E.A. Preobrazhensky

From N.E.P. to Socialism

Lecture 11

The beginning of the transition of the economy to a higher stage
An economic impasse

IN THE preceding lectures I have briefly sketched for you the economic development of Soviet Russia in approximately the first decade of the New Economic Policy. During this period, as I have already said, the pre-war proportions of the economy were attained, and in part exceeded. The mixed form of the commodity-socialist economy opened up sufficient scope for the development of the productive forces, and the capitalist coat did not at that stage constrict the development of the economy. On the contrary, it was only calculating in the capitalist way that the working class at large could learn how to manage production, at the given level of the development of large-scale production. But soon the socialist content of the socialized part of the economy began to be constricted by the capitalist form of its clothing and to burst out of it, seeking new forms. At the same time, relations with petty peasant production entered a new phase, when the link with it through trading and credit was found to be inadequate for the development of the country’s economy as a whole. This new period could therefore be described as the painless and gradual casting off by socialist economy of the husk of capitalist forms. This process was merely hastened by the unsuccessful revolt of NEP against the proletarian dictatorship, but it had begun earlier, before that revolt.

In this period the international situation of the Soviet republic changed substantially, as a fresh wave of proletarian revolution began to ‘arise in Europe, to which the rout of the NEP revolt in Russia served as a sort of introduction.

But let us return to Russia.

In examining this period I will not dwell upon the figures of the production of large-scale industry, and still less upon those relating to particular branches. I will speak only of the changes in economic forms. Let us start with the summit of the economic pyramid, state industry. We left this in the position where it was financed, in the great majority of cases, by Gosbank and the Bank of Trade and Industry, and operationally managed by the Supreme Council of the National Economy and the Bureau of Industrial Congresses, and where it kept its accounts in the capitalist way, and bought and sold for money not only in its trading relations with the non-socialized section of the economy but also in the trading relations between individual state enterprises. This market chaos inside the state sector of the economy itself had to be abolished first and foremost, because it prevented the establishment of strict proportionality the development of the separate branches of large-scale industry even where the market was the state sector of the economy itself. A state enterprise, a factory engaged in manufacturing work, for instance, needed a certain quantity of mechanical equipment, fuel and so on. The suppliers of all these requirements were also state enterprises. But they did not know what, in each production year, would be the demands on their production by other state enterprises. Each enterprise made its purchases where it could buy cheapest. As a result, purchasing was carried out over a wider territorial area than was necessary, resources were expended on commission charges and purchasing organizations, and all this meant many cross-hauls in the transport system. The organs of economic planning began first of all by putting an end to the market chaos within the state sector.

The first step, which was taken already in the first years of NEP, was to oblige all state enterprises to draw up not only financial estimates but also economic ones. These estimates were put together and worked over, by the Supreme Council of the National Economy in such a way that all magnitudes of the same kind were added together, and it was ascertained how much petroleum, coal, iron and so on was needed for the state sector itself. Thus, the demands upon industry by industry itself and by state institutions were clarified. This made it possible, first, to know beforehand what quantity of what products had to be produced to meet the state’s own requirements. Secondly, it made it possible to distinguish according to their degree of importance those enterprises which needed various products of state industry but could not pay for them in full. Consequently it was established what enterprises had to be subsidised by the state in order to expand production. Further, this made it possible to discover, among the state enterprises, what quantity of their products they could certainly dispose of within the state sector and what they must sell on the market of the non-socialized sector. This made it possible, finally, to observe where underproduction of particular products was threatened, and to prevent it, as also to foresee possible amounts of overproduction. Under this system, measures could be taken in advance to purchase abroad goods which were in insufficient supply, and to introduce compulsory planned distribution of those goods which, inevitably and deliberately, would not be available in sufficient quantity for all the state consumers. It is quite obvious that, in addition to this, the state had to know the volume of production expected from all private enterprises which were of more than local significance, and to compel all private enterprises to supply the state with details of their production plan and their expected production figures.

This work of socialist accounting had been begun, as I have already said, so far as the most important branches were concerned, already before the period under examination; now it was carried out in relation to the whole of industry, not excluding the principal branches of handicraft and artisan industry. The next stage was then to distribute orders and purchases in accordance with a definite plan. The state planning organs did not wish in any way to stifle the initiative of the separate enterprises by introducing the old system of distribution and trade by authority’. But they did endeavour to associate a definite group of state consumers with a definite group of state producers by economic gravitation, starting from the task of accounting for and economizing in transport costs. At the same time a number of measures were worked out which permitted the purchaser not to be tied down in cases where particular producers supplied satisfactory goods.

