Sergey Tsakunov

The People's Commissariat of Finance

Most studies of the history of Soviet financial and credit policy stress the important changes which took place in the role of the People's Commissariat of Finance (Narkomfin or NKFin) in the management of the national economy at the beginning of the 1930s.[1] We know a great deal about the financial system of the 1930s and about its major institutional shifts. The official journal of NKFin Finansy I sotsialisticheskoe khozyaistvo ('Finance and the socialist economy'), which was in 1934 renamed Vpomoshch' finrabotnika ('For the help of a financial worker'), published articles about state finance, including official documents and instructions of NKFin. NKFin's activities were discussed annually by the Congress of Soviets in its deliberations concerning the state budget for the next year. The people's commissar (narkom) of finance USSR delivered a major report on the utilisation of the state budget and on the draft of the budget for the next year. In addition NKFin annually collected a tax system both rural and urban. The extent to which NKFin influenced policy, however, has not been subject to analysis.

NKFin from 1921 to 1926, under G.Ya. Sokolnikov, enjoyed enormous power as the dominant economic agency of the early NEP years, when priority was accorded to monetary stabilisation. In 1926 Sokolnikov, discredited by his association with the defeated Zinoviev and Kamenev, was replaced as narkom by N.P. Bryukhanov. Thereafter, NKFin's power was eroded with the growing influence of Gosplan and Vesenkha. As NEP went into decline the primacy of financial and monetary stabilisation was supplanted by a commitment to forced industrial development.

The financial system in 1930s was highly politicised in character. It was under great and decisive influence of the leading party bodies, the direct instructions of party congresses, conferences and decisions of the Politburo. As a result many important financial questions were decided not in NKFin and not even in Sovnarkom, but primarily in the Politburo. Here we examine to what extent NKFin could influence decisions concerning the financial system, particularly concerning the drawing up of the financial and investments' plans for the Second Five-Year Plan, the fight against inflation, the struggle for a 'healthy' non-deficit budget, and the battle against the excessive financial expenditures.

In the 1930s NKFin achieved considerable success in restoring, at least partially, the influence which it had enjoyed under NEP. Three stages of NKFin's evolution can be identified:

1. 1930-32, when the financial system underwent major transformation. NKFin's efforts were concentrated in two directions: the strengthening of its influence among the economic commissariats and on the political leadership itself, and the struggle for the stabilisation of the financial system and strengthening of the ruble.

2. 1932-33, when the new macroeconomic role of NKFin as a pure state budget body, which was responsible for the public revenues and spending of the state budget, was established.

3. 1934-37, when with the abolition of rationing and the proclamation of 'the victory of socialism', renewed efforts were made to further simplify and reduce NKFin's functions in the economic system.

NKFin's slow recovery as a financial institution 1930-32

NKFin under Bryukhanov: weakness and uncertainty The changes in NKFin's position were determined essentially by the large-scale transformations of the economic system which took place in this period. The direct investment of money resources into the national economy as part of the industrialisation drive and the sharp expansion of the sphere of direct state control at the end of 1920s generated among the country's political leaders enthusiasm for 'a leap into socialism' and the rapid elimination of market relations.[2] In this period it was anticipated that finance would no longer play the role it had played under NEP, and with the shift to planning and commodity exchange the abolition of money could again be contemplated.

The changes in the external economic environment, based on political actions of the Central Committee and the Politburo, disorganised NKFin and weakened its influence in the financial and economic sphere. This stemmed from the fact that NKFin, during the industrial drive and fast curtailing of the market, appeared to be simply redundant. During that period Stalin and his group believed that they simply no longer needed a financial regulator.

However, the growth of economic difficulties, uncontrolled spending of huge resources and high inflation, compelled the country's leaders to attempt to find a place for finance in the new planned system. The resolution of the joint Central Committee - Central Control Commission plenum of December 1930, on the report of Kuibyshev devoted to the control figures, stated that the industrial plan could not be realised without fulfilment of the financial plan. For the first time it condemned as inadmissible anti-monetary Utopias. It was recognised that at this stage of 'socialist construction' the party ought to wage a resolute struggle against the 'underestimation of the role and significance of the financial system'.[3]

The decision to link financial and industrial planning, which subordinated the former to the latter, stimulated a radical reorganisation of the financial system during 1930-32. The wave of large-scale reorganisations which took place at this time covered state credits and the accounts of the national economy, capital investments, the system of public revenues, state social insurance, tax collecting, state property insurance and financial planning. Among the most significant changes we might single out the following: the 1930-31 credit reform, the adoption of a new mode of formation and usage of circulating funds of the enterprises, the reorganisation of the financing and crediting of capital investments, the creation of a special bank network for long-term investments, and the 1930-31 tax reform, which unified the system of enterprises' payments to the budget and strengthened tax control functions, changed the rules of formation and usage of reserve and insurance funds of the state enterprises and the reorganisation of the state social insurance system.

In the literature there are detailed accounts of how the financial management of the country was reorganised in this period.[4] However, so far nobody has analysed the question, who was the initiator of those changes, and whether or not they were approved by NKFin. N.P. Bryukhanov, who headed NKFin from January 1926 until 18 October 1930 and was a member of the Central Committee, lacked the political weight of his predecessor Sokolnikov, and was unable to resist attempts to change the financial system without taking into consideration the opinion of the experts. Moreover, the large-scale purges of NKFin's staff in 1930-31 considerably weakened it.

The new tax system for socialised industry The relative weakness of NKFin in the period of the First Five-Year Plan is illustrated by its role in the debate concerning proposals for the development of a new system of taxation for state-run industry.

After the Central Committee resolution on 'Reorganising of the management of industry' issued on 5 December 1929, NKFin was compelled to elaborate a new unified tax system for the socialised sector. Two basic points were advanced in that resolution. Firstly, enterprises were granted considerable freedom in determining prices for their products. Secondly, it established 'deduction from enterprise's profits' as the main principle of the tax reform. These two points, which had been approved without consultation with NKFin, contradicted NKFin's interests. A point which was repeatedly expressed in memos to the higher bodies.

In fact NKFin received instructions 'from above' on how it should construct the new tax system. Consequently there was little room for any debate regarding the reform inside NKFin. The chief of NKFin's tax reform commission M.I. Lifshits, with hardly concealed bitterness, as can be judged from the stenographic report, said at the meeting ofNKFin's collegium:

These circumstances and instructions of the Central Committee resolution concerning the right of enterprises to preserve in their hands part of their profits and of the decisive role of the ob"edineniya in the field of price control and elsewhere could not have no effect on the character of the proposals, which we make.[5]

The Central Committee's intervention into NKFin's sphere of competence badly dented the professional pride of the specialists of the state revenues' management department, headed by Lifshits. In 1929 NKFin repeatedly submitted various proposals to the top state bodies concerning the reconstruction of the tax system, but met with little success, as Lifshits conceded: 'We, NKFin, put forward a number of proposals to the legislative bodies; some of them were accepted, some were not, but if we summarise all that was done, we should say that all decisions [Lifshits here hints of the adopted CC decree - S. Tsakunov] having been undertaken were far from solving the question.'[6] However, NKFin was not going to surrender or simply shrink before the decisions of the powerful Central Committee.

The Central Committee's variant suggesting the unification of profit taxation, made the state budget's income dependent upon the enterprises' profitability. In the early 1930s for many enterprises, and even whole branches of the economy, that condition was frequently not fulfilled. That meant that under this variant of the reform the non-realisation of the state budget became more than probable, hence NKFin's specialists' resistance to the adopted variant. The experience of 1930-33 showed that the collection of taxes was quite separate and serious task which could not be executed automatically after the subject for taxation was defined.

