TO most western economists and business men the Five Year Plan is another Russian chimera, conjured up from the smoke of chimneys yet to be. To Soviet leaders it is the formula of industrialization, a gigantic but realizable scheme by which they expect to change the face of Russia. Under it they expect to invest some eighty billion rubles in the national economy between 1927-28 and 1932-33 and to double the national income at the end of that period.

The average foreign resident of Soviet Russia hesitates to label a project impossible merely because it seems to him fantastic. Involved in most Soviet undertakings is an unknown quantity x -- a lex economica of revolution -- which baffles analysis. Under the state planning system the Soviet Government forbids the import and production of luxury goods, fixes prices according to policy rather than supply and demand, and forces all able-bodied consumers to take part in production. There is, as yet, no way of measuring the economic advantages to be gained by this method, by eliminating the middlemen or by avoiding the waste of duplication and competition. Nor is there any way of measuring the abiding patience inherent in the character of the Russian people. The very size and diversity of the lands, resources and population groups which comprise the Soviet Union tend to retard the application of new schemes, but also to lessen the penalties inherent in them. This combination of factors has in the past permitted the partial fulfilment of Soviet programs which by western economic laws could lead but to disaster.

Very little capital is owned abroad by individuals within the Soviet Union, while that owned by the state is employed in current trade operations. Nor does Soviet Russia possess shipping and other facilities which would produce income abroad. Again, the excess of exports over imports is considerably less than it was before the war, because the importation of equipment is increasing. Foreign investments in Soviet concessions amount only to 50 million rubles. And although the Soviet Government enjoys a certain amount of goods credit in other countries, it has been unable to raise desired foreign loans. How, then, are the enormous sums for industrial development to be obtained?

The answer to this question, as stated in the Five Year Plan, is that sufficient funds will be obtained by "mobilizing the internal accumulations of capital." To understand this method of financing economic development one must first examine the application of Lenin's dictum: "Accounting and control . . . lead to socialism."

The history of Communist rule in Russia is a record of the effort by the party and the Government to establish effective economic control as a necessary condition of enforced industrialization. On seizing control in 1917, the Communists were confronted with an undeveloped agricultural country, economically exhausted and politically in chaos. For many years the Russian population had been increasing faster than the means for providing ordinary necessities and employment, and the resulting discordant population-production ratio created a problem which would have challenged any government that came to power.

It was already a problem in Tsarist times, and in the 90's Count Witte adopted industrialization as a solution. Industrial development and railway building were made possible by huge borrowings abroad, but these, added to the debts incurred for military preparations, demanded interest payments greater than the country could readily bear. Put to it to meet its foreign obligations, the Tsarist Government wrung an exportable agricultural surplus from the soil. The peasant producers were forced by taxation to increase their output, and even to sell grain which they really needed for their own consumption.

In addition to inheriting the population-production problem and the attempt to solve it by industrialization, the Communists also took over the Tsarist policy of forcing the agricultural population to pay most of the current costs. They have an additional (and in their view compelling) motive for the industrialization of Russia -- the need to adopt industrialization as the "road to socialism."

The broad Communist program for increasing the prosperity of the Soviet Union may be summarized, then, as the transformation of the national economy from the capitalist system with its so-called anarchy of production and distribution, into a socialistic system of unified plan and control; and the transformation of society from a class order into a classless order of "collective man."

THE STRUGGLE FOR ECONOMIC CONTROL

There have been three distinct periods in the evolution of communistic economic control.

The first period -- Military Communism -- resulted in the virtual destruction of traditional private property and personal rights. The Government proclaimed monopolies on the so-called "commanding heights" -- big industry, transport, foreign trade, banking, insurance and large agricultural estates -- with the purpose of organizing industry as a "single state factory." By March 1919 industrial enterprises operated by the state were conducted entirely on a non-commercial basis, without the use of money. Workers received wages in the form of a card ("payok") entitling them to food and goods in proportion to the labor credited to them. Distribution was controlled by the Commissariat of Supply. Agricultural products were declared a state monopoly. The net result was that by 1920 private capital had been abolished, products were no longer marketable assets, and the legal function of money disappeared. Economic control had been established in industry. But it had not been established in agriculture. Defying a system which requisitioned their grain without a quid pro quo in goods, the peasants limited production to their own needs, and the towns were threatened with starvation.

