Comparison Merchant vs Aristocratic Wealth

[David_Pritchard]

By Andrey D. Ukhov

Russian Monetary System. Historical Overview.

This section contains a brief historical overview of the development of Russian monetary system. Here you can read about monetary policies of several Russian Tsars, about monetary units - paper rubles, silver rubles, and gold rubles. Period Covered: From 1801 until 1917.

Alexander I (1801 - 1825)

During his first years on the throne Tsar Alexander I initiated several reforms. In 1802 the existing Commissions (Kollegii), established by Peter the Great as centralized governing bodies, were transformed into Ministries. The Ministry of Finance was among the new Ministries. The first Finance Minister was Count A.V. Vasiliev. Before this appointment he occupied the post of the State Treasurer. Beginning from December 4, 1796 State Treasurer was the highest post in governing finances of the State. Before the post of State Treasurer was established in 1796, Attorney General headed State financial affairs. Count Vasiliev was Finance Minister from September 8, 1802 until August 15, 1807 when he was replaced by F.A. Golubtzov.

During the wars with Turkey (1806 - 1812) and with Sweden (1808 - 1809) Russia had enormous military expenses. Again, printing press was used to ''create'' money. Towards the end of the year 1810 the amount of paper rubles in circulation equalled 579,373,880. One paper ruble was worth merely 0.254 silver rubles. The official publication of the Finance Ministry describes the situation as follows:

''The prices of goods increased drastically, economic relationships lost their rigidity, credit transactions were difficult, production activities gained speculative nature; the economy of the whole country experienced great shock. The State Treasury was also experiencing great losses, since revenues were received in paper money that lost value.''

Once again the government was initiating changes aimed at monetary stabilization. The reforms were based on the work created in 1809 by M.M. Speransky with assistance from Count N.S. Mordvinov and entitled ''Financial Plan'' (''Plan Finansov''). According to the ''Financial Plan'', all previously issued paper money were to be recalled from circulation and destroyed. It was planned to establish a new bank for currency emissions. This bank would have sufficient reserves of copper and silver coins to guarantee the exchange of the newly issued banknotes.

In 1810 an attempt was maid to issue internal bonds in the amount of 100 million paper rubles. These bonds will be described in more detail in due course. Here we will note that the placement of the bonds was not successful - only 3.2 million rubles worth of bonds were sold. At the time, investors preferred bank demand deposits that paid 5% annual interest and could have been withdrawn upon the first request. The banks used the funds to give mortgages to landowners and also provided credit to the State Treasury at the rate of 6% per annum. For the government such loans were easier and quicker to arrange than placement of bonds. Also, although these loans had repayment dates, they were often re-negotiated at maturity and repayment of the principal was postponed.

When the war with Napoleon began in 1812, the government faced large military expenses and could not continue the reforms. Instead of recalling paper money from circulation, it was decided to turn it into legal tender. The decree of April 9, 1812 declared paper money as legal tender and established mandatory acceptance of paper rubles for all payments. All contracts could be made in paper rubles or in silver rubles. There was no fixed exchange rate between these two monetary units; the exchange rate was determined by banks and through exchange trading. In the meantime, to finance the war, the government continued to print paper rubles. In 1815, after its glorious victory over the armies of Napoleon, Russia utilized its soaring political prestige to restructure its foreign debt. After this task was successfully accomplished, the system of internal credit was reorganized. The main feature of these reforms, implemented by the Finance Minister D. A. Gur'ev, was the issuance of perpetual government bonds. These securities will be discussed in detail later. In addition to the perpetuities, long-term bonds in the amount of 100 million paper rubles were issued. Together these debt issues allowed to recall approximately 302 million paper rubles from circulation. On one hand, Russian government pursued its goals of recalling paper rubles from circulation; on the other - it readily printed paper rubles again when it was necessary to cover the deficit. In 1818 there were 836 million paper rubles in circulation, in comparison with 581.4 million at the end of 1811. In 1818 paper rubles was at its low, one paper ruble being worth only 0.20 silver rubles.

