enterprise, the bank refuses to supply additional credit, and the financial difficulties of the enterprise become the object of investigation by competent Communist government authorities.
As bank loans are provided to the enterprises, on the basis of  an  analysis  of  the  borrowing  enterprise's  financial  and economic position, the bank loans become one of the most valuable and effective forms of control over the activities of the Soviet State enterprises. Much like in the United States, where the commercial banks, by raising or lowering the prime and other
interest rates, are a very potent control over the economic activity of the Nation. The financial tragedy being, that in the U.S. there is no "State" or "Government" control over the bankers' "Credit Money" lending interest rates, and thus leaving the United States business and industry at the financial and economic mercy of the commercial banking industry which includes the Federal Reserve
banks.
However,  there  are  branches  of  industry  in  the  Soviet Union whose production processes are not subject to seasonal fluctuation, such as the machine building, which are of great importance to the country's economy. Such branches of industry could  almost  be  self-financing  from  their  sales.  This  would render such industries practically immune from the control of the bank. An experiment was recently made in reconstructing the working capital of these non-seasonal industries. A Certain part of their working capital is contributed by the bank, in the form of repayable, or revolving, ruble-credits. Whenever a particular enterprise is forced to utilize any portion of this

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working  capital,   it   automatically   comes  under   the control of the State bank.