The second period -- the New Economic Policy -- was forced by the "peasants' strike" and the famine of 1921. It opened with a limited restoration of the market and a return of money as a medium of exchange, and led to the transfer of state-owned economic enterprise to a basis of commercial accounting detached from the budget. To aid in the reconstruction of the country many of the restrictions on private capital were removed.

The New Economic Policy has been called a "retreat to capitalism." In reality, it was a forced compromise between the two internal pressures which have determined the development of Soviet Russia since 1917: the ideological pressure to abolish capitalism, and the economic pressure to provide for the living necessities of 150 million people and to utilize the initiative of private capitalism for the sake of increased production. As a result of this compromise, capitalistic elements are still operating in Soviet Russia to a varying extent. The country's economic life has been divided into two main streams: the socialized sector, consisting of state and coöperative enterprises; and the private sector, consisting of enterprises belonging to individuals.

In lessening its economic control the Soviet Government assumed that the socialized sector would expand in due time to such an extent that the private sector would disappear. But, contrary to expectation, the private sector grew faster than was considered safe for a state in the "process of becoming socialistic." In 1926-27 the private sector accounted for 17.2 percent of the total production in industry, and 98.1 percent in agriculture; it conducted 3.3 percent of the wholesale trade, and 35.3 percent of the retail. It was apparent, then, that the compromise of the New Economic Policy was no longer tenable from the Communist Party point of view. The productive powers of the country had greatly increased, but private capitalism, particularly in agriculture and trade, had become a greater obstruction to the Government's plans. The Communist rulers had to permit more individualism (that is, loosen the control), or enforce more socialism and tighten the control. They chose to retreat from the New Economic Policy not to more capitalistic, but to more socialistic methods. This decision marked the second triumph of ideology over economic pressure.

The third period was opened in December 1927 by the "Socialistic Offensive." It aimed at a faster rate of socialization, of collectivism in agriculture and coöperation in trade; a faster tempo of industrialization, and recentralization in industry; greater emphasis on state planning, and enforced discipline for its fulfilment; greater use of the budget system to redistribute the national income and thus finance socialized economy; and a general tightening of the control over all economic life in the country.

The immediate task of the Soviet Government was declared to be the coördination of the means of production, so that private agriculture would work with socialized industry. The instruments decided upon for effecting such coördination were the distribution services of transport and credit (both of them state monopolies), and trade, which was to be forced into the "line of the state" by the Government's control of wholesale supply. The focal point in the struggle became control of agricultural supplies, an exportable surplus of which must be obtained in order to pay for the imported equipment.

SUPREME ECONOMIC CONTROL

The success of the Five Year Plan is predicated on the toil and sacrifice of all Soviet citizens. Certainly the Russian workers and peasants never had the comforts and luxuries of life. Whether under any other than the Soviet system the majority of the population would be any better off economically is a matter of sheer speculation. In evaluating the situation, however, the fact cannot be overlooked that the Soviet idea is to plan for the future rather than the present. For instance, butter and eggs, badly needed for home consumption, are exported; Russian butter can be obtained in London when it is unobtainable in Moscow. And vast sums are assigned for the development of "long haul" projects of primary production, such as power plants, iron foundries, etc., even though this means neglecting textile mills and other units producing consumers' goods, of which there has been a shortage since the revolution.

The Communists themselves submit to the exigencies of planned economy on the simple premise that this generation must suffer. There can be no doubt that most Communists and members of the organization of Communist Youths, who together comprise 2 percent of the total population, are sincerely working and enduring hardships today for the sake of future prosperity. The 98 percent majority, however, who are not sustained by discipline and faith and do not enjoy the sweets of power, are more concerned with the problems of subsistence. The interesting question arises: How do 2 percent convince 98 percent that they must suffer for the sake of the Five Year Plan?

Several answers can be given. Armed rebellion is virtually impossible. Open resistance is kept within local bounds, and is quickly punished. The 125 million peasants, constituting four-fifths of the total population, lack energy and organization, even though (as the unquestionably severe food crisis in 1929 shows) they may indulge in a kind of sabotage, a sullen resistance to the Government's policy of fixing agricultural prices. In the urban centers persons who do not approve of the party's program must coöperate or starve. Furthermore, the party is staunchly supported by the trade unions, and by the proletariat in general. Workers grumble fiercely as individuals, but collectively they coöperate with the Government, secure in the knowledge that they receive first consideration in times of actual shortage.