NKFin's variant of tax reform differed from that suggested by the Central Committee but accorded with its own departmental interests. NKFin's commission, which comprised 16 experts, prepared two variants of the reform. The first variant envisaged two channels of taxation: the first and main channel - tax on the turnover of capital, and the second and auxiliary channel - deductions from profits. For NKFin this variant was the most advantageous. In his report to NKFin's collegium on 10 April 1930, Lifshits declared that the suggested variant 'enables us to ensure that the budget is firmly realised', 'the revenues are completely supplied', 'the system becomes much more simple both for us and for the whole of industry'. The most important point was to ensure 'large independence of revenues' flow to the budget, large independence of the state budget separate from the results of the whole industrial-financial plan's (promfinplan) fulfilment, from the results of fulfilment of all parameters of the promfinplan.'[7]

Naturally NKFin's main aim was to implement the reform with the maximum warranty for itself. Therefore, NKFin staff and heads, in contravention of the Central Committee's resolution, continued to support the variant with the turnover tax. Besides, acceptance of the Central Committee's variant, threatened to deprive NKFin of part of its powerful rights in the field of price control, and through price control the profitability of enterprises and the level of state receipts. According to Lifshits:

If you consider the total sum of withdrawals, which is rather a significant part of the general receipts, you will see that these withdrawals are established by the government according to NKFin's submissions. What is the role of NKFin under these conditions in the field of price control? Enormous. This was its role till now and it should remain the same. And do we preserve any role under the acceptance of the second variant [i.e. the Central Committee variant, unified tax on the enterprises' profits - S. Tsakunov]. No, on the contrary it will involve the complete disarmament of NKF. We cannot agree to this.[8]

Looking forward to securing its interests with the help of the turnover tax, NKFin still had to implement the Central Committee's directive on the transition to one-channel taxation, though in 1929 NKFin continued its opposition, considering that 'this half step, this half-measure will not simplify to any extent the system in general but will only make it more complicated' .[9] In 1930 the only way out for Lifshits's commission concerning the new system of taxation was to find some kind of a compromise. And this is what they suggested. According to the Central Committee-Sovnarkom resolution on 2 September 1930, two main taxes were devised for the state enterprises:

(i.)               turnover tax which accorded with NKFin's proposals and

(ii.)             profit deductions (otchisleniya otpribyli) which were the main points of the Central Committee's variant.

The majority of commissariats did not participate in drawing up the draft tax reform which as we have seen was dictated by the Central Committee resolution. Only the People's Commissariat of Workers' and Peasants' Inspection (NKRKI or Rabkrin), which was given an order to prepare a draft parallel with NKFin, was engaged in working out the reform. At this point a dispute between these two governmental bodies for priority in preparing the draft of the tax reform emerged. NKRKI proposed to introduce a tax based on gross income, whilst NKFin favoured a tax based on production turnover. As noted by one ofNKFin's specialists in a memorandum to Lifshits 'the dispute is about words "turnover" and "gross income", other "essential" arguments are "far fetched"' (are pulled by hair - prityanuty za volosy)[10]

The Sovnarkom resolution of 21 July 1930, signed by Rykov, put an end to this inter-departmental struggle. The resolution took the materials of NKRKI, rather than those ofNKFin, as the basis of the draft of the tax reform. Bryukhanov sent a strong letter of protest. NKRKI sarcastically noted how NKFin's representatives in 1929 had resolutely opposed the idea of a unitary tax, but in 1930 had justified it vigorously after the Central Committee resolution. According to NKRKI's representatives their variant was submitted in 1929, long before NKFin presented its variant.[11] However, Bryukhanov in his letter to Rykov insisted that 'the NKRKI USSR draft was submitted to SNK 18 days later, and not a month earlier then the NKF's draft as the representative of NKRKI sought to pretend at a meeting of SNK'.[12] Comparison of the two variants shows that there were no essential differences between them. Thus their struggle did not reflect the struggle for a definite concept of the reform but was rather a trial of strength between NKFin and NKRKI.

The situation sharply changed in August 1930 when Rykov was replaced by Rudzutak as head of the Sovnarkom commission on preparing the reform. Afterwards at the next meeting of the commission, chaired by Rudzutak, on 16 August 1930 NKFin's project was accepted.

The case with the tax reform drafts shows vividly that in order to re-establish its position as a powerful administrative body NKFin had to undertake various efforts in different directions. First, it had to seize the initiative in advancing proposals on key questions of national finance to the Politburo and Sovnarkom. The major objective was to prevent decisive questions concerning the construction of the new financial system being solved either without consultations with NKFin or even by another non-financial body like TsKK-NKRKI. Second, it had to demonstrate to other commissariats that it held in its hands powerful instruments of regulation and control over state finance.

The dismissal of Bryukhanov

The relationship between NKFin and Gosbank and their ambiguous position vis-a-vis the party leadership was highlighted by a development in the summer of 1930. On 19 July 1930 Pyatakov, head of the State Bank and a former supporter of Trotsky, came to the conclusion that inflation was getting out of hand and sent a memorandum to Stalin arguing that the state budget for the following year must be in surplus and that no further currency should be issued. He proposed also to drastically reduce imports, and to cut to the minimum the export of food products. In his memorandum Pyatakov sought to assure Stalin of his political loyalty and that the proposed adjustments stemmed from necessity, not for political disagreement with the 'general line'.[13]

In successive letters to Molotov, Stalin claimed that Pyatakov was being manipulated by bourgeois specialists, notably by supporters ofKondrat'ev and Groman, whilst policy in NKFin was being shaped by Yurovskii. He called for these specialists to be dismissed. He described Pyatakov as a 'truly right-wing Trotskyist'. He informed Molotov that within NKFin and Gosbank 'two or three dozen wreckers from the administration must be executed, including a dozen cashiers of various kinds' and that 'Kondrat'ev, Groman and another couple of scoundrels must certainly be executed'. This letter initiated a general campaign against bourgeois specialists within the apparatus, although Groman and Kondrat'ev were temporarily spared.[14]

Stalin demanded a renewal of the leadership ofNKFin and the State Bank (Gosbank), based on reports from OGPU and NKRKI. In October both Pyatakov and Bryukhanov were replaced. The appointment ofG.F. Grin'ko to head NKFin on 18 October 1930, brought the commissariat closer to Sovnarkom and Gosplan, the principal agencies of economic management. The task for Grin'ko was to carve out a distinctive role for NKFin within this new relationship.

NKFin retained its close links with Gosbank. In October 1930 M.I. Kalmanovich, formerly a deputy narkom of NKZem and a member of the Central Committee, took over as chairman of Gosbank. Within a couple of weeks he was appointed also deputy narkom ofNKFin.[15]

Having seemingly established a political framework for further inflation Stalin then initiated or acquiesced in an abrupt change of policy. Even before the new appointments had been made the Politburo decided to tighten the financial screw. And in December the economic plan for 1931 proposed that the state budget should be in surplus and that no further currency be issued.[16]

NKFin's new image: financial planning and the collecting of state revenues 1932-34

Grigori Fedorovich Grin'ko, a former SR and a member of the party since 1920, worked throughout the 1920s in the Ukraine as commissar of enlightenment, chairman of Gosplan UkrSSR, chairman of Kiev gubispolkom and from 1929 onwards as deputy narkom of NKZem UkrSSR. The circumstances surrounding his appointment remain uncertain. He had considerable administrative and management experience, but he had no previous experience of work in financial institutions and had made no theoretical contribution in this field. In this he stood out in contrast to his predecessors at NKFin. He became a member of Sovnarkom and STO, but surprisingly did not achieve membership of the Central Committee until 1934.