All these measures also made it easier for state industry to operate as a ‘united front’ in relation to the non-socialized sector of the economy, and prevented individual state enterprises from weakening the position of state industry as a whole on the free market. The new form of accounting and of distributing orders was at the same time flexible and elastic; it left sufficient scope for the initiative of the separate trusts, while protecting the interests of the whole, the interests of more rapid advance by the entire economy with the last possible expenditure of forces.

However, regulating the production of that section of large-scale industry which was orientated towards the non-socialized part of the economy, especially the peasant economy, was very difficult. It was hard to ascertain with any exactitude either the volume of effective demand or the amount of raw material which the peasant economy could furnish. For approximately estimating the production of the non-socialized economy and foreseeing the possible conjuncture, the state made use of all sorts of statistics, correspondents’ reports from the localities, and indices from all the trading and credit organizations which had contact with the free market and could estimate its demand and its stocks. Before the adjustment of peasant economy to large-scale state industry on a production basis began – which radically changed the whole situation – a big role in estimating the resources of the countryside and subordinating petty production to the tasks of large-scale industry was played by the system of long-term credit, which was developed in Russia, in relation to the rural areas, on a very much bigger scale than anywhere else previously. Already, thanks to the wide development of short-term credit through the mediation of all sorts of co-operatives and state trading organs, the autumn harvest was usually mortgaged in part to the state six months ahead, in the springtime. The peasants not only received credit in commodity form but also advances in money, against the forthcoming harvest. This system was utilized for the purchase of technical crops (flax, hemp) and also of various kinds of raw material of animal origin, such as wool, hides, bristles and so on. This system of trade on credit necessarily required estimation of the solvency of the millions of households to which credit was to be given, and to avoid huge losses being incurred by the lender, all the organs which carried out this task had to take into account all the resources of the peasant economy. Socialist accounting grew eventually out of this capitalist commodity accounting. Long-term credit had a still greater influence on the relationship we are studying. Through a special agricultural bank of long-term credit the peasants obtained on credit every year agricultural machinery, fertilizers, improved seed, and so on, and also money loans to the value of tens of millions of gold roubles – loans for new buildings, to buy cattle, to carry out land-improvement, and so on. The annual amount of values lent increased as industry and foreign trade expanded and the production of peasant economy itself increased. But every year the amount being paid off by the peasants also increased. This repayment was effected not so much in money as in kind – in grain and other foodstuffs, in raw materials, to some extent in labour, since carting work and procuring firewood for the factories and railways, work at repairing the roads, and so on, could serve as means of repaying loans received from the state. But long-term credit requires not less but more thorough estimation of the credit-worthiness of the client than the short-term variety. Thus, estimation of the quality and quantity of peasant production was undertaken from this angle, too. Mere reconnaissance of the market was not sufficient now. What was needed now was regular agency work, constant, systematic, scientific and statistical calculation of the facts of peasant economy generally and the economic position of the individual peasants. Under long-term credit the peasants mortgaged not only the immediately forthcoming harvest but also the harvests of several years ahead. If now three magnitudes be added together, namely

  1. what the state received in repayments of short-term commodity credit and long-term credit, and
  2. from the tax in kind [1] and
  3. what was consumed within the peasant economy itself, and these magnitudes be deducted from the total production of the peasant economy, then what is left is what the peasants had to put on the free market.

This amount, which escaped from the state’s control, was now no longer so big as before, and it grew less year by year, as the peasants found it more advantageous to deal with the state with-out employing intermediaries. This is to say nothing of the fact that the peasants sold a considerable part of their production to the co-operatives. They sold on the true ‘free market’ only that part of their production which was exchanged for the products of handicraft and artisan industry, and of the small private capitalist industry, as well as that which was exchanged among the peasants themselves. Naturally, the estimates of peasant production which we mentioned above had to take into account this part of it too, which did not come into the state’s hands.

In any case, when the general production programme for the following year was drawn up, the state’s planning organs not only knew everything that could be calculated in the state sector but were also fairly well able to estimate the volume of that part of the output of petty production which was destined to enter the channels of the state economy in the form of raw material and foodstuffs. At the same time, the planners could estimate approximately how much of the production of large-scale industry could be absorbed in the coming year by peasant economy, given an average harvest. It was already no longer quite correct to talk of the peasant market in the old sense of the word, because the amount of the products of large-scale industry made available on credit to the peasants was determined by the state itself. which knew both how much credit it could give and also, through the tentacles of the trading, credit and statistical organs and agencies, how much credit the peasantry were in a position to take.