But the real answer to the question of how the small minority controls the great majority is found in the organic nerve system of control, with its center in the Kremlin.

Under the Soviet régime the towns dictate to the villages (i.e., industry to agriculture); the proletariat dictates to the towns; the Communist Party dictates to the proletariat; and the Central Committee and Politbureau of the party dictate to the party as a whole, to the Government, and to the country at large.

The Communist Party enjoys a "monopoly of legality." No other party is permitted, and factional groups within the ranks are forbidden. There is complete freedom for discussion of all controversial questions within the party until a decision has been reached, but after that if a member opposes the will of the majority he may find himself expelled. The resolutions adopted by the party are not laws, but party loyalty requires that all members abide by them. As all the People's Commissars (who make up the governmental cabinet) are also members of the Central Committee of the party, the decisions of the latter are readily transmuted into governmental decrees.

In general, policy originates in the "steering committee" of the Central Committee, known as the Politbureau and composed of nine leaders. It is the real source of legislation, and has the power to annul the decisions of the constitutional or Soviet organs of authority. This interrelation of party and Government is carried downward from the center at Moscow, and exists between the most remote local Soviet and the corresponding party cell. In every elective governmental body there is a party "fraction," composed of the party members in that particular organization, which enforces the party control locally. As voting in the Soviets is by "showing of hands," opposition to the party members seldom develops.

Internal party control is entrusted to the Central Control Commission, the "party cleanser," the function of which is to recommend the expulsion of members guilty of factionalism or breaches of discipline. In November 1928 the Central Control Commission renewed its assault on the remnants of the left opposition (Trotskists), who favored faster industrialization at the expense of agriculture, and also declared an offensive against the new right opposition (the Bukharin group), who wished to slacken the tempo for the sake of improving the immediate welfare of the consumers. In May 1929, on the adoption of the Five Year Plan, a general party cleansing was declared, the first since 1921. All opposition, left or right, is to be exterminated, and the party will seek only such new recruits as will add strength to its program.

The fact that the higher governmental bodies are exclusively Communist in personnel, that three-fourths of the managers in state industry are party members, and the rank and file of the party at all stages of the pyramid serve as constant inspectors of the enterprises with which they are associated, insures the party's control of Russia's economic life. This control, in the strict sense, operates through the Workers-Peasants Inspection and the State Political Administration (G. P. U.), which are entrusted with enforcement of conformity to the single, unified plan.

Nominally the Workers-Peasants Inspection is a government commissariat; in reality, it is an extension of the Central Control Commission of the party. G. Orzhonikidze, a Georgian and a close adherent of Stalin, is the chief of both.

The function of the Workers-Peasants Inspection is to study the Soviet system at the commanding points, in order to place it on a "scientific basis, which would exclude the possibility of bureaucracy, perversion and superfluity." The masses, the trade unions, economic commissions and workers and village correspondents are directed to report to it all instances of obstruction, incompetence and breach of trust.

The method of inspection is for a commission from the control and verification section of the Workers-Peasants Inspection to appear, without notice, at the headquarters of a commissariat, a trust, a Soviet, a bank, a factory, a railway, almost any state institution, and call for its books. For weeks the commission checks accounts against ascertainable facts. The working conditions of the organization are examined in the light of the general economic plan. The Council of People's Commissars then publishes the findings, along with a decree designed to effect the recommended changes. From time to time party congresses have given more power to the Workers-Peasants Inspection, until today it provides the party and Government with a searchlight from which there is no escape.

The State Political Administration or secret police, better known by the initials G. P. U., is the "watchful eye of the revolution" and the punitive organ of the class war. It pursues the speculator, the counterfeiter, the smuggler, and all "economic criminals" who ordinarily lie beyond the jurisdiction of a military-political tribunal. In Russia and abroad it ferrets out economic conspiracy, economic espionage, and economic counterrevolution -- generic terms which cover all possible offenses against a state which is in business. It differs from the old Cheka in that it is, at least nominally, subject to the Central Executive Committee of the Government and attached to the Council of People's Commissars. As a matter of fact, its orders come from the Politbureau and the Central Committee of the party. It differs also from other famous weapons of class justice, such as the Committee of Public Safety of the French Revolution, or the Okhrana of the Tsars, by its functions in economic as well as in political control.