Lacking experience in financial affairs, Grin'ko relied heavily on his deputies in NKFin. A significant role was played by R.G. Levin, who enjoyed great authority within the commissariat and in Sovnarkom, and who effectively conducted the day to day work of the commissariat. Levin presented drafts of the most important documents, including those passed to higher authorities, to Grin'ko for his signature. Frequently Levin himself sent to Sovnarkom documents on financial policy, in breach of the principle of subordination.[17] It is significant that the NKFin commission for working out the financial plan for the Second Five-Year Plan was headed by Ya.A. Teumin, deputy narkom, and not by Grin'ko himself.

Defining NKFin's role within the planned economy The elaboration of a common financial plan under the growing administrative role of NKFin was the key point of Soviet financial planning of 1930s.[18] The drawing up of the five-year and annual financial plans for all branches of the national economy, as well as carrying out the function of collecting taxes for the state budget increased NKFin's authority vis-a-vis the economic departments and gave it the levers to pressurise the latter. Whilst there were no attempts to restore the NEP functions of NKFin in regulating the economy, its participation in drawing up the perspective financial plans allowed it at least occasionally to analyse the main macro-economic parameters of the national economy and to achieve a certain economic equilibrium in the process of fixing the planning parameters and fighting against unrealistic approaches to the development of the economy.

In 1931 neither Grin' ko, as recently appointed narkom of finance, nor his staff, still disorganised by the purges of 1930-31, were able to prepare their own variant of the financial programme. In the autumn of 1931 Levin, who at that time frequently chaired the meetings of the collegium, expressed shock at the poor quality of NKFin's work:

For a long time I did not participate in the drawing up of the plans, and budgets in particular, but I must say quite frankly that I am astonished at the low level of knowledge of the subject on the part of our workers, in comparison with the level which was known to me 4 or 5 years ago. We now know damn all, know scandalously little.[19]

Recovery took NKFin almost the whole of 1932.

NKFin did not play a serious role in elaborating the proposals for the five-year plan, advanced in 1931 first by Kuibyshev and then by Molotov, although Grin'ko himself would certainly have been aware of the preparatory calculations in Gosplan or discussions of these questions at Politburo meetings.[20] NKFin began drawing up the financial plan for the Second Five-Year Plan immediately following the XVII party conference of January-February 1932. The variant of the financial plan which emerged in 1932 was called in NKFin's documents 'the initial plan'.

On 19 May 1932 NKFin's collegium issued its resolution 'On the organisation of work on elaborating the common financial plan and state budget for the Second Five-Year Plan period (1933-1937)'.[21] It outlined a detailed and compressed schedule for drawing up the plan. The preliminary variant of the financial plan and state budget was to be prepared by 20 May, the final variant by 5 August. The commission charged with this task was to submit the preliminary variant of the common financial plan, state budget, and control figures of the local budget to NKFin's collegium by 1 August and to Gosplan USSR by 10 August 1932.

As preparatory work NKFin intended to collect voluminous information concerning the fulfilment of the financial plan for the First Five-Year Plan, to analyse the main financial flows in the economy and the incomes of the main groups of the population. It was necessary also to obtain data on the dynamics and structure of prices in the socialised and private sectors for the period 1928/29 to 1932, the dynamics of the wages funds and the levels of wages broken down by the branches of the economy, the dynamics and structure of trade turnover and distribution costs. Other independent items of preparatory work included the processes of accumulation in the First Five-Year Plan, dynamics of profits, amortisation, turnover tax, incomes and accumulation of collective farms.[22]

The seriousness of NKFin's approach to this work reflected its revival under its new chief. To resist the investment appetites and budget requirements of Narkomtyazhprom, NKPS, NKSovkhoz and NKLes, NKFin needed precise information concerning the results of structural shifts in 1928-32, the condition of the finance sphere, the tendencies of prices, costs, wages and profit dynamics. Taken together these economic parameters gave a reasonably complete picture of the macroeconomic situation in the country and served as a foundation for the substantiation of NKFin's position.[23]

In May 1932 'The main instructions on drawing up of the common financial plan and state budget of the USSR for the Second Five-Year Plan period (1933-1937)', prepared by NKFin's specialists, were issued. The official character of the instructions, with their constant references to the decisions of the XVII party conference, gave the impression of NKFin's first steps in restoring its role in economic management. It was the first attempt by the commissariat's specialists to define their place in a system of planned economy under the conditions of desired 'healthy' industrial growth.

The key factor here was the understanding ofNKFin's staff that the policy of forced investment during the First Five-Year Plan had caused financial instability and had fuelled inflation. The brilliant quantitative results of the first years of the plan had been achieved by an 'inadmissible' deterioration in many qualitative indicators and above all in the profitability of these huge investments. The real expenditure for construction appeared to exceed their budget targets considerably. A serious financial crisis loomed. Budgetary expenditures, driven by the burgeoning investment in industry, especially in 1932, exceeded all stipulated indicators. The mass of money in circulation increased greatly, while the population still could not afford the prices for necessities. The ruble's strength was threatened with a crash.

Therefore, in the prepared methodical 'Instructions' great prominence was accorded to NKFin' s attempts to emphasise the importance of strengthening of money and financial methods of management, and general equilibrium of the financial system after the investment drive of the First Five-Year Plan. One of the major points of the 'Instructions' was the idea of 'a vast role' of the monetary system in the immediate future.[24]

NKFin in its desire to revive 'the dictatorship of finance' could not, however, contradict official policy, which was based on forced capital investments and grand investment programmes. At the same time NKFin could not continue to pump the economy with credits provided by printing money as at the beginning of the 1930s. NKFin favoured a policy variant in which the growth in volume and rates of the investments would be achieved at the expense of the increase of internal accumulation in the public sector and their redistribution between branches of the economy. In this NKFin's position was close to that of Sovnarkom and Gosplan.

To realise its role in a system of planned economy during the Second Five-Year Plan NKFin sought to emphasise the growth of profitability of the socialised sector, increasing the role of enterprise accumulation in investments and replenishment of current assets, development of self-financing of enterprises, and strengthening of ruble control (by way of penalties and taxes).[25] The authors even suggested 'to leave at the disposal of enterprises and organisations of the socialised sector a growing share of profits for coverage of their capital costs and replenishment of their current assets',[26] as well as to revise the acting norms of amortisation and to establish the new norms, which would meet the need of restoring fixed capital.

It was impossible for NKFin to solve those problems without further centralising the financial systems' organisation and its management of financial resources. It completely corresponded with the way management methods were developing under the planned economy. Therefore the 'Instructions' emphasised that in managing the financial system in the

Second Five-Year Plan they should combine 'central planning of state resources with decentralisation of economic management'.[27]

Accordingly the role of the united financial plan was considerably enhanced. 'The common financial plan should be the main instrument of financial planning, providing the control and reasonable direction of all financial resources, spent on investments in fixed and working capital, on welfare construction, management and defence of the USSR.'[28] The state budget was to become the main instrument, which could secure the appropriate redistribution of the national income between branches. In general these ideas meant a return to the schemes advanced during the First Five-Year Plan but which in fact had not been carried out.

The State Bank's role in the management of the economy also changed. It was considered to be a bank of 'short-term credit and a central settlements organisation of the USSR socialised economy'.[29] During the Second Five-Year Plan 'radical improvement' in the State Bank's functioning was to be achieved on the basis of its transformation into a body that carried out 'the day to day ruble control over the fulfilment of the plans in production and circulation of goods, of the fulfilment of the financial plans and the process of accumulation in the socialised sector of the national economy'.[30]

The contents of these initial 'Instructions', which obviously were idealistic in character, could not reflect real process of fighting and bargaining for resources, through which the drawing up of the five-year plan finally took shape. In the course of fulfilment of the planning instructions in the Soviet system of the 1930s, the typical divergence between the ideal and reality was revealed. The main instructions on drawing up the financial plan for the Second Five-Year Plan looked rather attractive: they envisaged the strengthening of regulation with the help of monetary and financial levers, stipulated the need for more rational organisation whilst minimising money and material costs, and stressed the need to ensure a growth in the living standards of the Soviet people on the basis of expanding goods circulation as a condition of fulfilment of the investment programme. However, in practice the realisation of the financial programme, as it will become clear later, was not based on financial levers, but rather it was completely administrative.

