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«A note on the chervonets - a gold-backed currency during the New Economic Policy in the Soviet Union. Europe-Asia Studies. July 1994. ...»

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As good as gold?

Vincent Barnett

A note on the chervonets - a gold-backed currency during the New Economic Policy in the

Soviet Union". Europe-Asia Studies. July 1994. FindArticles.com. 08 Mar. 2008.

From the archive section of

The Master and Margarita



Jan Vanhellemont

Klein Begijnhof 6

B-3000 Leuven



There seems to have a decline in interest in the idea of a parallel Russian currency during

1992-93.(1) While discussing this topic with a colleague the question arose of whether and to what extent the chervonets was actually convertible into gold and foreign currency in the USSR during NEP.(2) In a previous work this author had examined Soviet theoretical conceptions of foreign exchange in the 1920s, but had not gone on to ask the question about the actual functioning of chervonets exchange at this time, and as far as was detected no other paper has focused on this specific question.(3) This research note attempts to fill this lacuna using existing Western sources, new archive material and Soviet historical work.

A number of variants of the gold standard exist in theory. The simplest variant is a pure gold coin standard where only gold coins circulate as money. During the period 1880a fractional reserve gold standard existed in Western Europe. In this system both government-issued notes and notes issued by commercial banks circulate alongside gold coins, these paper notes being convertible into gold on demand at a fixed rate. A third possibility, the gold bullion standard, was proposed by Ricardo in 1816, where gold coins would not circulate at all but fiduciary currency would be convertible into gold bullion.

Such a system existed in the twentieth century in the inter-war period.(4) The chervonets was not described as a currency based on the gold standard in the Western sense sketched above, but the label 'gold-backed' was attached to it by many Soviet economists during NEP. A 1922 decree stated that the chervonets was a denomination of gold money containing one zolotnik 78.24 dolyas of pure gold'.(5) Were chervontsky banknotes ever redeemable for gold at this par value?

Was the chervonets convertible?

Existing authorities pronounce on this question as follows. E. H. Carr states that `down to March or April 1925 both foreign currency and hoarded gold were being freely offered in Moscow in exchange for chervontsy'.(6) At first sight this appears straightforward.

However, Carr omits to specify who was offering gold and foreign currency for chervontsy, the state or private traders, and this statement is therefore ambiguous. A. Z.

Arnold, author of the impressive 1937 work Banks, Credit, and Money in Soviet Russia,

writes that:

... [the chervonets] was to be fully secured: by precious metals and stable foreign currency, equal to not less than 25% of their amount outstanding: the balance of the security was to consist of easily marketable goods, short-term bills, and other short-term obligations. The notes were not convertible, but the decree states that the date upon which convertibility might begin was to be fixed by a special act of the government...(7) Thus the chervonets was first of all covered by precious metals but not convertible into them. Since this was written in 1937 and no reference is found in other parts of Arnold's book to when the chervonets was made convertible, the conclusion is reached from this work that the chervonets was not actually convertible into gold or foreign currency at all.

One of the most important sources on this question must be L. N. Yurovsky, who was in charge of currency management within NKFin in the 1920s and who masterminded the 1922-24 currency reform. Yurovsky was the author of many articles and books on financial matters, and in 1925 he wrote: The banknotes [the chervontsy] secured, at least to the extent of one quarter, by precious metals and foreign currency, were not for the present to be convertible into gold. The date when the exchange of banknotes into gold will begin... will be announced in a separate government enactment.(8) Yurovsky notes that the government promised to make them convertible with gold in the future'.(9) This implies that Yurovsky agreed with Arnold that the chervonets was not at least initially convertible, or that Arnold's source for his view was in fact this work by Yurovsky.

However, Yurovsky gives a somewhat different impression in a later work of 1928. Here he writes that export of foreign currency could occur only with the permission of the

Special Foreign Currency Commission under NKFin SSSR. Moreover:

In order to strengthen this law in relation to regulating demand for foreign currency, it was determined that state and cooperative institutions and enterprises were obliged to obtain permission from the Special Foreign Currency Commission for transfer of foreign currency overseas and for the purchase of foreign currency internally. This limitation did not apply to private individuals... However, from March 1926 the purchase of foreign currency (and gold) by private individuals without the permission of the Special Foreign Currency Commission was discontinued by administrative measures.(10) This implies that between 1924 and 1926 private individuals could purchase foreign currency (and perhaps also gold) freely, but that institutions and enterprises had to obtain permission before doing so. However, this is not identical with exchanging chervontsy for gold at par, and Yurovsky does not seem to mention such a practice in this later work. Ambiguity thus remains.

