The Russian Review/Volume 1/May 1916/Paper Money in Russia

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Paper Money in Russia.

By Leo Pasvolsky.

There are three ways in which the countries at war succeed in meeting the enormous financial strain to which they are subjected. These are new taxes, long- and short-term loans, and new issues of paper money, usually without sufficient gold basis. All three of these methods are used extensively by the chief belligerents, whose money chests bear the main financial burden. They are a part of the general mobilization of all resources in the possession of these countries, for now everything is turned to account in the supreme effort of both sides to achieve success.

Of the three methods, the most interesting one is that of meeting war expenses by means of new paper money, which is not redeemable at the time of its issue. It is considered by economists the most dangerous way of raising money for government expenses. Despite its apparent ease of practical application, it often leads to such variations in the exchange value of the money unit, especially when it has not behind it a sufficiently large specie fund for immediate conversion, that an over indulgence in it is a very hazardous method indeed for any government to adopt.

Russia is making a very considerable use of this method at the present time. Her expenses in the war are enormous. Up to January 1, 1916, these expenses were calculated at no less than 10,282,000,000 roubles. The tax receipts during the first seventeen months of the War were barely sufficient to cover the current budget requirements, owing to the abolition of the spirits monopoly and the consequent loss of its enormous revenues, as well as to several other causes.[1] The government's credit operations, representing loans on the home, as well as the foreign markets, yielded 6,129,000,000 roubles, or 59.5 per cent of the total war expenses. The rest of the money needed for war operations was obtained by special issues of paper money, the amount issued being equal to 3,232,000,000 roubles.

The Russian agency for the issue of paper money is the State Bank, and the amount of its issue is authorized by the government. It is usually kept well within the limits of the gold reserve, so that ordinarily the money market of Russia presents a condition of considerable stability, even when compared with the countries of Western Europe. The following table shows the condition of the Russian paper money market with reference to the country's gold reserve, as compared with the same conditions in the countries of Western Europe.

Paper Money in circulation in millions of roubles. Gold Reserve in millions of roubles. Per cent of gold reserve to paper money in circulation.
Before the War.
Russia (July 14, 1914) 1,633.0 1,714.0 106.8
Great Britain (July 15, 1914) 277.3 378.8 136.6
France (July 16, 1914) 2,266.8 1,534.9 67.7
Germany (July 15, 1914) 1,007.3 622.1 61.8
After the 1st year of the War.
Russia (June 29, 1915) 3,583.0 1,686.0 47.1
Great Britain (June 24, 1915) 750.0 781.2 104.2
France (June 24, 1915) 4,539.4 1,472.6 32.4
Germany (June 23, 1915) 2,895.0 1,103.0 38.1

Thus, at the end of the first year of the War, England alone was able to maintain the system of redemption of her paper money. The other countries, including Russia, were compelled to discontinue redemption. In the meantime, the War continued and its expenses had to be met. The issue limits of the State Bank were soon reached, and it became imperative to extend them. By the end of 1915, these limits were increased by 3,200,000,000 roubles, so that the report of the State Bank for February 21, 1916, shows the amount of paper money in circulation as 5,775,656,000. During this period, the gold reserve of the bank shows a decrease, as compared with the figure in the table; its amount is 1,621,368,000 roubles.

The Russian money market is not so strongly developed as those of the other belligerents. Hence it is more difficult to float loans within the country with any degree of rapidity that would approach the need, and the burden of these financial operations temporarily falls upon the State Bank. The Bank is thus compelled to allow credit to private banks, requiring from them as security government bonds issued for these loans. By increasing in this way the amount of securities held by it, the Bank is enabled to supply the government with considerable amounts of money, until the sale of government securities upon the open market would bring in sufficient amounts of money for the government to dispense with this method. The most important method, however, by which the State Bank is enabled to assist the government financially is by discounting short-term treasury bonds, which, too, are beginning to secure a good position upon the open market.

As has been already pointed out, the issue limits allowed the State Bank have already been reached, and the Ministry of Finance proposes another extension of the limit. Assuming that the War will last until the end of the present year, it is calculated that the war expenses of the government during the year will reach approximately ten billion roubles. The experience of the past year has shown that about 31 per cent of this amount would have to be obtained by means of new issues of paper money. Taking into consideration the possible temporary expenditures that the Bank might be called upon to make for the needs of the Treasury in the matter of floating new loans, etc., the Ministry proposes that the issue limits of the State Bank be increased by another four billion dollars.

This sum does not take into account the needs of commercial operations that are not connected with the War. Again the experience of the past months has shown that no new issues of paper money will be required for these operations during the current year.