The contents of subsequent confidential memoranda ofGrin'ko's deputies and sector heads concerning the financial programme for the Second Five-Year Plan, which will be analysed below, proves that the authors of the financial programme went considerably further than the 'recommendations', contained in the 'Instructions' (1932), and proceeded from a much more realistic view of the situation in the economy.

NKFin and the financial crisis of the winter of 1932-33

By the end of 1932 NKFin had a clear and fixed position on some of the most important questions concerning the new five-year plan. The deepening financial crisis at the end of 1932 served to strengthen NKFin's position in dealing with current difficulties, and also to justify a stronger role for financial control within the Second Five-Year Plan as a whole.

On 20 November 1932, Grin'ko passed to Stalin, Molotov and Kuibyshev a large confidential memorandum 'On the financial programme for the Second Five-Year Plan'. This memorandum had a summarising character and certainly its author was not only Grin'ko. Many of his proposals were earlier presented in the materials of NKFin's preparatory commission. However, Grin'ko used the acute financial crisis to achieve his purposes. The memorandum definitely had a political character and became the basis for strengthening NKFin under the direction of the new narkom.

In this memo Grin'ko specified 'what particular price was incurred by the financial sphere for the rapid increase of the investments to the national economy against planned volume of investments?'

Of 33 milliard rubles additional resources, 28 milliard rubles were received from the increase of the tariffs, prices and money issue. The fulfilment of the First Five-Year Plan was associated with mounting inflation, especially in l931and l932.[31]

Grin'ko was compelled to draw attention to 'the serious inflationary phenomena in the country'. Other symptoms of the financial system malfunctioning were the 'vast' increase of planned wages without a corresponding growth of production, and the slackening of government pressure on costs reduction. This resulted in the following negative phenomena: a rapid growth in the unprofitability of enterprises and whole branches of the economy (in 1932 the losses totalled 3.1 milliard rubles against planned - 800 million rubles, and for 1933 the commissariat anticipated almost 5 milliard rubles of planned losses);[32] the accumulation of significant volume of money '(about 4 milliard rubles) in the hands' of the population which were not covered by a corresponding increase in commodity supply.

Grin'ko in his memorandum proposed that in 1933 the government should aim to achieve a state budget surplus, by means of which 1,500 million rubles currency could be withdrawn from circulation. This evidently won the support of the leadership. In a Sovnarkom decree of 16 December it was recommended that 1,000-1,500 million rubles be withdrawn from circulation.[33]

The elaboration of the Second Five-Year Plan The 'drive' for the elaboration of the Second Five-Year Plan in the spring of 1932 took place more on paper than in practice. The staff of NKFin, over­burdened by current work, were slow to switch to perspective calculations. The minutes of the commission's meeting (25 July 1932) contain reports from the sectors on drawing up the Second Five-Year Plan which make clear that the majority of sectors had not even started drawing up the plan.[34]

By the middle of July some 100,000 rubles had been spent on drawing up the financial plan for the Second Five-Year Plan draft, not an insignificant sum of money.[35] Despite this expenditure, with considerable sums reserved for the payment of preparatory materials, the schedule of work elaborated in the spring of 1932 was not actually carried out. Many sectors of the commissariat failed to agree matters with one another. For example, the conflict between the deputy head of the sector of financial policy, Rogov, and the head of the sector of industry, Vvedenskii, concerning the sensitive matter of accumulation in socialist industry resulted in the matter being referred to Teumin, the deputy narkom of NKFin.[36]

On 13 September 1932, NKFin's collegium considered progress on the financial plan (finplan) for the Second Five-Year Plan. On the basis of a report submitted by Gorelik, the deputy narkom, the commission's work was voted a failure.[37]

These difficulties persisted. On 14 March 1933, Grin'ko sent a memorandum to Molotov complaining that none of the commissariats had submitted their fmplans for the Second Five-Year Plan to NKFin USSR by 10 March as required. As a result, he argued, NKFin would have the greatest difficulty in submitting the finplan and budget to Sovnarkom USSR by the appointed date of 1 April.[38] Only on 22 July 1933 did the chief of the finplan sector and budget, A. Maimin, finally submit the plan to the top-managers of NKFin.

Comparing the time needed for drawing up of the five-year financial plan variants in Gosplan and in NKFin shows that the latter was considerably behind. In April-May 1933, the calculations of the major parameters of the financial plan for the five-year plan were submitted to the chief of the finplan sector, I.G. Konovalov. However on 8 June Mezhlauk and Borilin from Gosplan sent an enquiry to NKFin because they had not received 'any materials for drawing up the Second Five-Year Plan' .[39] Gosplan asked them to submit the material not later than 10 June.

Table 3.1 shows rather significant variations in the calculations of Gosplan and NKFin for the Second Five-Year Plan. NKFin's variants in 1933 envisaged higher figures for state revenue and higher figures for state expenditure than Gosplan's variants, with correspondingly lower targets for the budget surplus.

In drawing up the financial plan for the Second Five-Year Plan NKFin clashed not only with Gosplan but also with other commissariats, especially those which had unstable finances and which controlled sections which were chronically unprofitable. The positions of three departments, NKPT, NKLes and NKSovkhoz, were especially notable. Thus to judge from the archival data, the process of coordination of variants between NKFin and NKTyazhProm in the summer of 1933 was very difficult. In NKFin's fond a document comparing these variants is preserved. A. Smirnov, looking through the variants wrote at the bottom of the page: 'The resulting indicators show vividly the conflicting points of view of different departments - this is not normal.' For example, NKPT (the People's Commissariat of Post and Telegraphs) planned the sum of 4.471 milliard rubles for its working capital while NKFin planned only 4.154 milliard rubles; for profit NKTP calculated 7.790 milliard rubles and NKFin 8.781 milliard rubles; on the usage of investments (osvoyenie) and commencement of production in newly built enterprises, on the contrary, NKTP proposed 6.013 milliard rubles, and NKFin only 5.384 milliard rubles.[40]

In general in the 1930s, Gosplan and NKFin's functions in the sphere of financial planning were gradually brought together. The first reason for this was that the financial plan contained such major macroeconomic indicators as volume of accumulation and the amount of the investments to the national economy. Such questions went beyond the limited sphere of NKFin's competence. For this reason Gosplan actually duplicated the work ofNKPin in the drawing up of the five-year financial plan in a special sector of the finplan. The specialists of that sector of Gosplan worked independently and in parallel to NKFin and in no way coordinated their calculations with the latter. For this reason Gosplan had an obvious priority in drawing up the financial plan in comparison with NKFin.

There were further reasons for Gosplan assuming leadership in the elaboration of the financial problems of the Second Five-Year Plan. First, initial data for the calculations was received by NKFin from Gosplan, and not vice versa. Moreover, the correction of the plan was carried out in accordance with correction made by Gosplan. Thus in 1933, when drawing up a variant of the plan, Maimin specified that a number of figures of the plan were defined on the basis of information received from Gosplan in 'a working order'.[41] After the XVII party congress, Gosplan adjusted the figures of the five-year plan and only then were these adjustments made by NKFin.[42] Gosplan dictated not only some initial figures, but also the 'division of labour' in drawing up the plan. Gosplan itself was to be responsible for questions concerning the level of accumulation in the national economy, the costing and pricing of goods, plus determining the purchasing potential of the ruble and the question of money issue. NKFin, it was suggested, should concentrate on the question of taxation of the population, methods of financing of the national economy, including capital construction, creation of insurance reserves; it was also to consider perspectives of the state credit system and savings departments.[43] Finally, the very subordination of Gosplan and NKFin in the framework of Sovnarkom meant that NKFin should submit to Gosplan the calculations for the five-year plan, and that the latter would present them to the government. All this reduced the motivation for NKFin to establish any independent position in the sphere of perspective financial planning. NKFin's staff worked extremely slowly on the drafts of the finplan and state budget, with large failures.