I must also mention the very great role played by state insurance against fire, damage by hail, loss of cattle, and so on, since this insurance also necessitated estimating the property of the insured and meant that considerable amounts of the peasants’ resources were mobilized in the form of insurance premiums.

And so we see that, while using capitalist accounting methods in most cases, and combining scientific statistical calculation with these methods, the state was in a position, not only in the state sector alone, but also in the whole field in which it carne into contact with the non-socialised sector, to carry out calculations covering the economy as a whole. One may ask whether the state was able not merely to estimate the resources of petty production, not only to divert a large part of its output into the state’s own circulation-channels, but also to influence the volume and quality of this production. It was important to the state not only to know what amount it could obtain from the peasantry and in what form. The state was also vitally interested in ensuring that, in accordance with its plan for the development of industry and with the demands of the foreign market, the peasants should produce those kinds of raw material and foodstuffs which the state needed, and in definite quantities. Further, the state was interested not only that some crops should expand at the expense of others but also that the expansion of all crops should not lag behind the tempo of industrial development – or, in other words, that the backwardness of farming should not hinder the process of industrial development.

The first task proved capable of accomplishment already on the basis of the link between peasant economy and state industry through trade and credit. When the planning organs of the state drew the conclusion, on the basis of their calculations, that it was necessary to increase the cultivation of flax at the expense of grain in the North, the cultivation of hemp at the expense of potatoes in the Centre, and so on, they addressed not only to the People’s Commissariat of Agriculture but also to all the organs of capitalist regulation the directive to arrange their dealings with the peasantry in such a way that the necessary effect should be achieved in all the areas mentioned. This effect was achieved through Gosbank, the Agricultural Bank, the organs of state trade and the co-operatives announcing to the peasants: ‘We will accept flax and hemp in repayment of our loans and our commodity credits, we will not accept grain, we will raise the prices of hides and wool,’ and so on. At the same time the credit organs could increase their loans to those peasants who extended their production of the required crops. From the standpoint of the economics of the entire economy these bonus prices and increased advances were a sort of a loan to secure the expansion of branches of production needed by the state; they meant an increase in the fixed and circulating capital of certain branches of the economy, and had to be kept up until, thanks to increased production, equilibrium was obtained with large-scale industry and its requirements. Reduction in the output of a crop was secured by measures of the opposite order, that is, by refusal to accept this crop in repayment of loans and by reducing the price paid for it.

While, in a similar situation, in the years of War Communism a decree would have been issued, agitators would have been sent in to the rural areas, vigorous appeals to the peasantry written, and all this, through the lack of the necessary economic incentives, would still have failed to achieve the desired results, now, with the degree of economic power the state had acquired, these results were achieved by shrewd manipulation of the price lever. Market prices, formerly the spontaneous regulator of the economy, were now transformed, in the hands of the mighty state, into an auxiliary tool of planned economy. In this way socialism transformed, adapted to itself and made serve it those capitalist forms which had proved most elastic and most suitable for the economy of the transitional period. The movement of prices on the market, which at the beginning of NEP forced state industry to dance to its tune and made a mockery of planned economy, was now made a means of socialist regulation of the non-socialist part of the economy. We shall see later how this transformation affected money and its functions in the socialist commodity system.

