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I came across this from a telegram sent by a Mr. Lindley in Russia to Mr. Balfour in London.—

(Received November 28.)

(Telegraphic.)

Archangel, November 27, 1918.

Principal reason why Bolsheviks have lasted so long is their unlimited supply of paper money, and I venture to recommend particular attention be paid to this side of the problem. This paper money enables them not only to pay their way in Russia but to build up credits abroad, which are to be used to produce chaos in every civilised country. It is the first time in history that an anarchist society has unlimited resources.

I am absolutely convinced nothing is to be gained by having dealings with Bolsheviks. Over and over again they have shown themselves devoid of all scruples, and if it is inconvenient to punish their crimes and rid the world of them by force, the only alternative consistent with self-respect is to treat them like pariahs.

Source: A collection of reports on Bolshevism in Russia Great Britain. Foreign Office. April 1919

So, a major source of revenue for the Bolsheviks was the unlimited printing of paper money. Another major source was declaring anyone with anything worth taking to be an "enemy of the people", executing them, then taking all their stuff. But both those sources seem to have built in limits. You run out of people to execute and dispossess and, at some point, paper money will launch hyperinflation. What other sources did they have? The starving population wasn't going to be able to pay much in the way of taxes.

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    I think communism is keen on controlling the means of production (not only paper money production)... – Evargalo May 20 at 7:22
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    From Wikipedia Hyperinflation in early Soviet Russia: "In the words of one economic historian, "The only industry which thrived was that concerned with the production of paper money."[10]..." – Lars Bosteen May 20 at 8:23
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This is based on an Estonian radio show, 'Müstiline Venemaa' ('Mystical Russia') by historian David Vseviov, chapters 'The Financing of Bolshevik Activities', which described the pre-1917 financing, and 'Banking. Money Reform' and 'Speculations around Money', which described activities after Bolsheviks formed the government.



Summary Answer

This is to provide a summary answer in comparison with the winding full narrative:

  1. Before the 1917 revolutions, the Bolsheviks financed their party by membership fees, expropriation, protection rackets, and donations.
  2. After the October Revolution, the first method was the organise a 'Revolutionary Tax'.
  3. The next idea was to print money in order to solve problems of monetary supply.
  4. A "natural" tax was conceived in order to replace a ever-more-worthless monetary income with an actually needed good that was taken in taxation.
  5. The monetary policy evolved to be nearly without money by 1920 when goods (in a type of barter economy) were the main source of government financing.
  6. This was reversed in the NEP where money was rehabilitated and public faith in a seemingly stable currency restored.

However, I think the telegram in the OP is misleading as it would have been very difficult for the Soviet government to restore faith in them for foreign (non-Socialist) governments given they repudiated all foreign (and domestic) debts of previous governments in 1917. Nevertheless, world revolution was supported by providing goods and supplies to foreign revolutionary elements.



Pre-Revolution Financing

To set the ground for later methods, this is useful. Regrettably, there is no good written evidence on the actual sizes of monetary instruments the Bolsheviks had at hand. Nevertheless, Bolshevik monetary capacity was quite considerable. By the start of the Revolution, the Bolsheviks had control over several tens of millions of roubles. The sources of this financing were:

  • membership fees;
  • expropriation;
  • protection rackets;
  • donations.

Membership Fees

In the early years, the membership fees were almost sufficient to cover expenses. Even in the later period of the Party, the official explanation (including in Party Q&A sessions when this question came up) was that the membership fees were the primary and main source of income, occasionally supplemented by the Party newspaper industry (one copy for one or two kopecks).

Expropriation

Expropriation was an acceptable activity because they were taking from the rich and re-distributing this to the poor (and not keeping it for the Party). This was later excised (or, at least, not emphasised) by Soviet historiography though the practice continued into the 1920's. The Bolsheviks also robbed banks to re-distribute the money to the poor (which would not have been able to happen later when they were in charge of the banking system).

Between 1905 to 1907, the Revolutionaries stole approx. 7 million roubles in over 3,000 heists. Some notable examples:

  • 13-Feb-1906, Latvian Social Democrats robbed the state bank in Helsinki for 150,000 roubles;
  • 07-Mar-1906, Vladimir Masurin robbed a credit union for 800,000 roubles;
  • 14-Sep-1908, a post train was robbed for 2,000,000 roubles.

Protection Rackets

More or less the same as above in a slightly more polite format. Very little evidence exists contrary to the public nature of heists. Some reports are extant from Baku with respect to Stalin, but there are no good estimates on the totals gained from protection rackets.