At the same time the actual parallel work of drawing up the financial plan resulted in divergence in the plan drafts of Gosplan and NKFin. In the NKFin fond are preserved several drafts of the letters from Grin'ko to Mezhlauk in April 1934, with evaluation of Gosplan's variant of the financial plan for the Second Five-Year Plan. Grin'ko (with the help of Smilga and Lyando), who prepared these drafts called upon Gosplan to be more realistic in calculating the final variant of the finplan, including the volumes of price rise and trade turnover:

The fund for reducing prices during the Second Five-Year period, planned by Gosplan in volume of 55 milliard rubles, seems to be insufficient, if we take into an account, that for 1937 29 milliard rubles are scheduled and for 1935 and 1936 there remain 24 milliard rubles. The available data on trade turnover provide the basis to expect, that 1935 should be the turning point concerning the reduction of prices. In this case the reduction of prices in the Second Five-Year period will require a sum of about 70 milliard rubles, and the reserve of 16 milliard rubles stipulated by Gosplan USSR would be converted for realisation of this measure. And finally we can find ourselves without any manoeuvre reserve under the tense level of the planned incomes and large expenditures programme.[44]

NKFin and Gosplan each issued their own variants for the planned income of the state budget during the Second Five-Year Plan in January 1934. Revised variants were issued in April. The final version was approved in November 1934. In both the January and April variants NKFin proposed higher targets for state income than those set by Gosplan. In the event the finally approved plan set a target somewhat below that proposed by Gosplan (see Table 3.2).

NKFin and the management of the state budget NKFin during the Second Five-Year Plan stmggled constantly for control over the revenues and expenditures of the state budget. With the increase of the resources being distributed and redistributed the task of controlling and monitoring transfers became ever more complicated. In this situation NKFin was compelled to expand and elaborate the forms of its financial reports, to enlarge the staffs of its central and local bodies, to create special finance and budget inspectorates (FBI), to perform numerous check-ups both independently and jointly with the Commission of Soviet Control (KSK).

The turning point in NKFin's activities stemmed directly from the crisis in the collection of public revenues which burst at the end of 1932. The crisis took NKFin by surprise. When 70 per cent of the revenues was expected to come from the socialised sector, that is from state enterprises and economic bodies, many officials assumed that tax collection would be trouble free. K. Abolin wrote that 'during 1932 a number of finance bodies did not conduct a systematic struggle for receipt of payments from the socialised sector, counting exclusively on a drift (samoteky).[45] In the final budget quarter of 1932 it was suddenly discovered that some regions were far behind in fulfilling the public revenues collection plans and plans for mobilising finances from the population. On 1 December 1932 the fulfilment of the plan of state revenues collection in Leningrad region totalled 51.5 per cent, with arrears amounting to 17 million rubles.[46]

NKFin's actions in curbing state budget expenditure and in imposing strict wage controls from the end of 1932 to the first half of 1933 played a significant role in stabilising the financial system in 1933. Here NKFin's efforts coincided with the important political decisions to cut investments and investments plans in July 1932.

The Sovnarkom resolution of 9 December 1932 laid on NKFin and its local bodies responsibility to make inspections and to audit budget and economic bodies on the spending of budgetary funds to ensure comprehensive control from above. In the newsletter concerning the results of the FBI's work in the first half of 1933 it was stated that 'already during the very first period of the FBI's work the information and materials received from the regions concerning the work reveal the unsatisfactory organisation of the local financial economy, characterised not only by the absence of a "saving mode" (rezhim ekonomii) but by mass cases of overspending and financial waste (razbazarivanie) of national funds, including direct waste and plundering'.[47]

At the end of 1932 NKPin was compelled to institute a special 'fortnight campaign' devoted to the collection of the revenues from the socialised sector. Several threatening resolutions were issued.[48] The campaign revealed that a number of enterprises and organisations not only underpaid their dues to the budget, but tolerated 'criminal facts of concealment of the sizes of their turn-over'.[49] The check-up of Leningrad regional financial department (oblfo) and city financial department (gorfo) uncovered cases involving the concealment of hundreds of thousands and millions of rubles. Two Leningrad factories of the Treugolnik ob"edinenie managed to conceal trom the tax authorities a turnover of 1 million rubles during nine months of 1932.

In response NKFin in the first half of 1933 took bold steps to decentralise the collection of payments from the enterprises. Previously a large part of turnover tax and deductions from profit was collected centrally by NKFin from Moscow. In practice this resulted in hundreds of enterprises escaping taxation. Now responsibility for tax collection was placed on local financial bodies in the places of the enterprise's location. This evidently had a beneficial effect.

NKFin check-ups in 1933 also uncovered 'extensive facts of overspending of the planned wages funds'[50] in individual plants as well as in whole commissariats.

The level of wage and salary debt reached a peak in January, February and March 1933. In this period not only NKFin, but also Sovnarkom and the Politburo were engaged in liquidating these debts. For 1 January the debt totalled 753.4 million rubles, on 1 February - 954.5 million rubles.[51] On 23 February Sovnarkom USSR issued its resolution, which required all commissariats to mobilise internal resources by realisation of excessive material values and other means. In a draft confidential resolution of 21 March 1933 STO even proposed to institute criminal proceedings against the chiefs of economic bodies which were guilty of systematic delay in wage payments [52]

Through the application of strong administrative pressure the wage debt was reduced almost threefold by 1 September 1933.

The main reason for the delays in the payment of salaries was the shortage of money. However, that problem stemmed also from intrinsic weaknesses of the planned economy: non-payment of accounts for work carried out, and the large financial losses incurred by entire commissariats. On 18 February 1933 Grm'ko and Kalmanovich, in a letter to Molotov, specified that all demands to commissariats to liquidate the wages debt only elicited new requests for additional financing on reimbursement of expenses from the budget and new claims for credits. They emphasised that the debt emerged as a result of the fact that 400 million rubles which were allotted in the first quarter of 1933 for the reimbursement of losses in 1932 were overspent by NKTyazhProm, NKZem, NKPS, NKSovkhoz and NKLes. As for NKFin, its part of financing of replenishment of current assets under the 1933 programme was fulfilled completely and the planned losses of 1933 were also compensated. Under those conditions Gosbank failed to take any special restrictive measures towards the listed commissariats.

Whereas the task of government to reduce the administrative-management expenditures in the economy in a total sum of not less than 350 million rubles is being realised extremely slowly, the separate organisations are not informed ot the task, whilst control over the fulfilment of this business is not organised ... We consider it absolutely impossible to proceed with the increase of the financing from the budget for compensating of the wages debt without instituting an absolutely specific programme of mobilisation of internal resources by each commissariat through the realisation of excessive material values as well as through the reduction of administrative-management expenditures, and directing them to liquidate the salary debt.[53]

On 23 February 1933 Sovnarkom issued an appropriate resolution on the problems of cutting expenditures and mobilisation of the internal resources, with a breakdown for each of the main commissariats.

However, already on 26 February 1933 Kalmanovich, chairman of Gosbank, complained to Molotov of the unwillingness of a number of commissariats to implement this resolution. For example, NKTyazhprom 'agreed' with the sum of only 58 million rubles from the task of 200 million rubles on mobilisation of resources that was proposed. It was motivated by lack of information about the larger volume of detected resources of excessive material values.