Part 1

[David_Pritchard]

By Andrey D. Ukhov
 
Russian Monetary System. Historical Overview. (continued)

Several foreign loans were arranged for in 1820 - 1822. International and internal loans provided the necessary funds and the amount of paper money in circulation was reduced. During the period from 1818 through 1822 the total amount of paper money decreased by 229.3 million rubles, or 28 percent. The exchange rate of paper to silver rubles, however, changed only from 0.25 to 0.264 silver rubles for one paper ruble. The policy objective was to strengthen the paper ruble by decreasing the amount in circulation. The exchange rate did not react as it was anticipated and in 1822 its was decided to stop recalling paper money and the amount of paper rubles in the country remained unchanged until the next monetary reform in 1839 - 1843. In 1825 there were 595 million rubles of paper currency in the country.

Nicholas I (1825 - 1855)

The new Emperor kept the previous Finance Minister, E.F. Kankrin. Kankrin was true to his policy of not covering budget deficits by using the printing press. Instead, the taxes were collected with heretofore unknown energy. Three loans were obtained abroad, totalling 200 million rubles. The money was used to cover new large military expenses caused by the Persian War (1826 - 1828), war with Turkey (1828 - 1829) and the suppression of Polish rebellion (1830 - 1831). The government also relied on another, not widely publicized, source of loans, - banks. During the period 1828 - 1842 the government borrowed 427.1 million rubles from the banks. Often these were relatively informal loans without specified repayment date. Of course, there was a hidden danger. In the case of a sudden ''run on the banks'', when depositors simultaneously ask for their money, the banks would face liquidity problems and the government would be forced to rely on the printing press to pay the banks back so that the depositors could receive their money. These risks were understood by the officials and borrowing from the banks, although tempting, was used more as an emergency measure.

Although the policy of decreasing the amount of paper money in circulation was no longer pursued after 1823, the value of paper rubles increased in the years that followed. This can be attributed to the higher demand for money caused by economic growth. The mining of gold and silver also increased, and the metal was used to supply new coins.

New wave of reorganizations came in July of 1839 when government issued a new decree, ''On Organization of Financial System''. According to this document beginning January 1, 1840 all contracts in Russia were to be written using silver rubles only. Silver ruble with fixed and specified silver content was declared the main monetary and payment unit. Paper money were to become supplementary payment instrument. The exchange rate between paper rubles and silver rubles was fixed at 3.5 paper rubles per one silver ruble, - the rate chosen to be close to the market rate on the date when the government decree was issued. All transactions with the government, including tariffs and taxes, were to be set in silver rubles, but payments could be made in paper rubles at the fixed exchange rate.

There was another important aspect of these reforms. The government set the long-term goal of building trust in paper money. As the first step, the government established Deposit Branch of the State Commercial Bank. The Deposit Branch accepted deposits of silver coins and issued Certificates for the deposited amount. The decree of July 1, 1839 announced that these Certificates are legal tender and can be used for all payments. The value of these Certificates was set equal to the value of silver ruble. These instruments were created so that people gain trust in paper money fully backed up by silver. The opinion was that this would help to make the next step. The next step was to exchange all paper money in circulation by the newly issued currency. This new issue of paper rubles was to be partially guaranteed by the silver reserves. The silver Certificates were popular payment instruments. Nicholas I wrote in 1841 that silver Certificates were issued in order to make large transactions in silver rubles more convenient, without the need of physical delivery of heavy coins. He also wrote that because all Certificates were freely exchangeable into silver and there never were more Certificates issued than actual deposits accumulated, people welcomed this new method of payment and almost 50 million rubles worth of Certificates were in circulation by 1841. The government realized that the trust in Certificates was based on them being fully backed up by silver reserves and this principle remained unchanged.

The next step of the reform followed in June of 1843 when it was announced that all existing paper money will be exchanged for newly issued paper rubles. First, the issue of new silver Certificates was terminated. The new paper rubles were issued. Old paper rubles were exchanged for new ones at the exchange rate of 3.5 for one. This exchange was completed in April 1851, with only 3.3 million of old rubles not presented for exchange. All silver Certificates were to be exchanged into new paper rubles one for one until March 1, 1853. The Ministry of Finance established special fund of silver coins to partially exchange new paper currency into coins.