The methods of regulating peasant economy were adequate for the socialist state up to a certain time. But then it began to become clear that the rate of development of agriculture was beginning to lag behind the rate of development of industry and of the demands of foreign trade. True, the large-scale state farms in the borderlands mitigated the approaching crisis, and their rapid expansion played the part of a safety-valve, but this safety-valve proved inadequate. Such changes were needed in the entire technique of the peasant economy as would signify a rapid and decisive increase in the agricultural basis for Russia’s industry, and for the industry of Germany which was economically linked with it. The trade-and-credit link with the peasantry could serve the purposes of regulation only up to a certain point. When these resources were exhausted it was necessary, on the one hand, to go over to changing the very mode of production in the peasant economy, and, on the other, to bring under cultivation fresh tracts of the desert expanses in South-Eastern Russia and Western Siberia. According to the calculations of economists and statisticians of this period, the task was formulated more or less like this : it was necessary, with the given amount of labour power engaged in agriculture, to increase to an enormous extent the production of grain, technical crops, fats, meat and animal raw material; it was necessary, in all areas where local conditions made this possible, to introduce cultivation by means of tractors and electric ploughs; it was necessary to introduce all the improvements known to agricultural technique and agronomical science, to carry out a planned distribution of crops as between districts, and to intensify emigration to the borderlands, organizing a large-scale economy for the immigrants. All this was, first, to increase enormously the crop capacity of the land, and secondly, to release from the peasant economy a large amount of labour power which was needed for the further development of industry. In the period being studied, over a hundred million people were engaged in agriculture in Russia, of whom about half were able-bodied. The revolution in farming technique was to release about one-third of all these able-bodied people. The economists proposed to devote this surplus labour-force, in proportion as peasant economy was rationalized, to the colonization of the desert areas in the borderlands. In this way, through a revolution in technique and a redistribution of forces within farming itself it would be possible to bring very large tracts of land under cultivation and also improve cultivation in the areas of old peasant farming. This would ensure a huge increase in the supplies of grain and raw material which were needed for industry and export and would make it possible for Soviet industry to race ahead for an indefinite period.

But in spite of all the obvious cogency of these conclusions it was almost impossible to put this plan into action in the more or less near future. There were obstacles on every side. In the first place, the district power stations had not all been built, and insufficient resources were available to the state to hasten their construction. The stations built were insufficient to serve the huge area covered by peasant farming; they were able to constitute only islands of electrified agriculture in the boundless peasant sea. As regards cultivation by tractor, to serve the whole area where electric ploughing was impracticable would have required nearly a million tractors, and, consequently, an enormous number of drivers and repair workers, a huge amount of petrol, and, the most important thing, enormous resources at the state’s disposal. The third obstacle was the peasantry itself. The very great over-population which then existed in the countryside, and the passion for small-scale intensive cultivation, led to stagnation in farming. The numerous stratum of farmers operating farms separated from the village stood stubbornly by their ‘Danish methods’ of farming, which certainly produced a very large yield per desyatin, but required a tremendous outlay of labour power by the farmer and his family, per unit produced. And the remaining great mass of peasants, though less attached to their holdings than these, feared a mass-scale shift in the economic system and still more a mass migration to the borderlands, which was absolutely necessary. Previously, when in the days of Tsardom life in their own villages, in circumstances of frightful land-hunger, had grown excessively unbearable, the peasants had felt a great urge to migrate elsewhere. But since the peasants had succeeded in getting their economy working in their old homelands, improving cultivation and increasing the yield of their land, the majority of the peasants, especially the older ones, had no desire at all to leave the places they had occupied for so long. Only the young people, who had acquired higher needs during their stay in the towns, in the Red Army barracks, did not object to a mass transference to the borderlands.

Despite the fact that this colossal task could not be accomplished in a short time with the resources of Soviet Russia alone, and that a political revolution in Europe was needed if the economic revolution in Russian agriculture was to be carried through, nevertheless something was done here and there with the country’s own forces. Mechanical cultivation was introduced on some peasant holdings, though only a small percentage of them. In the same way, electrification was introduced in a number of places in the countryside. It was necessary to accelerate this process by every possible means. The situation was similar with migration, which took place every year, though only on a restricted scale. The state had need of agricultural workers to extend the area of its big state farms in the borderlands and its animal-raising centres in the steppes. The migrants were recruited, and willingly for the most part, in the provinces of the interior, those where there was least land available, and they made their way to the borderlands on their own initiative. It was mostly youngsters who went, after making a partition of property with their elders. At first, owing to the lack of the necessary means, the state restricted itself to staking out holdings in the immigration areas for individual peasant households, and giving the most necessary aid for the journey and the initial building work on arrival. The migrants continued to cultivate their holdings in the new homeland in the same way as in the old. But when the state grew richer it organized the migrants in a different way. In the resettlement areas it put up buildings for large-scale collective farms, provided with machinery and everything needed for large-scale agricultural production. Now the migrants changed not only their place of habitation but also their way of running their economy. From being individualists and petty-bourgeois they became workers in a collective enterprise, and sometimes, if everybody in the unit agreed, they formed communes. True, these large farms were not always state enterprises like the state farms and the resettled peasants did not always look on themselves as workers in a state enterprise. This depended on the terms of the agreement which they had concluded with the state when they migrated. In those cases where the migrants were given equipment for a large farm, in the form of a long-term loan, they looked on this farm as their own property. They disposed freely of the products of their labour, except for that part which went to repay the loan. Thus, already at that time, alongside the old resettlement policy, the state began to introduce a new, socialist policy. Besides extending petty production into the borderlands, that is, besides petty-bourgeois colonization, there began also to develop socialist colonization of the borderlands.