Ownership of the largest single economic enterprise ever known makes the Soviet state peculiarly sensitive to activity detrimental to its business plans and its property rights. Crimes against individuals are considered less heinous than crimes against the state. Murder, unless the victim happens to be an official, is punished by up to ten years' "restriction of liberty," with frequent permission to go home on parole. Destruction or theft of state property, on the other hand, may, and frequently does, involve the death penalty. This departure from Western concepts of crime is explained by the ideas underlying the Soviet state.

ADMINISTRATIVE CONTROL

Administrative control of the economic and financial activities of the state is vested in the Council of Labor and Defense (STO), an inter-departmental group responsible directly to the Council of People's Commissars. The STO was organized from the old Council of Defense, the inter-departmental war cabinet, and was granted executive and legislative powers. Its members, trusted Communists of long standing, are the holders of the key positions in the Soviet economic system.

The STO is the unifying organization at the apex of the pyramid. It originates the general economic plan, holds the "commanding heights," and through its subsidiary organs controls the entire economic activity of the Soviet system. Its decisions automatically become laws, binding on both central and local authorities, unless they are protested by individual members of the Council of People's Commissars, or by representatives of the republics in the præsidium of the Central Executive Committee.

The most important of the commissions through which the STO operates is the State Planning Commission (Gosplan). Although without direct executive or legislative power, the Gosplan has become the key control of the economic system. Created in 1921, it grew out of the Electrification Planning Commission. Its instructions were to work out means of coördinating industry so as to eliminate competition and waste. This rôle was soon enlarged to include planning in finance, trade, credit and marketing. In 1926 the STO ordered all the commissariats to coöperate with the Gosplan by submitting all information demanded, and by observing the "strictest discipline in carrying out the plan." In January 1927 the Gosplan began work on the first Five Year Plan. It was proposed that each year thereafter this economic prospectus should be made for the succeeding five years.

The chief handicap in planning is the unreliability of agricultural statistics. The sown area is calculated from information furnished by the peasants themselves, who intentionally or unintentionally give wrong figures. Data are collected from about one million peasant families, one twenty-fifth of the total number; for the rest, estimates are made. To the peasant returns is added an "unaccounted sown area," sometimes as high as 25 percent of the whole. Miscalculation arises also from the necessity to set the "control figures" for the ensuing year before the results of the current year are known. The figures for 1927-28 were made out in the summer of 1927, when the crop was only estimated and when the output of industry was known for only eight months.

Natural calamities and unforeseen changes of policy cause even greater upsets in the calculations. The 1927-28 plan was first published on September 9, 1927. In December 1927 the party opened the "Socialistic Offensive" on the capitalistic elements of agriculture and trade. Crop failure had reduced the grain supply and the offensive caused the peasants to hide grain. As grain ceased to be available for export, the foreign trade balance for 1927-28 showed not an excess of exports but an excess of imports of 161 million rubles (ruble equals $.5146). At the same time the agricultural tax yielded 48 million rubles less than was expected. And because of the suppression of 90,000 private trade-units at a faster rate than was contemplated in the plan, the revenue from the trade-industrial tax fell 102 million rubles short of the estimate. On the other hand, other revenues, and industrial production, exceeded the plan figures.

Even the short experience of the Soviet Government with state planning demonstrates the fact that economic planning must be coördinated with political policy.

THE FINANCIAL PLAN

The economic control described above is exercised to "mobilize" the internal accumulations and reserves of the entire country according to a financial plan first worked out in 1928. Before examining the general financing scheme we should note two features of the Soviet system -- the policy of price-fixing, and the redistribution of the national income by means of the budget.

Let us first consider the Communist method of fixing prices. Besides its many functions in administering the foreign trade monopoly and in controlling the domestic market through the state monopoly of wholesale supply, the Commissariat of Trade (Narkomtorg) employs a trained personnel to fix the prices to be paid for agricultural products which are collected and for industrial commodities which are distributed. This function of price fixing gives the state enormous power in favoring one economic group against another, or one region against another.