Part 2

[David_Pritchard]

By Andrey D. Ukhov  
  
Russian Monetary System. Historical Overview. (continued)

This prudent monetary spirit lasted until the Crimean War began in 1853 (the war lasted until 1856). On January 10, 1855 Tsar Nicholas I issued a decree allowing the State Treasury to print paper rubles in order to cover the expenses. The decree stated that three years after the end of the war, and if the situation permits, even sooner, the government would start recalling these additional paper money from circulation. In the years 1855 - 1856 the Treasury issued 378.8 million rubles worth of paper currency. By January 1, 1858 there were 735.3 million paper rubles in circulation. Although the official exchange rate between paper and silver rubles was fixed, because of large emissions paper rubles lost their popularity and were more and more frequently presented to the government for exchange into silver coins. In 1858 the exchange of paper money into silver was abolished because of insufficient silver reserves. Paper rubles continued to fall. Thus, the monetary system conceived and created through the reforms of 1839 - 1843 ceased to exist. Inflation was high. The last years of the reign of Nicholas I\ did not pass as the years of stable financial system or the years of peaceful economic growth.

Alexander II (1855 - 1881)

New Russian Tsar Alexander II, who held the throne from 1855 until 1881 welcomed political and economic reforms. Perhaps the loss in the Crimean War helped to realize that Russian economy is developing slowly and that the reforms are in order. The critics blamed the economic system that was based on peasant slavery. The reforms included liberalization of foreign trade regulations, foreign investment, and in 1861 - a drastic measure - the system of peasant slavery (serfs) was abolished and a labor market was created. When meeting with representatives of Moscow nobility in 1856 the Sovereign said that it is much better to lift the system of peasant slavery from above than to wait until it would be lifted from below. When the peasants were freed they were not given any land, the existing landlords preserved their ownership. Therefore, new labor relationships were developed and the labor market emerged. Concurrently with the abolishment of slavery existing limitations on the private economic activities were lifted. These measures provided conditions for the development of private enterprise and public companies were created in different industries.

Until mid-1850's state banks had monopoly over banking business. These banks raised capital in the form of demand deposits and gave loans to the government and long-term loans to nobility. Securities markets were dominated by government bonds. (A small number of shares issued by the insurance companies was traded.)

Economic and political reforms stimulated the development of private enterprise, thereby fueling the growth of capital markets. This was the period when state-run banks lost large amounts of deposits to the competing private stocks and bonds that promised higher returns. Large withdrawals pushed existing banks to the edge of insolvency, and in 1860 all state banks were abolished and their assets and liabilities were assumed by the newly established State Bank of Russian Empire.

During this time Russian government began to feel competition on the capital markets. It could no longer easily borrow from the state banks. Securities issued by new public companies were available to investors. Interestingly, the printing press was only modestly used: 43 million of new rubles were released into circulation in 1865, and 59.5 million in 1866. Still, paper rubles depreciated: one paper ruble was worth 0.834 silver rubles in 1864, 0.816 in 1865, and 0.764 in 1866. Competitive capital markets forced the government to look for innovative solutions to finance budget deficit. One solution - State Lottery Bonds - issued in 1864 and 1866 will be given detailed treatment in the one of the later sections.

Economic growth attained by Russia in 1860's and 1870's gave a chance to stabilize monetary system and to successfully fight inflation. The war with Turkey (1877 - 1878), however, placed new spending requirements and postponed these hopes into the distant future. To cover budget deficit the government obtained foreign loans, and once again... printed money. The paper ruble fell again - it was worth 0.648 gold rubles in January 1880, compared to 0.76 gold rubles in January 1875. By January 1881 there were 1,133.5 million paper rubles in circulation.

Alexander III (1881 - 1894)

The post of the Finance Minister was occupied by N.Ch. Bunge from May 1881 until January 1887. He planned to begin another currency reform in order to build stable national currency. Bunge obtained Doctorate degree in 1852, his dissertation carried the title ''The Theory of Credit''. Prior to becoming Minister of Finance he was Professor at Kiev University and authored several books. Bunge believed in market economy open for foreign trade. He realized that high inflation makes it difficult for the private and public sectors to obtain loans. New loans were especially important to build the infrastructure, including railroads, capable of servicing the needs of the emerging industrial economy.