After the cancellation of the rationing system the conflict between the regional economic bodies, which constantly overspent the planned wages funds, and central state departments which tried to impose certain restraints of wages growth became even more aggravated. In November 1934 Sovnarkom and the Central Committee issued a special resolution 'On arbitrary (samochinnyi) increase in wages', in which any increase of wages not approved by Moscow and which broke the existing rules and laws was strictly forbidden.[54] Since state budget expenditure was under tight control, employees of state enterprises sought to conceal their funds in order to have some small room for financial manoeuvres in spending of the enterprises means. NKFin strongly disapproved of such tendencies, denouncing them as a 'bourgeois nepman distortion' of economic accounting, which had 'nothing in common with Bolshevik financial policy'.[55]

In order to strengthen NKFin's fiscal control Grin'ko constantly put on the agenda questions of increasing the number of inspectors and improving their pay. On 5 November 1934 Grin'ko sent a confidential letter to Molotov with the request for a 1.6-fold increase of staffs of lower inspectors and for additional state financing of NKFin on that account from Sovnarkom's reserve fund.[56]

Grin'ko once more returned to this question in 1937, just a day before his arrest, when he proposed that the government release rural Soviets from responsibility for calculating and collecting money taxes, insurance payments and natural deliveries. Having guided that resolution through Sovnarkom and secured its ratification by the Politburo Grin'ko won permission for a significant increase of staff of the tax and insurance inspectors and auditors in the countryside.

On the whole, the struggle waged by NKFin together with the Commissions of Party and Soviet Control (KPK and KSK) for tax collection and for controlling the spending of state finances was doomed to failure. The conditions of rigid centralisation of distribution of planned resources dictated 'the rules of the game', which reasonably quickly trained the main agents of the Soviet economy. Despite all the check-ups and auditing the volume of losses to the state, according to NKFin's estimates, totalled in the years of the Second Five-Year Plan more than 9.9 milliard rubles including the largest share, about half from NKTyazhProm (more than 4 milliard rubles, of which direct losses were about 1.2 milliard rubles).[57]

NKFin in 1934-37: continuity and change

After certain successes in 1933 in stabilising state finances NKFin's policy during the next three years was oriented on strengthening control over budgetary expenditure, applying constant efforts to collecting state revenues, and developing measures to combat inflation. But there was a noticeable difference between the behaviour of NKFin in 1934-37 and in 1932-33. In the earlier period NKFin sought to deal with the deep financial and currency crisis by using not only administrative but also economic measures; decreasing the volume of money in circulation in the economy, using commercial prices to increase state revenues and substitute credit emission. After the relative stabilisation in 1933 the emphasis in NKFin activity in 1934-35 was put on administrative measures of financial planning and control.

NKFin sought to strengthen links with the financial departments of the commissariats to keep expenditure and investment in line with projections. Two sectors where the weakness of financial control gave rise to concern were the railways and agriculture.[58] In June 1934 deputy narkom of NKFin Ya.A. Teumin was transferred to NKPS to head the latter's finance department, to represent NKPS on the TsIK Budgetary Commission, and to enforce stricter control. At this time also deputy narkom of NKFin and chairman of the State Bank M.I. Kalmanovich was appointed narkom of NKSovkhoz.[59]

In the mid-1930s NKFin had to face some new realities: the necessity to fulfil the financial programme of the Second Five-Year Plan, to reconsider the methods of establishing revenue and expenditure balances after the abolition of rationing and the introduction of commercial prices. From 1934 to 1937 NKFin strenuously tried to strengthen its fiscal functions in different directions.

Taxation policy

The state still controlled a reliable lever of financial control, namely taxation. And this was the sphere where NKFin showed itself most active in the 1930s. In March 1933 Grin'ko submitted a proposal to the Politburo to determine the kulak's characteristic features in order to solve the question of taxation. Grin'ko and Kalinin were entrusted with preparing the proposals.[60] As a result of their work in March 1934 TsIK and Sovnarkom USSR approved a resolution, 'On determining the kulak's attributes under taxation of cultural-housing tax (kultzhilsbor), agricultural tax and other taxes by the Sovnarkoms of the union republics and regional (krai) executive committees'. The resolution was considered by the Politburo and was then authorised. Its main provision was to extend the definition of kulak farms to those engaged 'in systematic speculations (buying and selling) and in making profit (iiazsivautsayd) at the expense of the workers and peasants'. It was also extended to farms which were 'not performing plans of sowings given to them and other lawful state obligations if they could not be defined as poor peasant (bednyak') farms'.[61]

In connection with party directives on the destruction of the kulaks, the state during the Second Five-Year Plan adopted an increasingly punitive taxation policy. After Stalin's well-known instructions about 'new tactics of the class enemy' the definition of kulaks was significantly extended to include those farms which no longer corresponded to the existing definition of kulak but which continued to live on 'unearned (netrudovoi) incomes received earlier'. Later those farms which failed to fulfil the sowing plan were also considered as kulak farms.

One of the most painful questions of tax policy was the question of plurality of enterprises' payments especially in agriculture. It was an old question of tax policy and during the 1930s NKFin tried several times to solve it. For example during the elaboration and estimation of the sizes of 'kultzhilsbor' for 1934 Grin'ko in a confidential memo to Molotov tried to raise more general questions concerning tax policy in agriculture. He argued that plurality of payments resulted in a number of inconveniences. First of all collective farmers and individual peasants at the beginning of the year did not know the size of their financial obligations to the state for the whole year. On the other hand lower financial Soviet bodies during the whole year were swamped with work on calculating each separate payment.[62]

The proposals on the unification of rural taxation came to NKFin from local departments of different regions. NKFin discussed the question in detail at the end of 1933. It was decreed that for 1934 the issue of unification of payments in agriculture could not be solved. NKFin did not know how to unite three diverse kinds of payments ('kultzhilsbor', agricultural tax and self-taxation) in one tax: which method should be used to execute united taxation, how to estimate the taxed income. Actually the problem concerned not only the individual incomes of peasant families but above all the taxation of peasant incomes from their work on collective farms and from collective-farm trade.

The difficulties which NKFin encountered in trying to solve those questions had a real basis. With the growth of the collective farms the character of the economic relations between the state and agricultural farms changed. With independent peasant farms the problems of state tax policy included record-keeping of all kinds of individual household incomes, their redistribution for the needs of the cities and progressive taxation of 'kulak' households. Now peasants became the members of the semi-state enterprises, the collective farms, and their incomes were calculated on the basis of the number of labour-days (trudoden') worked. The opportunities for additional incomes gained somewhere else were sharply limited. The more the 'kolkhoz' system developed the less economic base for any special system of taxation in agriculture was preserved.

However, in 1934 Grin'ko realised the prematurity of radical changes in the existing system of rural taxation.[63] In December 1934 he presented to Sovnarkom USSR a memo devoted to the problem of urgent changes in the taxation of the incomes of workers and employees. Under the existing order, he noted, two kinds of taxes, income tax and 'kultzhilsbor', were collected from the urban population which were quite identical according to their system and circle of the taxpayers. 'At the same time the existence of two parallel payments creates the significant preconditions for over calculation (obschet') of workers and for excessive swamp in work for lower accounting bodies of enterprises and organisations.[64]

Grin'ko proposed to Sovnarkom to unite income tax with 'kultzhilsbor' in one payment from 1935. Abolition of consumer rationing and the related increase in workers' and employees' wages as well as government decision that salary increases should not be the subject for taxation required revision of levels of a non-taxable minimum of salary and levels of the tax rates for workers and employees. Therefore Grin'ko offered to increase the level of a non-taxable minimum up to 140-200 rubles a month, instead of 90-115 rubles in 1934 and to reduce a number of non-taxable minimum zones from four to two. He proposed to introduce a system for the institution of criminal proceedings for over-calculation of the workers dues and, in particular, for non-submitting of privileges under the tax.