On the basis of data gathered in different regions the Narkomtorg computes the amount a peasant should receive in order that he will feel it worth while to produce. Data are collected also on the quantity and kinds of products he is likely to produce. From these two sets of data the Narkomtorg calculates minimum prices, that is, the lowest at which the peasant is likely to sell in order to get supplies for his family. The Narkomtorg also calculates the maximum prices industry can afford to pay for such products, using as the basis the estimated costs of reworking raw materials. Workers' budgets are taken into consideration, and in the case of products which are exported as well as consumed at home the calculation also takes account of world prices. In other words, the prices actually fixed for agricultural products represent a compromise between the peasants' demand for high prices and the demand of industry and town workers for low prices, with due regard for world prices when necessary.

Prices are fixed by the Narkomtorg for large areas, sometimes for whole republics. The governments of the republics may raise or lower by 10 percent the prices fixed by Moscow for their areas, to meet local conditions. But they must maintain the average fixed for their areas. Price violation is punishable.

Price fixing is directed, among other things, toward state planning in agriculture. Thus the Narkomtorg manipulates prices in order to make it more profitable to grow the kind of crops desired -- for instance, wheat rather than rye, or flax rather than potatoes. If there has been over-production of sugar the prices on sugar beets are lowered in advance so that the peasants will grow other products.

In recent years the Narkomtorg has promoted the contract system, which is looked upon as a half-way step to collectivism. The peasant agrees to grow a certain amount of raw products, and receives an advance payment in the spring. The remainder is paid, at prices fixed in advance, when he makes delivery in the autumn. As the system develops it is expected that agricultural production will take on the semblance of an organized plan.

The Narkomtorg also fixes the price norms at which industrial trusts and the syndicates must sell manufactured goods to the central trading organs, also the trade surcharges permissible at each stage in the distribution system. Disputes as to the "freeing," or factory, prices between the Supreme Economic Council, representing the producers, and the Narkomtorg, representing the consumers, are referred to the STO for arbitration.

Except for a certain amount of handicraft wares the state controls almost the entire supply of industrial commodities. Nearly 100 percent of the marketable grain and more than 80 percent of the other marketable agricultural products are collected by state agencies and coöperatives. Tax pressure, and political and social pressure, force the peasant to sell his grain, meat, flax, butter, eggs, wool, etc., at prices fixed by the state. In many instances these prices are unquestionably lower than those he would receive were there an open market.

Since 1928 agricultural retail prices have been rising rapidly. But the peasant derives no advantage from high retail prices caused by a scarcity of his products or by the high costs of distributing them. He is, however, greatly affected by the spread between the prices the Government pays him for his products and the price he, in turn, must pay for industrial retail commodities.

Considering the 1913 price level as 100, we may note that industrial retail prices dropped from 210 in 1926-27 to 203 in 1928-29, whereas agricultural collecting prices rose from 156.6 to 170.3 during the same period. In other words, the Soviet Government has reduced this spread, the cause of agrarian crises, from 53.4 to 32.7 in three years. It should be noted, however, that many of the industrial retail goods quoted in the price lists are not available to the peasants at any price because of the goods shortage.

The mechanism of fixed prices is considered in Moscow a proper instrument to insure accumulations to socialized industry and to curb the speculation inherent in a condition of goods shortage. The 1929-30 plan calls for a reduction of costs in industry by 11 percent, and a reduction of industrial wholesale prices by 3.5 percent, the combination being designed to increase the ratio of profits in industry. And while there is a certain mystery in the operation of price control, its functions are admitted, and even proclaimed as evidence of the superiority of the Soviet system during the period of transition to socialism.

Now let us consider the Communist method of using the budget to redistribute national income. The single state budget, which incorporates the budgets of the central government and of the governments of the several republics, is prepared by the Commissariat of Finance and ratified by the Central Executive Committee. It must be approved by the Gosplan to insure its conformity to the general economic plan, of which it forms an integral part.

The three sources of state income are taxation, non-tax revenue, and state internal loans.

Taxes were restored with the shift from Military Communism to the New Economic Policy in 1921, and now yield more than two-thirds of the state revenue in the net budget.

