The First Time in History

IV. The Money Power in Russia

Two years ago when Russia again began to use money and to need a gold basis for purposes of foreign commerce, the State Bank opened with ten million dollars worth of paper roubles, rapidly falling in value. In three months' time, the value of the rouble had dropped to one third. Yet at the end of the year the State Bank had twenty million dollars in gold in its vaults.

It is a romance of the money power in Russia. Unlike most such romances, it is simple to understand, for it takes place openly in the sight of all the people. The ways in which banks control industry, the conflict between financial and industrial capital,--these things which elsewhere are shrouded in the mystery of secret conferences of the big interests, are in Russia matters of public policy, known in the workers' unions, discussed hotly in the press.

For more than a year Russia has been, for all practical business purposes, on a gold basis. The government makes its budget in gold; the industries keep their accounts in gold. The workers are paid on a basis more stable even than gold,--a "commodity rouble" reckoned in terms of the cost of living. The actual cash handed to them is partly in gold value, partly in paper roubles which continue to drop slowly in worth. But all savings, all amounts in hand larger than five dollars, can be kept in stable currency.

I myself saw the gold reserve of the State Bank a year ago. President Scheinmann said I was the first foreigner to see it. The store-rooms were located in the well-lighted first floor of the bank, protected only by iron bars at the windows and the bank guards. The plainly dressed, matter-of-fact clerks broke the seals of the bags at the president's words and poured out heaps of gold coins on the table. I took in my hands bars of gold worth ten thousand dollars each. I saw also high piles of English fivepound notes and smaller piles of American paper money.

"You have made all this gold in one year from paper?" I asked President Scheinmann in wonder.

"Not at all," he answered quickly. "But from the resources of a great nation."

"How did you do it?" I asked. He was quite willing to explain, for his job does not depend on secrecy but on public service.

"We loaned money, for instance, to the Timber Trust. We gave them paper roubles, which they used to pay all their bills in Russia. They exported timber to England. They paid us in English pounds. They paid us not only the loan with interest, but part of their profits. Sometimes as much as half of all they made! The fur industry also has been very profitable, making as much as 200 and 300 per cent. in export trade. On all of these profits the State Bank demanded its share, for making the first loan."

I gasped at this. "No wonder the State Industries call you a robber," I said, "when you make terms like that."

President Scheinmann smiled. "It is a question of public policy. The next Congress of Soviets may decide on a different method. At present we are building up a gold reserve for Russia."

These were the cold, hard tactics of the State Bank. It set out to make all the money it could, and it did not conceal the fact. At the end of the first year it had twenty million dollars in gold; at the end of the second year one hundred and twentyfive million, half in gold and half in negotiable assets as sound as gold. And this was only part of the Bank's success.

In matters of organisation the Bank also started with nothing. Two years and a half ago, when I first went to the Volga, there were no branches of any bank anywhere in the provinces of Russia. The Central Bank in Moscow had no foreign connections. It lacked public confidence, since the State was paying bills either not at all or in worthless paper roubles.

Within a year there were 158 branches of the State Bank throughout the provinces of Russia; there were foreign connections with most of the countries of Europe. Twice in that first year they tried to open an account in an American bank, but the American Government confiscated the money. Only many months after Europe was dealing directly with Russian banks did it become possible to send money between Russia and America.

In January, 1922, the Bank received only 599 drafts from foreign countries, and its connections throughout Russia were so poor that half of these could not be delivered, but were returned to the sender. Within nine months delivery was being made on ninety-seven and one-half per cent. of the drafts, of which some 30,000 had been received.

On these drafts also, the Bank pursued its "robber policy." It demanded ten per cent. of the face value for payment in gold. Or it paid in paper roubles at an "official" exchange rate below the actual value. It built itself up into power at the expense of everyone who did business with it; it was ruthless about it, openly ruthless. It had to make money at once; it could not afford to wait as the usual bank in capitalist countries. For it had no capital at all, nothing but paper roubles. It was getting its capital day by day, out of its business transactions.