It was now necessary to give very wide scope to all this advance by agriculture, and in particular to undertake the building of new power stations especially for the electrification of agriculture. As mentioned earlier, this huge task was beyond the power of the Soviet Republic alone. Here the development of Russia’s productive forces necessarily depended on proletarian revolution in the West and a re-grouping of productive forces on the European scale.

As regards the monetary system, it proved very tenacious of life not only in the first of the periods we are studying, that is, when socialist and capitalist economic relations existed side by side, but also in the second, when socialism began to conquer all along the line. The monetary system revealed great adaptability to the new type of economy, although, of course, the functions of money were markedly different under planned economy. In general, the abolition of money is inevitable in Communist society, where there is no individual or group accounting of who takes what and how much. Socialism, however (because it is socialism and not communism), does have this accounting, though eventually it is applied only to a section of the products distributed. Moreover, socialism does not completely exclude the market for those branches of the economy for example, for petty production – which are not yet socialized. True, these branches, and the market with them, gradually wither away under socialism. But they wither away gradually, as socialism gradually turns into communism – being, as it is, merely unfinished, undeveloped communism. Finally, under socialism voluntary, amateur industry and art develop, activities in which the workers under the socialist state engage after they have fulfilled their obligatory spell of work, and the products of which are exchanged for money, as happens now. But of course the role of money in these conditions is not at all the same as under the capitalist or commodity-socialist systems. In these latter, money served as the yardstick of the value of commodities, the means of circulation and the means of payment. It was one of the means whereby the spontaneous regulation of the process of production and exchange took place. When, however, all decisive branches of the economy became subject to planning, and when, consequently, exchange between these branches also became subject to planning, with planned accumulation and planned distribution of consumer goods, then money was transformed into a mere auxiliary instrument of planned distribution. It retained its former status only for the non-socialized part of the economy, and even there not for the whole but only for its market in the narrow sense of the word, that is, for the market in which exchange within the non-socialized part of the economy took place. But we have already seen that petty non-socialized production put only a small part of its output on the free market. Moreover, in the country’s general economic plan this output had also been already taken into account, and not only the output of petty economy but also all the processes in this surviving market were in many ways already regulated by the state. Thus, money existed here ‘in socialist encirclement’, and its economic role became extremely limited.

In the period being studied the state completely mastered the task of regulating the circulation of money. No unsolved problems continued to exist for it in this field. It also solved the problem of replacing the circulation of gold by that of paper-money while retaining for the latter all the basic functions fulfilled by gold. The state did not hasten to drive money out of circulation or artificially to restrict the sphere of calculations in money, since, as we shall see, non-monetary calculations successfully ousted monetary calculations in a natural way. Under the mixed system of economy money had a great advantage, and could not be replaced by any ‘labour-units’ or other artificially-conceived methods of calculation. Nevertheless, something like a crisis of monetary circulation threatened to break out. The origin of the trouble was as follows: The first decade of NEP saw a growth from year to year in the exchange of goods for money, though at the same time the possibilities of non-money settlements increased with the growth of credit and banking. In the period of the stabilization of the currency money was no longer tossed from hand to hand, commodity exchange absorbed it in enormous quantities, and thanks to the expansion of foreign trade the stable currency of the Russian state was in big demand abroad; in addition, accumulation in money form developed strongly. I have already mentioned that the government and Gosbank made use of this situation to increase their circulating media, in that every year they made an additional issue of money to the extent required by commodity exchange and the needs of accumulation. Now the situation underwent radical change.