Part 3

[David_Pritchard]

By Andrey D. Ukhov  
  
Russian Monetary System. Historical Overview. (continued)  

Before Bunge, the post of Finance Minister was briefly occupied by A.A. Abaza (October 1880 - May 1881). Count Paul Vassili in his memoirs writes about Mr. Abaza:

"M. Abaza for some time was a very considerable personage in St. Petersburg society. He was one of the intimate friends of Grand Duchess Helene and of Baroness Editha Rhaden, and it was their influence that brought him before the notice of Alexander II. He was supposed to be a great authority on all financial matters, and twice had the portfolio of that department entrusted to his care. He was one of those who had submitted to the influence of the Princess Dolgorouky; and when she became the Sovereign's morganatic wife and received the title of Princess Yourievsky, Abaza tried to induce her to persuade the Emperor of the necessity of granting a Constitution to the nation. Ryssakoff's bomb put an end to those dreams in the most shocking and unexpected manner. With the death of Alexander II the duties of his Ministers came to an end. His successor never forgave M. Abaza, not only his Liberal principles, but also his friendship with the Princess Yourievsky; and though he continued to be a member of the Council of State, and presided over many commissions, though he was granted orders and dignities, and even often consulted in grave matters of State, yet the political career of M. Abaza was practically ended on that eventful March 1st, 1881. When he died, many years later, leaving an enormous fortune, the event was noticed by only the usual obituary in the newspapers, and a remark made by Alexander III., who, having been told that the Princess Ouroussoff, daughter and heiress of the deceased statesman, inherited seven millions, said, `Only that! I thought he had stolen much more!'''

It was decided not to pursue previously developed mechanism of recalling paper rubles from circulation by issuing internal bonds. Instead, the government decided to stop new currency emissions, to accumulate gold reserves, and then to institute free exchange of paper rubles into gold. In the years 1881 - 1897 the gold reserves increased from 298.4 million rubles to 1,095.5 million. The gold reserves increased through extensive gold mining operations - Russia mined 42,202 metric tons of gold annually, which equalled 17.2% of world production. Another source of gold was from exports, mainly of wheat. Beginning from 1882 Russian exports exceeded imports. Russian economy experienced healthy growth during this peaceful time. European economies also followed the path of economic growth and the conditions were favorable for issuing foreign debt. This was the time when Gold Loans were issued. These loans were denominated in several different currencies, including French francs, British pounds, German marks, and United States dollars. The face value of the bond, in each currency, was printed on the certificate. The exchange rate between the currencies was established based on their respective gold content. The bonds could also circulate in Russia and in this case the face value was stated in gold rubles, hence the name - Gold Loans.

What were ''gold rubles''? After all, at this time the official monetary unit in Russia was silver ruble. Nevertheless, the money in circulation consisted of gold, silver, and copper coins and paper banknotes. There were two gold coins: 10 ruble coin (imperial) and 5 ruble coin (poluimperial). As we know already, there was exchange rate between coins and paper rubles. At times the exchange rate was officially fixed, at times it was floating. In the second half of the 19th century, the price of silver relative to the price of gold fell, and throughout Europe gold emerged as a major measure of value. Until 1895 contracts could not be written in gold rubles, and the only legal operations in gold rubles were the ones that involved Gold Loans. For these transactions, golden ruble standard was set as 1/10 of the ten-ruble gold coin. The standard also specified the weight and content of pure gold in the gold ruble. In the years 1889 - 1896 the government succeeded in placing several issues of Gold Loans. These bonds were successfully sold and helped to increase gold reserves. After the monetary reform of 1895-1897 paper rubles became freely exchangeable into gold, and Russian ruble became freely convertible currency. Since now paper rubles were freely convertible into precious coins, the system of ''two currencies'' - paper and silver rubles - was no longer in existence.

Although monetary policy during the term of Alexander III can be characterized as conservative one, this is not to say that the idea of using the money printing press was abandoned altogether. For example, during the years 1891 - 1892, new emission of paper rubles stood at 125 million.

Nicholas II (1894 - 1917)

Prudent monetary policies of the Ministers of Alexander III - Bunge, Vyshnegradsky, and S.Yu. Witte - resulted in increased gold reserves and smaller budget deficits. The ground was set for Minister Witte to begin and carry through the desired monetary reform. The objective was to establish one standard currency - gold ruble. The reform had several stages. As it was described earlier, gold coins were in circulation, but legally all contracts had to be written using silver ruble as the measure of value.