Donations

Donations can be subdivided:

  • domestic donations: newspaper recordings of generally relatively small donations (but see below); there also existed regular "monthly donations" options (supplementary to Party membership fees) where people would send parts of their salaries to the Party on a regular basis;
  • foreign donations: biggest sums from wealthy organizations such as Jewish conglomerates (with the hope of preventing pogroms and purchasing acceptance) as well as foreign states and intelligence services (some examples):

Both the proletariat (small sums but many people) as well as the wealthier classes (industrialists, newspaper owners, etc...) provided private donations, e.g. Savva Timofeyevich Morozov, a Moscow industrialist and one of the wealthiest people in Russia (!!!), and industrialist Nikolai Pavlovich Schmidt. Morozov spent tens of times more on charity than his annual salary of 250,000 roubles, incl. on the Bolshevik party.


Government Financing

First Principles

After the October Revolution, the new government had to make decisions based on their new national plan. In effect, there were two important ones they made with respect to this topic:

  • Nationalising the banks to allow central direction of the economy;
  • Disavow all domestic and foreign debts.

In these times, it was also decided that the Soviet state did not need a budget. On the same line of thought, (state-owned) nationalised industries were exempted from tax because the government did not see a reason in paying themselves by a round-about route.

Revolutionary Tax

A special Revolutionary tax was ordered with the purpose of collecting 10 billion roubles. Of this, about a billion was collected. This was found to be extremely ineffective as they spent more on the administration of the tax than what was collected.

Natural Tax

It was decided that a "natural" tax would solve these problems. Instead of collecting money, goods would be collected instead as these goods were the real necessity. The rich, in this system, will give more. The tax was divided into the governorates who sub-divided it up to the level of the individual. The tax was effected on the level of the individual by how much those individuals can retain -- everything they couldn't retain was to be given away (e.g., if you were allowed to retain 100 kg of grain, you would give away 2 kg if you had 102 kg or you'd give 100 kg if you had 200 kg). In essence, this was the formalization of taking 'everything' away, but also the only viable way to feed the army and the urbanized population in a time when money did not have value.

Currency

Old Provisional Government money was in effect after the 1917 October Revolution. The Bolsheviks printed this currency for a while, and the value of the Provisional Government roubles fell. It was decided to print a new, Soviet, money, because it was natural that the money which belonged to the old government would be worthless in a new system. The new Soviet rouble was introduced in February 1918.

This, however, had the paradoxical effect of fixing the supply of the Provisional Government money after February. Therefore, black markets had Czarist money, Provisional Government money, and Soviet money—and the supply of the last was now continuously increasing while the others were fixed. As an example, 1,000 Czarist roubles were worth, depending on the time, from 50,000 to 600,000 Soviet roubles.

As additional printing of Soviet roubles was not reported, it was not immediately obvious. The levels of monetary supply looked reasonable—not as if printing was ongoing continuously—and that people could increase prices, salaries, etc, due to how well the system was working. However, people soon understood that the actual supply was continuously increasing and they lost faith in the new Soviet currency in both the present and as a store of value for the future. This caused the rate of inflation to surpass the rate of printing new currency.

This situation is the same that the Czarist government had been by its end. The Czarist rouble only gained in value once its supply stabilized because it was no longer being printed.

The Soviet money printing industry employed—sometime between 1918 and 1920—about 10,000 people in four cities.

The Party pretended, once things had turned this bad, that these results had been intentional. Statements were issued to the effect that Bolshevik policy reduced millionaires to the status of plebeians:

The money prints are working like machine guns. This is the machine gun of the Financial Commissariat which has opened fire against the bourgeoisie.
Preobrazhensky

A Money-less Society?

From after the October Resolution, monetary supply had increased 54,370 times by 1922 (for every one original Soviet rouble printed in 1917/8, they printed 54,370 roubles in 1922). Prices had grown more and money was essentially pointless.

Only goods had a value and salaries were being paid in goods. Companies would make contracts between each other, e.g., if one employee worked for a bowl-making company, they would be paid in bowls, but the company could temporarily agree with a broom-making company, and one month the bowl-makers would pay their employees in brooms who could then resell these brooms for other items.

Similarly, the Government felt that they were being unreasonable by paying proletariat employees only for those people to pay rent for apartments. Therefore, apartment rents were abolished for the proletariat (but not for other classes) in early 1921.

After people turned to barter, many state companies also reached the same conclusion—they could instead trade goods for goods instead of money as in a barter economy. However, this created a debate on how to account for all the transactions that were undertaken. One of the proposed measures as a new accounting standard was "the expenditure of energy" (i.e., calories): the people whose work would expend more energy, would get a bigger food-packet compared to those who expended less energy.