Although the production of industry and agriculture increased from year to year, commodity-money exchange began to decline, owing to the reduction in the sphere of money calculations. The planned distribution of orders within the state sector reduced to the minimum the circulation of money among the state enterprises themselves. Money was paid out only to cover the balance left when accounts were reconciled; the amount of this balance in comparison with the total circulation within the state sector was only a small percentage. Substantial changes took place also in the method of paying wages. The workers left the greater part of their wages – in some areas nearly the whole – in the co-operatives and state trading organs, where they found everything they needed. The co-operatives bought their goods either from state institutions (the bulk) or on the free market (the small remainder). In particular, as regards agricultural products, such as grain, meat, fats and so on, whereas previously the co-operatives had bought most of these products in the rural areas in the normal course of trade, now they got them mostly from the state, which was in possession of huge quantities through the tax in kind, repayments of bank loans, payments for commodity credit by state trading organs, and so on. Thus, instead of settlements being made in money between state enterprises and their workers, then between these workers and the co-operatives, and finally between the cooperatives and the state and its organs, it was much simpler and more convenient for the co-operatives to work out clearance settlements with the state trading organs, with the participation of the bank, so that only the net balance needed to be paid in money. So far as the worker-consumers were concerned, the co-operatives bound themselves by agreement with the state to pay a worker his wages in kind, on the basis of his work-book, if he so wished. The co-operatives were granted sufficient credit for this purpose by the state organs. Money was paid to the worker at the end of the month only to the extent that he had not drawn his wages in kind, on the basis of his work-book, at the co-operative store. In most cases the workers took up in this way more than they drew in money wages in a given month, because they took advantage of the credit available at their co-operative stores. Concretely, if a worker took goods to the value of 60 gold roubles a month, and was due to receive 70 roubles in wages, then the factory office made the deduction and he received in money only the balance, ten roubles. In a number of places, especially where the workers usually spent all or nearly all of their wages in the co-operative stores, a system was further introduced whereby, through agreement between the factory administration and the co-operatives, the final end-of-month clearance in money was also effected in the co-operative store itself.

All this meant the ousting of money from an enormous field of commodity exchange and accounting, which was accomplished without the slightest loss either to the state trading organs and co-operatives or the workers. The peasants’ settlements of their tax-in-kind obligations to the state were predominantly carried out without the use of money, repayments of Gosbank loans were also mostly non-monetary, and so also to a considerable extent were the peasants’ payments to the co-operatives for goods received on credit. Furthermore, thanks to the development of the credit system, monetary [2] settlements declined even within the non-socialized part of the economy. For these reasons, the demand for money continually grew less. Whereas it had previously served the whole commodity-circulation of the country, both within and without the state sector, it was now completely ousted from the sphere of settlements within the state sector and to a very large extent from that of exchange between the state and non-socialized production. The only field which remained to it was the free market in the true sense of the word, and the volume of the free market shrank continually, owing to the increasing role of socialized production in the country’s economy. The sphere of settlements in money contracted still further when all enterprises, not only state and co-operative enterprises but also private ones (except small ones), were compelled to open a current account at Gosbank, the Bank of Trade and Industry or other credit institutions connected with them. Thus, Gosbank and the other credit organs were gradually turned not only into collectors of spare resources, the country’s exchequer of surplus capital, but also into the central accounts office of the entire socialist economy, not excluding a section of the enterprises in the non-socialized sector.

What role did money play now?

For the workers who received in money the difference between their purchases and their monthly wage, this money meant means of buying something elsewhere than in the co-operative store, that is, for freer choice on the free market. For state enterprises it was the means of settlement between themselves, with the co-operatives and with the peasants, that is, money was a means of payment. In so far as these payments did not mutually cancel each other out, what was left over served as a fund for purchases on the free market, which in its turn made purchases from the state enterprises. Here money played the role of means of circulation between two economic systems. Was money a means of accumulation? It was, but under the credit system, when the country’s entire accumulation normally flowed into the banks, this money was then put into circulation by the banks, and by being paid into the bank it merely served as evidence of a certain share of the national income. What, finally, was the position with that very important function of money in commodity economy, its role as a measure of value? As soon as a large part of the country’s production was produced in the socialist sector, managed by planning organs, as soon as it was no longer the market that controlled the state economy but the state economy that began to control the market, which now operated only as a corrective to the planned economy; when, especially, it was no longer the market that determined prices, through the spontaneous resultant of supply and demand, but prices were determined for the market – from then onward the role of money as the means of measuring value gradually began to wither away. Society no longer needed to go a long way round to determine what lay at the bases of value, that is, to determine the amount of socially necessary labour expended on a particular mass product. This magnitude could be determined directly, by calculations carried out in the central accounting and statistical offices of the dominant sector of the economy, and then expressed in money. Money under these conditions retrained a technically necessary means of expressing value in a generally-understandable way. What it had to express in the language of its figures was dictated to it by the accounts and statistics of socialist economy. In other words, money retained those functions which were needed for planned economy. Basically, it was little by little transformed into either a form of evidence of a certain share of the national income. that is, in the given instance, into coupons, or a form of evidence of receipt of a certain amount of raw material and instruments of production, that is, into a licence-ticket or voucher of planned economy. It retained its former role only on the free market of the non-socialized sector, that is, the sector of the economy which no longer played an independent role in the country’s economy. This process took place in a natural way, without upheavals, unnoticeably, as the ‘commodity socialist’ economic system under the dictatorship of the proletariat was unnoticeably transformed into a ‘socialist commodity’ system, and the latter into a purely socialist system.

