The general role of banks in free market economies is no mystery. However, listing what a banking contributes to a state-led economy, or even a wholly state-run economy, could require more thought. Thankfully, the early history of the Soviet Union reveals that banks had something to offer even in a system where the state budget handled most of the job of directing surplus capital to where it was needed.


           In its early history, the Soviet Union was plagued by hyperinflation. The inflation had begun even before the communist revolution, when the gold standard was abandoned in 1914 to allow money issuance to help finance spending during the First World War. Russia’s money stock grew in excess of 60% per year in 1914, 1915, and 1916. Retail prices rose fifteenfold during the war years, between 1914 and 1917.

           This was not even the worst of it as hyperinflation took hold after the Bolshevik Revolution. The socialist government struggled to bring inflation down, even after the end of the civil war had secured their rule over the country. Though the state would provide some goods at low or no cost, official prices were irrelevant as people relied on black markets to cover their needs and prices there were much higher. The divergence accelerated and, by 1920, official prices were an average of just 1.3% of those on the black market. Functionally, the economy was essentially demonetized, with barter, rationing, and requisitions taking the place of purchases with money. Conditions were inhospitable to credit and banking.

           Prices rose by almost 1,000% in 1919-20, only a bit less in 1920-21, and over 7,500% in 1921-22. Some improvement would come with monetary reforms in 1922. One new ruble introduced that year was valued at 10,000 old rubles. The State Bank of the Russian Soviet Federative Socialist Republic also issued new banknotes, the chervonets, partially backed by gold.

           There were further monetary reforms in 1923 and 1924. In 1923, an even ‘newer’ ruble was launched worth 100 of the rubles from the prior year. Gold chervonets coins were also introduced containing as much gold as the old 10-ruble imperial coin. Old devalued banknotes were withdrawn from circulation and new ones issued. In 1924, a new ‘gold’ ruble was worth 50,000 ruble of 1923. The ruble was fixed to gold as the old 10-to-1 ratio between the gold coin and the common ruble was restored.

           Hyperinflation ended and the state budget and balance of payments was in surplus by 1925. The money stock in 1924-25 had grown by ‘merely’ 89%, and this would fall to 40% in 1925-26 and 24% in 1926-27 by which point the price level had actual registered its first annual contraction.

New Economic Policy

           After the revolution, hyperinflation, and civil war, the early Soviet economy was in shambles. Economic output contracted 10% in 1919-20 and 12% in 1920-21. The Communist Party conceived of the ‘New Economic Policy’ to reverse this. The policy reintroduced market-oriented rules and so gave some space, and credit, to private enterprise.

           Economic growth began again in 1921 and the early recovery coincided with the monetary reforms to reduce inflation. Together with the monetary reform, the temporary relaxation of communism meant that bartering and rationing became less common and money and credit could assume their prior economic role.

           As a matter of ideals, Vladimir Lenin preferred there be a single government-controlled bank in the Soviet Union. The old State Bank of the Russian Empire in Petrograd was seized on the first day of the Bolshevik Revolution in 1917 and all other banks were nationalized without compensation that same year and amalgamated into a new bank. However, Lenin’s ideal would have to be suspended with the New Economic Policy.

           Semi-private banks were created in 1924 when municipalities were permitted to organize local banks so long as they held 51% of their shares. Mutual credit organizations were also created and there were 285 of them by 1927. Because they were capitalized by their members, they were privately owned. The mutual banks financed the private economy by discounting short-term bills and making loans.

           Indeed, during these years much of the pre-revolution credit system reappeared. There were now cooperative banks, municipal banks, joint-stock banks, and savings banks. The New Economic Policy even permitted private pawnshops. Together, these lenders supplemented the credit provided by the State Bank.


           The pre-revolution State Bank became the State Bank of the Russian Soviet Federative Socialist Republic after the revolution and then the State Bank of the whole of the USSR. It was usually more simply known as the Gosbank. It had taken up the burden of financing the country’s economy alone when the private banks were liquidated or nationalized back in 1917-18.

           Despite its size and importance, under the New Economic Policy, the Gosbank had been given some independence in 1921. Along with the other financial firms created, Gosbank provided short-term loans. However, the other banks were tiny by comparison. Gosbank was by far the largest lender to firms which otherwise had little access to investment beyond what their retained earnings or the government budget supplied.