Even out of the fall of the rouble the State Bank made money. There is a private semi-legal exchange where men speculate in the sale of dollars and pounds and roubles. Here also the State Bank had its agents, sometimes known, sometimes unknown. No tricks of high finance were alien to it. With its superior knowledge it could unload dollars or pounds to force down the price, and buy in again till it increased its reserve. It could not prevent the rouble from falling, for roubles were being printed for. State needs, uncovered by gold. But the State Bank knew beforehand when the money was to be issued; it knew what transactions were under way in the big industries. It speculated with its knowledge on the Black Exchange; the little private traders who gambled there sometimes lost and sometimes won; the State Bank always won.

So, little by little, it built up its gold reserve. The workers of Russia rejoiced, as the gains were announced in the papers, for it was their gold reserve; it was needed to make their industries stable. When they received a remittance from some friend in America, and had to pay ten per cent. to cash it, they grumbled a little; but their less lucky comrades laughed and told them they owed that much to the building of Russia. And when dollars jumped up and down on the Black Exchange, the workers laughed: "I wonder what the State Bank made on that transaction."

The rise and fall of the dollar caused no such sense of insecurity in Russia as it causes to-day in Germany. For their wages were reckoned in solid values; they were good for so much food and clothing. Their rooms, with light, water and heat, were controlled by the municipal governments with due regard to the condition of the workers. The price of foreign goods in dollars meant little to them, for Russia was not dependent, as Germany is, on food from abroad. The fall of the rouble became, for the Russian people, as the State Bank increased in strength, little more than an indirect tax on the money in people's pockets.

As the gold reserve increased, the Bank began issuing bank-notes. Chervonetz is the name, an ancient Russian word for "gulden." It signifies red gold. These notes have better backing than those of any money system in the world, even better than American Federal Reserve dollars. One-third of their value is covered by gold, one-third by American or English money, and one-third commercial paper on goods in process of export or trade. Only a year ago they began to print these chervonetz; now they have issued one hundred and twenty million dollars worth. The law allows them to issue two hundred and fifty million dollars worth, with a gold backing of only twenty-five per cent.; but so far they have not availed themselves of this privilege, fearing depreciation.

Why, then, does the government of Russia keep on printing paper roubles? Because one hundred and twenty million dollars is not enough cash for the business of Russia. And because the government's yearly bills are bigger than its taxes. To cover this deficit money must still be printed, and this money, which is not backed by gold, goes steadily down. But this money is now only the small change of business. Month by month, the budget of the State comes nearer to an exact balance; month by month, also, the supply of gold money increases. In another year there will probably be only "good money" in Russia. She will be the first country in Europe to go completely on a gold basis.

I asked President Scheinmann what his training was for managing the State Bank of Russia. He laughed. "My job before the war was being a revolutionist.... I am still a revolutionist," he added. "My assistants were formerly bankers and financial experts of the old regime in Russia. They put their financial knowledge at our disposal, for they are naturally interested in seeing any bank where they work prosper. I am personally interested, because as long as we must deal with foreign capitalists, our gold reserve is a source of stability and power."

We went to the dining-room where two thousand bank employees received each afternoon their main meal free. Everyone from president to scrubwomen dined there. "Do the workers in the bank have anything to say about the bank's policy?" I asked.

"All conditions of labour are settled by agreement with the union," he answered. "This diningroom, the organisation of work, the rights of the workers. But the workers of the bank have nothing to say about the financial policy of the bank. That is settled by the workers of the nation."

I went from the bank to a Conference on Industry and Transport, where I saw the other side of the picture. They were denouncing the robber policy of the bank. They were trying to build a united programme for industry. But factory after factory was closing for lack of credits, while the State Bank asked two, three, four per cent. a month for loans.

"It isn't only the amount they ask, but the way they ask it," explained one of the heads in the Department of State Industries. "The control of the bank over industry is very intimate. This control should be in the hands of men who have a policy for rebuilding industry, instead of merely a policy for making a gold reserve. The bank should serve industry, not industry the bank."

It is the old conflict that goes on everywhere in the world between industrial and financial capital. I had heard of it in the difficult columns of financial papers, but it never seemed clear and human till I saw it in Russia, where the heads of business and of banks alike can speak plainly, with cards on the table, since no private interests are at stake. I learned in this conference what the control of the money power in industry really means, in the intimate details of business.