What happened to the money thus thrown out of employment? By the laws of monetary circulation, should not the processes I have described have led to a regular annual decline in its value?

In fact this phenomenon was observed. The value of the stable rouble now began to fall, inside the country, not be-cause of disorder in the economy but because of the latter’s progressive development. There were two ways of avoiding this devaluation, which was very unfavourable for economic development: either to reduce the amount of money in the country year by year by withdrawing it from circulation and destroying it (or keeping it in the strong-rooms of the bank for posterity’s benefit); or to regulate the process by annual exchange of all the existing money in the country for fresh money, with a reduction in the face value – say, ten old roubles for nine new ones. The government was strong enough both politically and economically to adopt the second of these measures, which from the narrowly financial point of view was the more advantageous. But this was too unwieldy a method, and one which would have to be repeated nearly every year. The state preferred to proceed by the first method, that is, by deflation, floating a number of internal loans for this purpose. Thanks to these, the quantity of money in the country was adapted to the needs of circulation, or in other words it was reduced year by year. Money not only lost its former economic functions, being gradually transformed into coupons, but also it withered away physically.

Now a few words about the fate of small-scale industry in this period. In the days of the breakdown of large-scale industry the role of craft and artisan industry increased enormously throughout the economy. Whereas before the war the net output of handicraftsmen and artisans was equivalent in value to one third or one quarter of the value of capitalist industry’s output, luring the revolution this output became almost equal to that of state industry. When large-scale industry began to be restored, and its output attained the pre-war level, the role of craft and artisan industry began to decline rapidly. This decline became still more marked when the state set itself, as one of its next tasks in the sphere of production, to kill off those branches of craft and artisan industry in which petty production could long since have been replaced by machine production and which survived in Russia only because pre-war capitalism barbarously exploited labour-power and had no interest, given the low level of wages, in introducing machinery in a number of branches. At the same time, in the areas where power stations were in operation, the retention of certain kinds of handicraft work had become obviously senseless from the economic standpoint. In this way the restoration of industry led not only to the ousting of petty production from those spheres which it had penetrated, thanks to the temporary breakdown of large-scale industry, but also from those where it had been established before the war.

Handicraft proved, however, to be very tenacious of life. In the first place, the fact that the improvement of technique in agriculture freed part of the peasant’s labour-time encouraged him to take up handicraft work as an auxiliary and secondary job. Already in the War Communism period, collective work in farming communes and artels, especially the liberation of women’s labour in the kitchen, had led to the commune-members having more time free from agricultural work than the peasants of the neighbouring villages. This free time the commune-members usually employed in various sideline jobs. Finally, owing to the seasonal character of farm work, the peasants had plenty of free time in winter, which they usually spent in hand-weaving and a number of artisan occupations. All these factors delayed the abolition of the survivals of the Middle Ages in small-scale industry.

In conclusion, it was also important that when large-scale industry replaced handicraft it could not always absorb the surplus of labour-power thus created. If, say, owing to machine production, 1,000 workers on machines began to do the work of 5,000 craftsmen, the remaining 4,000 had to be found employment somewhere or other in large-scale industry. With very rapid development of industry, this placing of the labour-power ousted from handicraft work proceeded more or less normally. But when there was a slowing-down in the development of large-scale industry some of the ousted handicraftsmen were left without work, which usually led the handicraft section of industry to try to compete with large-scale industry by ferocious exploitation of the craftsman’s labour-power and that of his family, through reducing their personal consumption to the minimum.

But we have seen already that the rapid progress of Soviet industry was hindered at a certain stage by the backwardness of agriculture. Industry suffered from the existence of this ‘Achilles’ heel’, the stagnation of agriculture, also on the front of struggle against handicraft industry. Here all roads led to Rome, that is, to the proletarian revolution in the West.