In view of the fact that all land in theory belongs to the state, there is no land tax as the term is understood in America. In the place of such a tax and of all other direct taxes, the Russian peasant pays a tax on his estimated, not his real, income from land, live stock and other means of production.

This agricultural tax bears a frankly class character. The policy is to exempt the poor peasants and to take as much as possible from the prosperous. On the tenth anniversary of the revolution, in 1927, the number of peasants exempted entirely from the agricultural tax was raised from 23.5 percent to 35 percent. Of the remainder, the middle peasants (53 percent of the total households) pay 39 percent of the tax; the kulaks (12 percent of the households) pay the other 61 percent.

Another change in the application of the agricultural tax, begun in 1929, was the deduction of 20 rubles per "mouth" from the estimated taxable income of a peasant household. This measure was designed to arrest the tendency of peasant families to subdivide their holdings in order to escape taxation entirely. For in the mind of peasants everywhere taxation is unjustified oppression; and in Russia, where winning the peasants to acceptance of the Soviet régime is considered essential to the success of planned economy, this attitude is of particular importance.

In estimating a household's income the tax collector is guided by norms established for the district in which it is situated. The tax rate varies, by region and class status, from 7 percent on incomes below 100 rubles a year to sometimes as much as 30 percent on those above 600 rubles. As an example of the method of calculating the agricultural tax, consider the case of an average kulak (or prosperous) household of six members with sources of income evaluated by the following norms of income per unit:

 

10 dessiatines (27 acres) of sown land 50 rubles per dessiatine
1/3 " (.34 " ) of garden 240 " " "
2 " (5.4 " ) of hayfield 16 " " "
2 horses 25 " each  
2 cows 20 " "  
5 pigs 6 " "  
8 sheep 2 " "  

At the local income norms, the tax collector estimates the agricultural income of this kulak family at 698 rubles. The family also runs a cooperage, the income from which the tax collector estimates to be 300 rubles; but the Executive Committee of the province has ruled that only 50 percent of the income from cooperages should be considered as taxable. Another local ruling calls for a 10 percent addition to the estimated taxable income from agriculture when the total taxable income, including all items, exceeds 800 rubles. The tax collector thus arrives at the following:

 

Income from agriculture 698 rubles
Additional 10 percent  69.80 "
50 percent of income from cooperage 150 "
  ------  
  917.80 "
Deduction of 20 rubles per "mouth" 120 "
  ------  
Estimated total taxable income 797.80 "

According to the graduated scale, the tax to be paid by this kulak (prosperous) household is 180.15 rubles, or nearly one-fourth of the estimated taxable income. The American farmer would not be very happy if his income were about four hundred dollars, and if he had to pay a quarter of it in taxes.

For computing the trade-industrial tax, enterprises are divided into sixteen categories, based on their importance to national economy. The percentage of the turnover levied is smallest for the enterprises most necessary to the state. Heavy industry (primary goods) pays less tax than light industry (consumers' goods), and state and coöperative enterprises pay less than private ones. These percentages range from 1.6 percent in the first category to 17.15 percent in the sixteenth. Coöperative societies with a turnover of less than 20,000 rubles and certain organizations which the state wishes to favor, including social and cultural institutions, are exempt.

There is also the familiar income tax, which as elsewhere is used as a means of redistributing wealth. The difference is that in Soviet Russia the tax is graduated not only in proportion to income, but also with regard to social groupings which reveal the nature of the Soviet system. Three categories of personal income are established: 1. Incomes from wages, salaries, literary work, or from labor performed as members of coöperative societies which do not distribute their profits to shareholders. 2. Incomes from labor other than those included in the first category, i.e., from handicraft and industrial enterprises in which the number of hired workers does not exceed three, and from such enterprises which are exempt from the trade-industrial tax. 3. Incomes of trade and industrial enterprises which are excluded from the first two categories, and incomes from capital, i.e., interest-bearing bonds. Private juridical persons are taxed according to this category. Income tax exemptions vary according to zones of residence, i.e., incomes under 900-1,200 rubles are exempt in the first category; and under 500-800 rubles in the second and third categories. Educational and scientific institutions, mutual credit societies, some coöperative societies, and peasants who have paid the single agricultural tax are entirely exempt. The graduated income tax rates range from 0.7 percent on 1,000 rubles in the first category to 39.5 percent on 25,000 rubles in the third. Additions to the income tax of from 25 to 50 percent are made by local governments (counties, cities and villages). The incomes of state and coöperative enterprises, in general, are taxed 8 percent by the state. The amount of this tax is increased by one quarter for the local governments, making 10 percent in all.