Part 4

[David_Pritchard]

By Andrey D. Ukhov  
    
Russian Monetary System. Historical Overview. (continued)  

The first step of the reforms came in 1895 when it was allowed to write contracts based on gold. The value of 5 ruble gold coin (poluimperial) was fixed at 7.50 rubles, and the value of 10 ruble gold coin (imperial) was set at 15 rubles. As of May 25, 1895 State Bank was allowed to freely exchange paper rubles into gold, and vice versa, at 7.50 paper rubles per poluimperial and 15 paper rubles per imperial, - the rate fixed by the Finance Ministry. On July 20, 1895 State Bank was allowed to accept deposits in gold rubles. Thus, when one imperial, a gold coin with stated value of 10 rubles, was accepted for deposit the account was credited in the amount of 15 paper rubles.

On January 3, 1897 it was announced that 1.5 paper rubles equalled one gold ruble. Also, in 1897, a decree was issued ordering production of gold coin with stated face value of 5 rubles, containing 1/3 of the gold of imperial. Another new gold coin, with the stated face of 10 rubles, was issued in December 1898.

One of the concluding steps of the reforms was taken in August 1897, with the adoption of the new law that regulated the issuance of paper rubles, and stated the principles of exchange of paper money into gold rubles. In accordance with this law State Bank was allowed to keep in circulation up to 600 million rubles with 50% of the amount being collateralized by gold reserves, and 50% being collateralized by commercial obligations (held by the government). If the amount of paper rubles in circulation were to exceed 600 million, every paper ruble was to be fully backed up by gold reserves. One imperial coin (with the stricken face value of 15 rubles) served as full collateral for 15 paper rubles. Finally, the law of November 14, 1897 introduced unlimited exchange of paper rubles into gold, and paper rubles became official monetary unit, just as the gold ruble was.

This reform created stable currency unit in the country. The stability of the new currency attracted foreign investors, who now viewed investments into Russia as less risky.

During the years 1900 - 1903 Russian economy experienced deep depression. Budget deficit grew due to the expenses of the Russian-Japanese war (1904 - 1905). The political situation was also unstable with strong revolutionary movement of 1905 - 1906. The existence of Russian Monarchy was threatened. During this time, however, the government was able to avoid printing paper currency to cover the deficit by arranging for several large domestic and international loans. There was a brief period of recovery in 1906 - 1907, but it was not until 1910 when the economy started to grow again. The years 1910 - 1913 were the years of spectacular performance of the economy. Several years in a row of good harvests brought large export revenues. Industrial production was increasing. Government revenues also increased, which, for the first time in many years, allowed to pay back some of the outstanding debt.

The period of peaceful economic development lasted until July 1914, when Russia entered World War I. Military expenses were enormous and immediately caused budget deficit. In 1915 budget deficit stood at 8,561 million rubles; the same year military spending equalled 8,620 million. In 1916 these figures were 13,767 million and 14,573 million, respectively. The government frequently issued bonds to finance the deficit. War Loans (War Bonds) were issued in 1914, 1915, and 1916.

Then came the law of July 27, 1914. This law terminated the exchange of paper banknotes into gold coins. There were several other major changes. Prior to this law, State Bank was allowed to issue 300 million paper rubles not backed up by gold reserves. The new law increased this amount by 1.2 billion, for the total of 1,500 million. The law also gave the right to the State Treasury to sell short-term 5% Treasury bonds to the State Bank. The Bank was put under obligation to purchase these securities. To cover these purchases the bank had to issue paper rubles. This system effectively implied the issuance of paper money by the State Bank - the currency that was no longer exchangeable into gold. The new law marked the end of the monetary system based on gold standard. Once again, inflation began to increase.

Russian Imperial government needed to expand its borrowing through the State Bank. Soon, on March 17, 1915 the State bank was given permission to issue paper rubles in the total amount of 2.5 billion, - the ceiling was increased. Next year, by the decree of August 29, 1916 the ceiling was increased again, from 2.5 billion to 5.5 billion rubles in paper currency not backed up by gold. In December 1916 the ceiling was raised once more, to 6.5 billion rubles. All these issues of paper rubles by the State bank were backed up by the obligations of the State Treasury.

To further extend the amount of paper rubles issued, Imperial government obtained loans from the British Treasury. These loans consisted of 2 billion rubles worth of gold, placed on reserve outside Russia. The State bank was allowed to issue paper currency backed up by this ''gold abroad''. Domestic gold reserves declined during the war years from 1,603 million rubles as of July 16, 1914 to 1,474 million rubles as of January 1, 1917.