It is perhaps noteworthy that domestic insufficiency did not mean that the government couldn't purchase things from elsewhere. During this time, Lenin arranged the purchase of 73 Rolls-Royce's for the use of the higher leadership in the midst of public famine and troubles (the cars arrived in the USSR from 1922 to 1925).

Conclusion

This was accompanied by complex internal discussions. The process was not particularly top-down driven as none of the high leadership believed that a money-less society could be achieved before the final victory of the Revolution. In the end, they made the decision to reverse moves into this direction with the Novaya ekonomicheskaya politika (New Economic Policy / NEP) and other policies.

One of the first indications of this was a move in 1921 which removed limitations on the amount of money that could be held by a private person. Permitting savings was the next thing though these had previously been appropriated by the state.

Prices were reintroduced over 1921/22 along with the concept of paying for services and goods. A budget was reintroduced in 1922 (the first budgets were organized in Czarist roubles with official exchange rates printed for various subjects) which also necessitated the re-creation of a central bank and the banking system (i.e., a 'state' bank instead of a 'people's' bank). A monetary reform was undertaken at the rate of 10,000 old roubles for 1 new rouble in 1922. The sign for "money"—in effect a government-sponsored rehabilitation of the place of money within the Soviet society—was also re-introduced on these new bills, and new taxes (on wine, tobacco, matches, honey, mineral water) were instituted. A state lottery was also re-introduced in 1921.

A sign of these new times was Lenin's 1922 article on the anniversary of the October Revolution which exalted the NEP and the new importance of gold for the Revolution, incl. the following quotation (liberal translation):

If we win in the entire world, we will make some of the biggest streets in the world out of gold, but until that time we will treasure and hoard it.

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    We might also mention that in that time period, the vast majority of the population was rural, and they didn't use much money, if at all (Maybe buying a scythe every 20 years or so when the old one was so worn out to become completely unusable). They produced their own food, they produced their own clothing, they built their own huts, and they didn't really own much more than that. – vsz May 20 at 18:31
  • @vsz: I can find a figure of 21.6% urbanized population for 1917, and 125 mil people in 1897. While that is the "vast majority" it still leaves a pretty considerable industrial base -- and the failure of the cities (as a place where people could survive) is noted in the deindustrialization of approx 30-50% during the Revolution. Also, it looks as if even when the people lived in the provinces they were liable to travel for work. – gktscrk May 20 at 18:54
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    Great answer. I suppose, under "protection racket" would be the widespread practice of arresting, say, a merchant and requiring a large sum to release him. Then, I guess when the money ran out, arresting him again and requiring another payment. Frequently, when there was no more juice left in the berry, the victim would be executed after all. – CWill May 20 at 19:55
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    Probably a good point would also be to note that one of significant sources were German intelligence who were hoping to disrupt Russia during war, as researched by historian Catherine Merridale (I don't have link to her research, but her pop overview in NYT column: nytimes.com/2017/07/17/opinion/… ). In her article she quotes British intelligence as estimating to have to spend 2 million pounds to match Bolshevik propaganda effort, much of which was financed by Germany. – Gnudiff May 22 at 9:00
  • @gktscrk Sorry, I didn't notice that part of your answer. I am not sure whether it should be mentioned more prominently, but as I understand the German intelligence aid was so extensive that Lenin was accused of being nothing more than a German agent, to the point that he was actively pursued by the Provisional government as such. – Gnudiff May 22 at 18:05
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I personally doubt this report's accuracy. I've seen numerous reports, news articles of the time 1918-20 in the American/British press that this just seems another one far from reality (like those in which the Bolsheviks were defeated etc).

From what I know, since 1918 the Bolsheviks started "prodrazvyorstka" — commandeering grain from peasants. From this they must have funded all their activities, sort of "manually". They expropriated industry in cities, grain in the countryside. They fed workers to work and soldiers to fight. Something like that.

Had they had money (I mean money that are commonly accepted as such, not any candy wrapper) they would've been able to buy grain, not confiscate it

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1) the bolsheviks were revolutionary maximalist social democrats with a class basis in the bourgeoisie, intelligentsia and aristocracy. This means that they viewed their concrete political activity through the lens of immanent and imminent (right now the next thing) world revolution. Particularly in Germany. To this extent the bolsheviks did not attempt an economy, but rather a manoeuvre in class warfare.

2) people stupid enough to accept cash in service of the above were welcome to it: honouring it or the French debt were only considered after the failure of the global revolution and the martyrdom of the cream of the Petrograd working class

3) ordinary workers were paid in truck: ie in goods. Ie in food

4) ordinary peasants faced extractions. Ie mass theft.

Simon Piranis work on the Russian revolution is excellent archival work about low level economic behaviours.

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