In proposing this measure, the Ministry of Finance is perfectly aware of the fact, of course, that with its introduction the amount of paper money issued by the government will reach almost ten billion roubles, against a gold reserve equal to only a little over one billion six hundred million roubles. It is impossible to foretell how long the War is going to last, and, therefore, it cannot be calculated even approximately, what amount of paper money would have to be issued. So far, the issue limits of paper money have been extended three times, and the new issues have no gold reserve back of them. Yet it is not considered advisable to change at the present time the existing law concerning the size of the gold reserve that must correspond to the paper money in circulation. Moreover, it is evident that the resumption of specie payment and the return of the money circulation to its normal conditions would be possible immediately after the War, only if the general economic and financial conditions in the country are favorable. And these conditions depend upon the rate at which the Russian industrial and commercial life will develop when peace is again restored. This is inseparably connected with the regulation of money circulation, for an increased volume of national business would use up the surplus currency.

In commenting upon the proposal of the Ministry of Finance, the Petrograd "Messenger of Finance" says: "The main problem of Russia's economic policies in the future lies in the possibility of a rapid development of her productive forces. But there is another important problem that stands now before the Ministry of Finance. It is the problem of returning to the Treasury by means of suitable credit operations as large an amount as possible of the paper money now issued, so as to manage to cover the military expenses with as little an amount of new paper money as possible. Taking into consideration the comparatively small capacity of the Russian money market, as compared with the capacities of the richer European markets, a considerable part of the government credit operations has to go through the State Bank, largely in the form of its discounting the short-term term treasury obligations. However, the recent statistics show a noticeable growth of deposits in our savings banks. Thus the accumulation of capital, and consequently an increase in the capacity of the home market, are constantly going on, despite the War, and it is well to begin now the funding of the short-term treasury bonds. Since the withdrawal of these bonds will bring back to the State Bank very large amounts of paper money of recent issues, it would seem that it would be advisable to establish a connection between the issue of these bonds and the paper money circulation. This would mean that the paper money issued would be guaranteed by, and be in exact correspondence with, the short-term treasury bonds, which form the real basis and cause of its issue. In other words, the paper money not covered by a gold reserve would be guaranteed by the short-term bonds, discounted by the State Bank."

Should this proposal be accepted, Russia would be embarking upon a policy of regulation of paper money issue that would be very much similar to the National Bank system of the United States. The analogy is almost perfect, when we recall that the circumstances under which the United States established the National Banks as the banks of issue in the country, are almost identical with those which obtain in Russia to-day. Then, as now, it was a question of providing means of floating government bonds, the proceeds of which were imperatively required in order to cover war expenses. And then, as now, government indebtedness was laid down as the foundation of the country's supply of paper currency.

In embarking upon such a policy, it is more than advisable to bear in mind the story of the American system, its lack of adaptability to the business conditions of the country after the exigency of the war situation is over, and its final rejection in favor of the much more elastic and convenient system, introduced by the Federal Reserve Act. But there seems to be no doubt that, as an expedient, the plan can be utilized to great advantage. Fiat money is a dangerous institution, and often leads to financial disasters. But paper money, guaranteed by government bonds, has a much better chance of preserving the credit of the government above the point to which fiat money is likely to pull it.

There is another feature of the paper money situation which deserves attention. So far, we have considered only the State Bank and its facilities for keeping the exchange value of Russian money from falling too low. We have not taken into account at all the commercial banks of the country, which are also very powerful and have at their disposal means of aiding the preservation of the money standards of the country. The strength of these banks becomes perfectly apparent when we recall that on June 14, 1915, the total amount of deposits held by them was 3,308,200,000 roubles. With these colossal resources at their disposal, the commercial banks of Russia ought to be able to consummate a whole series of financial deals outside of the country, which would tend to raise the exchange value of the Russian money, which unfortunately has now fallen very much below the normal. Moreover, an alliance of the largest commercial banks might be powerful enough to extract from circulation a very considerable amount of the paper money, and thus, by decreasing the amount of paper money in circulation, raise very perceptibly its exchange value.

The unprecedented war, in which Russia is now engaged, requires the utmost straining of all the resources of the country. And the financial resources are not the least important; perhaps, just the contrary. Over a century ago, one of the world's greatest military leaders, Napoleon, recognized the importance of finance in modern wars when he said: "The three things that are most needed in war are money, money, and still more money." The leaders of to-day realize the truth of this aphorism, and are straining their utmost strength to provide this vis vitae of war, without which success is impossible.


  1. See "The Russian Review," February, 1916, p. 45.