Part 5

[David_Pritchard]

By Andrey D. Ukhov  ,  Ph.D. student in Financial Economics at Yale University.
    
Russian Monetary System. Historical Overview. (continued)  

 The amount of paper currency in circulation was increasing. The total amounts of paper rubles is circulation are given in the table below.

Date                     Paper rubles in circulation
 
January 1, 1914     1,633 million
1915                     2,947 million
1916                     5,617 million
January 1, 1917     9,103 million

Overall, 29% of war expenses incurred from the beginning of the war until the February Revolution of 1917, were financed by issuing paper currency. Printing money caused inflation. Prices were rising once again. As inflation increased, gold, silver, and even copper coins began disappearing from circulation, becoming a way for the population to store value. It is estimated that in February of 1917, before the February Revolution, the purchasing power of one paper ruble equalled that of 0.26 - 0.27 rubles before the war began.

Historians research and write about the reasons for the success, and subsequent failure, of the February Revolution of 1917 in Russia. Any reasonably detailed treatment of this event is clearly beyond the scope of the present chapter. One can only name military losses, difficult economic and social conditions in the country, starvation, and declining standard of living as factors causing protest. On February 17, 1917 military units in Petrograd (St. Petersburg) took the side with angry masses. Several military leaders and Ministers were arrested. Russian Tsar Nicholas II signed His resignation. This was the end of the reign of Romanov dynasty. Russian Imperial Government ceased to exist. Provisional government was created.

Provisional Government Vremennoe Pravitel'stvo

Immediately after the fall of the Russian Empire, the country was briefly entitled Free Russia (Svobodnaya Rossiya). On September 1, 1917 the Provisional Government announced the creation of Russian Republic. Provisional government decided to continue the war. The budget deficit was already enormous, and the need for additional large military expenses made the matters even worse. To fight inflation and to raise budget revenues, several measures were taken. One was the issuance of the internal loan, ''The Freedom Loan'', as it was officially called. Other measures included the introduction of state monopoly on the sales of sugar, tea, matches, tobacco, and other consumer products. The ''Freedom Loan'' of 1917 was sold, but the proceeds were not sufficient to cover the deficit. The Provisional Government actively used the printing press. On March 4, 1917 special decree of the Provisional Government raised the ceiling on paper currency emissions to 8.5 billion rubles. Several other decrees followed (May 15, July 11, September 7, October 6) and the ceiling war raised to 16.5 billion rubles. During this period, paper money of old type was printed, as well as new banknotes with face value 250 and 1,000 rubles.

The issue of paper money was actively used by the Provisional Government (headed by A.F. Kerenskii). The decree of August 23, 1917 announced the issuance of 20 ruble and 40 ruble banknotes. The figures for the volume of new currency emissions during 1917 are given in the following table.

Month          Currency Emission
March            1,123.6 million rubles
April                 476.0 million rubles
May                  738.5 million rubles
June                 874.8 million rubles
July               1,080.0 million rubles
August          1,286.6 million rubles
September     1,954.4 million rubles
October         1,999.5 million rubles

Total            9,533.4 million rubles

The total amount of paper currency in circulation equalled 19,574.7 million rubles as of November 1, 1917. During the eight months that the Provisional Government ruled over Russia, it issued more paper rubles than the Imperial Government of Nicholas II during 32 months of the war. During the time of Provisional Government inflation was enormous - 400%. By the time of October Revolution of 1917, the prices of bread were up 16 times, potatoes - 20 times, sugar - 27 times, meat - 5 times, when compared to 1914.

This certainly was a period of hyperinflation. The prices were rising so quickly that there was constant demand for banknotes of high denomination. In August and September of 1917 the demand for currency was so high that the Provisional Government could hardly satisfy it through the existing capacity of the State Banknote Company. Short-term bonds issued by the State Treasury of the Imperial Government circulated as money. In September of 1917 the Provisional Government allowed coupons of government bonds, the certificates of the War Loans, and the certificates of the ''Freedom Loan'' to circulate as money.

On October 24-25, 1917 the Provisional Government was overthrown. Soviet government was created. This marks the new epoch in Russian monetary system. The epoch that needs to be described and analyzed separately.

Part 6