It proved impossible in 1935 to unify the system of rural taxation, although some steps were taken to phase out the system of self-taxation. A confidential report of Grin'ko and Tamarkin, chief of the mass payments sector of NKFin, nevertheless insisted that 'taking into consideration new conditions it is necessary to change the system of rural payments, mainly concerning taxation of individual farmers. We intend to introduce the most serious changes to the new law about agricultural tax as the main rural payment.'[65]

At the end of 1935 whilst approving once more the draft of the law about 'kultzhilsbor' for 1936 Grin'ko explained that the decrease of the total sum of agricultural 'kultzhilsbor' in 1936 and the sums aimed at individual farmers are the result of a significant reduction in the number of individual farms. According to partial data available in NKFin USSR it was calculated that only during the period of realisation of 1935 agricultural tax about 770,000 individual farms entered the collective farms. Since realisation of 1934 agricultural tax the number of individual farms was reduced by 3 600 000 units. Nowadays the total number of individual farms does not exceed 2 800 000.

For that reason in July 1936 the existing system of taxation of collective farmers through the agricultural tax was abolished. An income tax calculated from gross income of collective farmers in the previous year was imposed.

Problems of financial control

During the Second Five-Year Plan, NKFin concentrated in its hands a number of important control functions over enterprises, regions and commissariats, concerning investments, prices, wages, costs of production and many other items. This, however, provoked counteractions by various economic departments which tried to escape from rigid central financial control. Pravda wrote on 1 June 1936: 'The new regulations of NKFin USSR completely unmasked all abnormality of those separate tendencies of slipping out from the management and control of NKFin USSR, which are observed in some regions in credit and financial bodies and which should be fundamentally eradicated.'[66] Second, the more functions in the sphere of finance management which NKFin acquired the more its position became vulnerable. Since 1934, when NKFin consolidated its position, it was more and more criticised for mistakes and failures in the financial sphere, even those for which it was not responsible.

Local financial bodies in the Soviet republics constantly tried to evade rigid central control, to get at their disposal additional financial resources which were not controlled from the centre. NKFin repeatedly clashed with the rep­resentatives of Ukraine and the Caucausus, concerning the 'self-activity' of the local bodies. At the end of 1934 KSK investigated a whole series of cases concerning the situation in the financial sphere in Ukraine.[67] The case of the All-Ukraine office ofGosbank (VUK) was the most celebrated one. VUK, headed by Pevzner, was accused of failing to carry out NKFin's policy. Numerous cases of 'swindles' in the handling of loans and credits, payment of cash by VUK branches were uncovered.[68]

Following these events the clouds over Grin'ko's department darkened. Its activity became the frequent subject of resolutions of two powerful control agencies, the Commission of Party Control (KPK) and the Commission of Soviet Control (KSK). For example, following check-ups by these bodies in May 1935 party sanctions were applied to Grin'ko and Mar'yasin in connection with the large volume of monetary substitutes then in circulation.[69] The issue had been drawn to NKFin's attention by the Politburo already in February 1933. In the resolution of KPK and KSK on 28 May 1935, it was specified 'that they, being directly responsible before the state for the defence of the interests of money circulation, have defaulted on their specific state functions and conducted almost no struggle with criminal issue of any sort of local loans and money substitutes'.[70]

After the abolition of the rationing system the government actively sought to strengthen the ruble. The check-up made by KPK and KSK revealed a huge quantity of 'local substitutes of money' circulating in various regions of the country. The channels of money circulation in the Caucuses were extremely obstructed. Here, for example, on state farms various bonuses, coupons and cheques were issued. In the municipal economy different substitutes for payment of municipal services were issued. Different kinds of loans and lotteries were very popular amongst local authorities.[71]

On one occasion the question of money supply was raised by Stalin himself. In March 1934 Stalin addressed the Politburo on the question of money issues made from substandard paper.[72] The Politburo charged Grin'ko and Kalmanovich, chairman of Gosbank, with 'negligence' (khalatnost).[73] The resolution personally obliged Grin'ko to stop immediately the issue of money from substandard paper and withdraw from circulation those already issued.

It was obvious that the issuing of local loans diverted resources of the population from the centralised loans and permitted local bodies to manipulate financial resources and to evade central control. The issue of money substitutes not only worsened the condition of money circulation and promoted inflation, but it also opened a channel of uncontrolled payments to the population evading the strict controls imposed on the wages funds. From the point of view of the central authority this was tantamount to a state crime. The problem was first raised in a resolution of KPK and KSK, and then by TsIK and Sovnarkom in May 1935.[74] Grin'ko was compelled to clarify his position. In the commissariat's journal he placed a lengthy article entitled 'Liquidation of cards and strengthening of the ruble', which underlined NKFin's resolve to deal with the problem.[75]

The purge in NKFin

The purges of 1937-38 did not leave the personnel of NKFin unscathed. The Central Committee plenum of October 1937 approved the proposal of the Politburo to expel Grin'ko as candidate member of the Central Committee on the charge of being an 'enemy of the people'. On 13 March 1938, Grin'ko was accused by the Military Collegium of the Supreme Court USSR of complicity in the case of the anti-soviet Right-Trotskyist bloc and shot. He was accused of carrying out wrecking in NKFin. During the investigation Grin'ko provided false testimony against his deputies (Levin, Abolin) and other leading workers of NKFin (Ozeryanskii, Dolgov, Mar'yasin, Popov, Lazarev) against whom cases were created.

After Grin'ko's dismissal in August 1937 NKFin was temporarily headed by V.Ya. Chubar'. Delivering a speech to the workers of the financial system in January 1938 he said that those who headed the NKFin in the previous period 'had the aim to muddle up the finance of the Soviet Union, they made the system of the turnover tax calculation more complicated on purpose, constantly shifted the rate of the tax, in order to break down the collection of means through one of most profitable sources of our budget' .[76]

The work of the commissariat was paralysed. The commissariat's staff was so disorganised, that despite the severe atmosphere of 1937 many party organisers (partorgs) in NKFin openly expressed their discontent with the scale of the purge.[77] During 1937 NKFin tried to recover from the heavy personnel losses which followed the removal of Grin'ko.

A.G. Zverev's appointment as narkom of NKFin in January 1938, which was personally 'blessed' by Stalin on Molotov's recommendation, opened a new stage in NKFin's history. Zverev also started his career with meetings devoted to 'the abolition of the consequences of wrecking'. However, in 1938 their spirit differed from that ofChubar' in 1937. NKFin's new administration halted the campaign of 'personnel questions' and the hunt for 'enemies of the people' and started critical consideration of the commissariat's work in the field of financial planning. The new administration sought at the same time to allay the displeasure caused to the political leadership and to those outside of NKFin. On the other hand the new administration according to the political traditions of the Soviet bureaucracy had to elaborate a new kind of programme of NKFin's activity under different conditions at the end of the 1930s. Zverev insisted: 'the problem is not just the necessity of abolishing the consequences of wrecking, but also in constructing our work in accordance with those economic and political problems, which stand before the financial system, and these problems are not identical to the problems of 1926, 1930 or 1936, they are changing and therefore each employee must grow to meet these requirements'.[78]

What were those new problems? Zverev reported that Stalin and Molotov brought his attention to the problem of balancing the revenues and expenditures of the budget on the whole and in separate branches and enterprises. The problem was that rigid collection of public revenues at the expense of the turnover tax, supported as we saw earlier by Grin'ko and by the majority of the former NKFin's chiefs did not enable them to supervise the financial 'health' of the economy. According to the ideas of Stalin and Molotov there should be cost accounting and correlation of profits and losses as the main sources of economic health of the country. As far as the tasks of the Second Five-Year Plan on tax collection and redistribution of resources through state budget for the needs of industry and defence were fulfilled the new record-keeping tasks were put before NKFin.[79]


The gradual re-establishment and strengthening of NKFin's position in the system of state administration in the 1930s did not mean that the most important matters of administration and control over the financial and credit system were in NKFin's hands. A significant proportion of resolutions in these fields, including those within the competence of NKFin, were settled in the sessions of the Politburo and Sovnarkom. The Secretariat and Orgburo of the party practically played no part in examining matters of a general character connected with the activities of NKFin. The Politburo in fact tended to duplicate the most important financial decisions passed by Sovnarkom: approving and confirming the state budget, the export-import and hard currency (valyuta) plans. The Politburo also examined and approved all basic draft laws concerning changes in the taxation and credit system.