* * *

My brief exposition of Russia’s economic development may have given you the illusion that the entire process of the struggle of socialism against capitalist forms and all the forms of the past which surrounded the socialist island of the proletarian economy in a peasant country, proceeded easily and painlessly, apart from the moment of the outbreak of the NEP counter-revolution. Such a notion would be mistaken. It is enough merely to study the Soviet press of that period, to study the reports, debates and resolutions of Party and Soviet congresses, to appreciate how many dangers lay in wait for the proletarian dictatorship at every step. True, our grandfathers exaggerated some of these dangers, or else noticed belatedly those which really had existed. But there were dangers, and a fierce struggle was waged against them. The proletarian power experienced several critical moments in its existence. These moments were the period of the Brest peace; July and August 1918, when the white-guard forces carne very close to victory and the Red Army had only just begun to be built; the period of the greatest successes of Yudenich and Denikin; the moment of the Kronstadt rising. The transition to the new economic policy averted the danger of petty-bourgeois counter-revolution, which was all the more serious because part of the town workers, under conditions of famine and want, were then strongly influenced by peasant moods. The first years of NEP were years of fairly peaceful existence for the Soviet state. Although state industry was in a ruinous condition, and the proletariat to a considerable degree declassed, on the other hand capitalism had not yet recovered its strength and was only just entering the epoch of ‘secondary accumulation’. Danger began at the moment when the development of capitalist relations began to progress rapidly and capitalism might have outstripped socialist construction economically. This danger was especially strongly felt in the first half of the NEP decade. The working class and the Communist Party had to rely in their struggle against capitalism not so much on their economic base as on means of non-economic pressure. To bring this pressure to hear it was necessary to have all the proletarian and Communist forces clenched in one fist, sharply counterposing itself, ideologically and organizationally, to the disruptive bourgeois and petty-bourgeois influences. This was extremely difficult; and the task itself contained an inner contradiction, because large-scale industry could economically subordinate petty production and capitalist relations not through economic isolation from them but only through becoming interlocked with them. This was a moment of great danger resulting from the cultural superiority of the conquered class over its conqueror. Socialism could not carry through its economic construction without the aid of bourgeois elements, because the task of construction itself called for a higher level of culture than had been attained by the proletariat of that epoch. The bourgeois specialists were an even greater danger at this time than in the period of War Communism, because their bourgeois habits and their psychology of hostility to the new social order were nourished from the inexhaustible sources of those very capitalist relations which socialism had to utilize to develop the productive forces of the country. The most dangerous and critical years for the proletarian power were precisely those years when large-scale industry was not yet completely on its feet and the working class had not yet produced from its own ranks a sufficient cadre of advanced people, in all fields of economic construction, to take over ‘from the bourgeois specialists. This was the period of maximum graft, stealing of state property, scoffing by the bourgeois elements at the failures of state economy; this was the period when even a section of the Communist Party was in danger of being demoralized. The Party began a vigorous fight to raise the cultural level of the working class and conquer higher education and science for the working class. The higher educational institutions gradually, as a result of these efforts, became really proletarian. At the same time, the Party undertook a fresh purge, the purpose of which was to get rid of those elements which were being demoralized under the influence of NEP, which had become ‘moderate’ in their attitude to the bourgeoisie and which had essentially turned into agents of the enemy within the commanding positions of the proletarian dictatorship.

This period also saw the struggle for the new Soviet man, for the regeneration of the Russian worker as an actual national type. Soviet industry could not make rapid progress so long as there had not been vanquished, in the working class itself, not merely ignorance and lack of culture but also laziness, lack of conscientiousness in work, and slovenliness. Soviet industry could not triumph without the introduction into it of a new scientific organization of labour and the formation of a type of worker who would correspond to the higher type of industry.

The history I am narrating is not the history of culture in the Soviet period and I cannot spend time on all these problems our grandfathers fought hard to solve. They solved these problems with honour. But in the field of economic and cultural struggle too there was, consequently, a moment when the existence of the proletarian regime in Russia in the NEP period seemed in jeopardy. The victory of socialism became clear only when the restoration of large-scale industry began to outstrip the development of capitalist relations, when in the cultural field the working class began to catch up with the class that had been overthrown, and when at the same time in Western Europe the economic bankruptcy of capitalism was revealed and a new wave of proletarian revolution began.

In my next lecture I will speak about the proletarian revolution in Western Europe.


1. Though the tax in kind was formally abolished after the stabilization of the currency, and the peasants were allowed to pay their tax in money, nevertheless it went on being paid for the most part in kind, as the peasants tried to avoid resorting to middlemen, and it was advantageous to the state to receive the tax-payments in kind, so as to increase its stock of grain to sell abroad.

2. The original says ‘non-monetary’ but this is clearly an error. [Trans.]

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Last updated on 29.1.2009