Offices of the State Bank Board in Moscow (1920s), Today the Offices of The Bank of Russia

           When the New Economic Policy was eventually abandoned, Gosbank would reassume its monopolistic role. In the late 1920s and 1930s, Gosbank was given exclusive, or near exclusive, responsibility over the monetary system, short-term lending, payments settlement, accounting, lending to the agricultural sector, the payroll of state firms, lending to trade companies, and foreign exchange. Because Gosbank controlled the payments of state enterprises, it helped the state conform the economy to its Five-Year Plans. This was not new; even in Tsarist times, the State Bank of the Russian Empire was used as a core instrument to implement state industrial policy.

Savings and Interest

           The savings of common people played an important role in the financial system of the New Economic Policy. In 1923, the Soviet government reestablished a system of savings banks across the country. There were 2,506 of these by 1924 and 16,924 by 1928, usually located in post offices, railroad stations, and other accessible places. These banks had 24 million depositors by 1933.

           The state set interest rates on deposit accounts at savings banks. The level was set to encourage savings to the extent desired and discourage the users of savings, state firms, from being inefficient with capital. Interest rates were high in the 1920s but then fell in the 1930s to levels typical in Western Europe in prosperous times. However, Soviet interest rates were not equivalent. By this time, lower interest rates could not stimulate any real economic activity since most capital was raised and allocated via the state budget and not banks or capital markets, except in rare exceptions.

End of the NEP

           By 1930, private banks and mutual credit organizations, and a great measure of private enterprise, had disappeared with Stalin’s abandonment of the New Economic Policy. Gosbank took over the role of the other banks and intercompany lending was prohibited; uses of Gosbank loans would be strictly specified from now on and the bank, for all its size, reverted to being little more than a tool of economic regulation.

           While in 1923-24, Gosbank provided ‘only’ 67% of all short-term bank loans in the Soviet Union, this was 97% by 1932 and would reach 99% in 1940. Only some financing for construction or foreign trade could come from a source other than the Gosbank. From now on, only the state budget would capitalize state companies. Still, the Gosbank maintained a role providing short-term financing to smooth over any temporary needs unaddressed by the budget.

“Without big banks, socialism would be impossible. The big banks are the ‘state apparatus’ which we need to bring about socialism, and which we take ready-made from capitalism. … A single State Bank, the biggest of the big, with branches in every rural district, in every factory, will constitute as much as nine-tenths of the socialist apparatus. There will be country-wide bookkeeping, country-wide accounting of the production and distribution of goods; this will be, so to speak, something in the nature of the skeleton of socialist society.”

Vladimir Lenin, Can the Bolsheviks Retain State Power?, 1917


           While some Marxists, including Karl Marx himself, seemed to assign little importance to credit in a socialist economy, the early history of the Soviet Union illustrates the importance of a banking system to both capitalist and communist economies. The Soviet Union’s temporary divergence from a socialist economy, the New Economic Policy, likely couldn’t succeed without a freer financial system to complement the limited free enterprise permitted, or so Lenin and other leaders of the revolution thought.

           Even when that experiment was abandoned, the banking system proved itself useful even in a communist economy. Though banks no longer possessed a leading role in managing the economy, they did still regulate the economy, on behalf of the state, and filled the temporary capital gaps that couldn’t be anticipated or addressed by the public budget.

More from the Tontine Coffee-House

           Read about the Moscow Narodny Bank, a Soviet-owned London bank which grew out of the London operations of an older Russian bank. Also explore Soviet education in finance and economics. Consider subscribing to this blog’s newsletter here

Further Reading

1.     Garvy, George. “Chapter 2 – The Origins and Evolution of the Soviet Banking System: An Historical Perspective.” Money, Financial Flows, and Credit in the Soviet Union, Univ. Microfilms Internat, Ann Arbor, Mich, 1991, pp. 13–35.

2.     “History of the Bank of Russia.” История Банка России, Bank of Russia.

3.     Homer, Sidney, and Richard Eugene Sylla. A History of Interest Rates. Wiley, 2005.

4.     Nakamura, Yasushi. “Soviet Banking, 1922–1987: An Analysis of Gosbank Balance Sheets.” Comparative Economic Studies, vol. 55, no. 1, 2013, pp. 167–197.

5.     Pickersgill, Joyce E. “Hyperinflation and Monetary Reform in the Soviet Union, 1921-26.” Journal of Political Economy, vol. 76, no. 5, 1968, pp. 1037–1048. 

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