However, the character of the decisions, which as a rule, were adopted without extended discussion and with only minor corrections, show that the Politburo and Stalin himself did not strive to interfere in detail or on a daily basis into financial policy, allowing others to act as a 'filter', in the form of Sovnarkom and STO and the various commissions of the Politburo. According to Molotov, Stalin allowed some matters to be handled by his deputies, by the commissars and by members of the Central Committee.[80]

Under Grin'ko NKFin was re-established as an important administrative agency, closely linked to Sovnarkom and STO; the function of financial and monetary regulation, which in 1928-29 had appeared to be no longer necessary, had to be recreated in response to the crisis unleashed by unchecked investment growth, and was incorporated into the management of the planned economy. Within that system NKFin retained its specialised role, particularly as an agency of financial and credit control, albeit with uneven success. Its influence in drafting the Second Five-Year Plan was limited, the commissariat being eclipsed by Gosplan.

[1] Istoriya sotsialisticheskoi ekonomiki, vol. 4 (Moscow, 1984); R.W. Davies, The Soviet Budgetary System (Cambridge, 1958); E. Zaieski, Slalimsl Planning for Economic Growth, 1933-1952 (London, 1980).

[2] R.W. Davies, Mark Harrison and S.G. Wheatcroft (eds) The Economic Transformation of the Soviet Union, 1913-1945 (Cambridge, 1994)pp. 15-16.

[3] KPSS v resolyutsiyakh i resheniyakh s"ezdov, vol. 4 (Moscow, 1970) p. 496.

[4] See for example M. Atlas, Kreditnaya reforma v SSSR (Moscow, 1952); V.P. D'yachenko, Istoriya finansov SSSR, 1917-1950 (Moscow, 1978) ch v.

[5] RGAE 7733/8/171,1 op.

[6] RGAE 7733/8/171, 17op.

[7] RGAE 7733/8/171, 19op.

[8] RGAE 7733/8/171, 21op.

[9] Ibid.

[10] RGAE 7733/8/171, 50.

[11] This fact is also confirmed by D'yachenko, op. cit., p. 251, where he states that the idea of the unification of taxation was advanced by TsKK-NKRKI already in 1928.

[12] RGAE 7733/8/171, 89op.

[13] Pis'maI.V.Stalina V.M.Mohtovu, 1925-1936gg: Sbomik dokumentov (eds L.Koshelova et al.) (Moscow, 1995) pp. 178-9.

[14] Ibid., pp. 193.

[15] SZ., 30,53-329. Kalmanovich served as chairman of Gosbank until April 1934, when he was replaced by I.E. Mar'yasin, who simultaneously held the posts            of chairman of Gosbank and deputy narkom of NKFin.

[16] R.W. Davies, Crisis and Progress in the Soviet Economy, 1931-1933 (Basmgstoke, 1996), pp. 110-12.

[17] Leplevskii, deputy chair of Administrative Affairs (upravlenyi delami) of Sovnarkom, on several occasions returned draft NKFin documents, signed by Levin, and not Grin'ko as required by protocol. RGAE, 7733/11/2,163.

[18] R.W. Davies, The Soviet Budgetary System, p. 152.

[19] RGAE 7733/9/15,195op-196.

[20] According to Molotov, the political orientations of the Second Five-Year Plan were discussed at night at Molotov's dacha with Kulbyshev and Mezhlauk. The main outlines of the plan were presented in Molotov's report to XVII party conference. 'Stalin came to read, then he summoned us, and made amendments.' F. Chuev, Sto sorok besed c Molotovym (Moscow, 1990) p. 262.

[21] RGAE 7733/10/61,43-45.

[22] RGAE 7733/10/60,4.

[23] 'Political danger' of some results of the commissions work compelled members of NKFin's collegium to make confidential all the results of its work. See RGAE 7733/10/60, 5.

[24] RGAE 7733/11/11,1.

[25] RGAE 7733/11/11,4.

[26] RGAE 7733/11/11,7.

[27] RGAE 7733/11/11,8.

[28] Ibid.

[29] RGAE, 7733/11/11,10.

[30] Ibid.

[31] GARF 5446/27/5,44.

[32] Ibid.

[33] See Gosplan chapter, p. 44 above.

[34] RGAE 7733/10/60, 51op.

[35] RGAE 7733/10/60,49.

[36] RGAE 7733/10/61, 84.

[37] RGAE 7733/10/60,107.

[38] GARF 5446/1/1647b, 27.

[39] RGAE 4372/31/16,108.

[40] RGAE 7733/11/126,1.

[41] RGAE 7733/11/130,66.

[42] RGAE 7733/11/1276, 25.

[43] RGAE 4372/31/294,44-5.

[44] RGAE 7733/11/127,4.

[45] K. Abolin, 'Rabotu po goskhodam-na politicheskuyu vysotu', Fmansy i sotsialisticheskoe khozyaistvo, 1933, no. 1-2, p 23.

[46] RGAE 773 3/10/308, 84.

[47] GAE 7733/11/304, 55.

[48] Resolution of NKFin's collegium 'Concerning the fulfilment of the plan of mobilization of money resources of the population and plan of collection of the turnover tax in the IV quarter 1932' (13 January 1933); Resolution of NKFin's collegium 'Concerning the work of financial bodies in the field of mobilization of means of the population, state incomes and budget' (23 December 1932); 'Concerning the work of Leningrad oblfo and gorfo on state revenue in the socialised sector', see Finansy i sotsiahsticheskoe khozyaistvo. 1933, no. 1-2,pp. 16-20.

[49] K. Abolin, op. cit., Finansy isotsialisticheskoe khozyaistvo, 1933, no. 1-2, p. 23.

[50] RGAE 7733/12/372.

[51] GARF5446/14/1462b,ll.

[52] GARF5446/14/1462b,94.

[53] GARF, 5446/14/1462b, 115-16.

[54] RTsKhIDNI, 17/3/961,22.

[55] Ibid.

[56] RGAE 7733/12/17, 242.

[57] RGAE 7733/15/228,1.

[58] Pravda 29 January 1935, Gnn'ko's report to TsIK

[59] SZ, 1934,11-92, 14-134.

[60] RTsKhIDNI 17/3/917, 5.

[61] RTsKhIDNI 17/3/919, 31.

[62] RGAE 7733/11/2, 200.

[63] RGAE 7733/12/17,125.

[64] RGAE 7733/12/17, 197.

[65] RGAE 7733/12/17, 204.

[66] P, 1 July 1936.

[67] RGAE 7733/12/9, 54-8.

[68] RGAE 7733/12/9,54, 57-8.

[69] RGAE 7733/13/761.

[70] RTsKhIDNI 17/3/915, 5.

[71] RGAE 7733/13/761.

[72] RTsKhIDNI 17/3/940,2.

[73] RTsKhIDNI 17/3/941,6.

[74] Finansy i sotsialisticheskoe khoiyaistvo, 1935, no. 5-6, p. 5.

[75] Ibid., no. 7-9, p. 5.

[76] V.Ya. Chubar', Problems of the workers of the finance system in 1938 (Moscow, 1938).

[77] RGAE 7733/15/85,52-3.

[78] RGAE 7733/16/89, 131.

[79] RGAE 7733/16/89, 144.

[80] F. Chuev, Slo sorok besed Molotovym, p. 259.