The state-owned industries of Russia had organised a new bank, the Industrial Bank of Russia. Its stock was held by the industries, the railroads and the department of foreign trade. It was to be a bank to serve industry and build up a united programme for state-owned production.

"There is two hundred thousand dollars now in Germany," they gave as an example, "to the credit of the Clothing Industry of Russia. It was deposited by the Amalgamated Clothing Workers of America. Now, we do not touch this money in Berlin, but because it is there, we give permission to the Textile Trust, which is also state-owned, to buy half a million dollars worth of wool in Australia. At the same time we order the Textile Trust, in return for this loan, to begin at once turning over cloth to the Clothing Trust. Thus we build up a united state-owned industry. We can do this because we are the bank where all these trusts do business.

"Suppose the miners in the Donetz Basin want clothing. They cannot pay at once, they must buy on installments. The mines of the Donetz ask us for credit, and we give it to them. Not in the form of paper roubles, but in the form of clothing for their miners. We can do this because we have power over the Clothing Trust which owes us money. We tell the Clothing Trust to send miners overalls to the Donetz and to wait three months for payment. They can afford to do this because we make the Textile Trust give them cloth. The Textile Trust can give them cloth because we allowed them to order raw wool from Australia. And all of this we did on that one deposit of credit in a bank in Berlin.

"We tell the mines of the Donetz that they must give coal to certain factories which produce enamelware cooking-dishes. And we order those factories to send $25,000 worth of cooking-dishes to the great Fur Fair at Irbit, Siberia, to trade for furs. These furs we allow the Fur Trust of the government to have, and they send them abroad and pay our bank back with money in London.

"That is the intimate control which a bank has in industry. The State Industries of Russia think that this control is too intimate to be placed in the Department of Finance, interested in building up a gold reserve. We think the united front of the state-owned industries is more important even than the gold reserve, and that the money power should be in the hands of the Department of State Industries, who will use it to strengthen the relations be tween the various state-owned factories and trusts, till they grow strong and complete and capable of crowding out private capital altogether."

"We must be able to dictate." They both said it openly. Both the State Bank and the State Industries said it. "The money power dictates, and we want that power."

"We must be able to dictate," said the State Bank. "We will impose our will on every separate industry and get from it what we can. Thus we build up a surplus to be used as the Congress of Soviets, the workers' government of Russia, shall desire."

"We must be able to dictate," say the Industries. "For since our goal is a socialist state, we muse strengthen Industry and not the Political Bureaucracy. The State as Organised Industry must flourish and the State as Bureaucracy must wither, till it handles only minor functions of mutual protection. Both administrative and financial power must be concentrated in Industry, which again is under the control of the workers. Thus we shall work out a united state-owned industry, the basis for Socialism."

So they discuss the conflict, hotly and openly. In all these discussions there is one thing that never is suggested. No one thinks of giving the Money Power of Russia into private hands, as it is given in every other country in the world. Which of the various state departments shall hold it, that is the only question.

Every factory, every peasants' co-operative, every mine in Russia is hungry for credit, and the things which credit means in our capitalist world. For a long time to come there will be sharp discussion as to which of many pressing needs shall first be satisfied, which of different state departments shall be first strengthened and given power.

The gold reserve, or the united front of industry,--for which shall the Money Power be used?... "It is," Said Trotsky to me, "a technical question of great importance, but not a question of final principle." .... The workers in their unions, the Communists in their weekly meetings, discuss this question, this conflict between financial and industrial capital, as simply as I have told it in this chapter. They have learned by such open discussion, what the Money Power is, and what intimate control it has over industry and life. They may discuss in which state department it shall be lodged, but they do not dream of putting it, as other nations do, in private or foreign hands.

"Just as Morgan and Rockefeller and Gary, for all their individual differences, can combine to resist demands of the workers," laughed the head of a State trust to me, "so you can be quite sure that if any little scrap arises between Russia and foreign capital, we and Comrade Scheinmann of the State Bank will know how to act together.....If we didn't," he laughed again, "we are both under the same final boss. The Communist Party would make us."