Archival material demonstrates that the Soviet government was concerned about the free export of chervontsy overseas as early as July 1925. In a letter to Yurovsky, dated 9 July 1925, Z. Katsenelenbaum (Gosbank) relates that a series of messages from overseas correspondents have raised the question of the necessity of reviewing existing currency legislation, in particular the free export of chervontsy overseas. The amount of chervontsy exported, not only by private persons but also by state institutions and enterprises, had grown recently. For example, in Riga a total of approximately 115 000 chervontsy had been obtained in the first six months of 1925, and in Berlin a significant

supply of chervontsy still existed. Katsenelenbaum then writes:

The task of supporting the chervonets rate overseas demands from Gosbank the purchase of these chervontsy for hard currency, which is exceedingly difficult given the current position of hard currency reserves.(11) This problem compels Gosbank to raise the question of the necessity of introducing a law which would equate export rights for chervontsy with foreign currency reserves. Only in this way could the level of chervontsy exported be limited. This letter from Katsenelenbaum implies that chervontsy were exchangeable for hard currency overseas at least until 1925, but that worries began to surface about this practice in the middle of

1925. No mention of internal convertibility is made in this letter.(12) A Vestnik finansov article from 1925 by A. A. Sokolov elucidates an important distinction in relation to gold-backed currencies which is relevant to the chervonets. Sokolov is discussing situations when a large gold fund is required and when such a fund is unnecessary. When banknotes are by law exchangeable for gold then clearly a gold fund

is necessary. Moreover:

... when notes in circulation are not formally convertible into gold, but the rate of exchange is supported at a definite level in relation to gold and foreign currency, a fund is also necessary, although in this case the fund can be composed in significant part not of gold in natura but from one or other foreign (gold) currency.(13) Sokolov's argument shows that direct convertibility into gold at par for a specific currency is not the same as a currency being supported at a certain rate in relation to gold and foreign currency by the relevant monetary authorities. In the former case a promise has been given to convert all notes at a certain rate no matter when they are presented for exchange, whereas in the latter a promise has been given to try to maintain a certain rate through currency intervention, but no guarantees of maintaining this rate are given.

Sokolov does not specify which of these cases applies to the chervonets. In a book examining the history of the ruble exchange rate published in 1958 Aizenberg implies that Gosbank regulated the foreign exchange market in the mid-1920s by selling gold and foreign exchange for chervontsy, but this could be consistent with either of Sokolov's two possibilities.(14) A definite answer to this question has been provided by a recent Soviet work on the chervonets by V. E. Manevich. Manevich relates that from April 1922 private individuals were allowed to hold gold and foreign currency, and from October 1922 stock exchanges were created for the purchase and sale of foreign currency, gold and state loans.

However, Manevich writes:

During the issue of chervontsy it was declared that the chervonets was a currency directly exchangeable for gold, but the commencement of this exchange was delayed until a special resolution was prepared: such a resolution was in fact never issued.

Therefore the exchange of chervontsy for gold by Gosbank never occurred.(15) Thus the chervonets was never directly convertible into gold at par, rather Gosbank purchased chervontsy for gold and foreign currency as a mechanism for supporting the exchange rate at a certain level. If Manevich is right than a mild deception had been carried out by the Soviet authorities. A promise to convert chervontsy at par some time in the future was given but never kept, and this technique proved successful (together with currency intervention) in introducing and maintaining a stable rate of exchange for the new currency.(16) Manevich further explains that the Special Foreign Currency Commission (mentioned by Yurovsky) was formed on 6 February 1923 from representatives of Gosbank, NKVneshTorg and Tsentrosoyuz and was chaired by a representative of NKFin. The stated aim of this Commission was the elimination from currency markets of the multitude of consumers of foreign currency by concentrating demand into a few large all-Russian centres and the preservation of currency resources inside the country through export control.(17) This was to be done by transferring foreign currency by means of account through Gosbank, and not allowing the direct transfer of actual currency from seller to purchaser. Gosbank thus preserved control over foreign currency on currency exchanges.

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