The excess profits tax applies especially to private traders, to certain concessions, and to those branches of private industry which rework raw materials for which there is a need in state industry.

Indirect taxes yield more than half the total revenue from taxation. Of these the vodka excise is still the most important, bringing in nearly a billion rubles in 1928-29. Customs duties supplement the foreign trade monopoly in protecting Russian industries, but contribute comparatively small revenue, as most of the state-owned imports are exempt.

The state's second source of income is the non-tax revenues, which are rents from state property and profits from state enterprises.

The third source of state revenue is the state internal loans. During the period of currency reform (1922-1924), the Soviet Government resorted to compulsory loans in order to avoid inflation and excessive taxation. Not only were private traders compelled to subscribe, but workers and employees were to a certain extent compelled to accept bonds in lieu of wages. As financial conditions improved, the government stopped the practice. The new method of loan flotation involves efforts to obtain subscriptions by groups, as well as from individuals and institutions, and permits payment by installment. In theory there is no compulsion to subscribe, but the trade unions, house committees, local Soviets, etc., exert social pressure on their members, and subscription is considered a duty.

In Soviet Russia there are no commercial stocks and bonds in the American sense. There are no shares in private enterprise. Shares of the state joint companies are held by the state. Shares of joint companies, owned in part by the state and in part by private persons, cannot be bought or sold. But over 80 million subscribers hold state loan obligations. Since the year 1925 state industry has been financed largely by this means. The official attitude is that funds for industrial development can better be obtained from loans than from extensive increases in taxation.

State internal loans are divided into three groups: 1. Loans intended for subscription by the population generally, workers, employees, peasants, and well-to-do classes. These are usually in the form of lotteries. 2. Loans intended for subscription by industrial, trade, insurance, and other organizations, such as savings banks. These are interest-bearing loans, which comprise about one-half of the present outstanding internal state debt. 3. Loans issued by other bodies, but guaranteed by the government. Often these do not appear as state loans.

The total state debt arising from loans has increased from 366.7 million rubles on October 1, 1925, to 2,148.8 million on September 1, 1929. This indicates the importance of state loans in the scheme for financing industrialization.

Soviet economists use the figures of the combined net budget to estimate the redistribution of wealth each year and, in particular, the flow of funds from the private sector into the socialized economy. The combined budget includes both the single state budget and the local budgets. Items of revenue not figuring in the redistribution of the national income -- such as the turnover items of transport and communications, of certain municipal institutions, and of forests and reserves -- are omitted from the reckoning. The total revenues realized in this combined net budget in 1928-29 were 7,410.5 million rubles, or one fourth the aggregate national income of 28,534 million rubles. Included in these revenues were: 4,283.7 million rubles from taxes; 1,055.6 million from non-tax revenue; and 777.9 million from state loans. The total expenditure assigned was 7,251.1 million rubles, including: 1,716.0 million for administration and defense; 3,352.3 million for financing national economy; 1,484.8 million for social-cultural needs (education, health, social insurance); and 288.3 million for service on state loans.

The combined net budget realized in 1927-28 was 6,131.9 million rubles. According to the data of the Commissariat of Finance, the private sector paid 72.2 percent of this total sum, and received 5 percent of the expenditure. The socialized sector contributed 27.8 percent, and received 95 percent.

The figures of the redistribution of wealth effected through the combined net budget of 1928-29 are not yet available. When the budget was ratified it was estimated that 62.4 percent of the total revenue would be contributed by the private sector, which would receive only 2.8 percent of the expenditure, mostly in the form of pensions, aids to migrating peasants, etc. The socialized sector was expected to contribute 37.6 percent, and to receive 97.2 percent. In the balance, according to the calculations, the socialized sector was to receive 4,200 million rubles more than it contributed; the private sector 4,109 million less.

All the time that the struggle here briefly described has been in process between the socialized and private sectors, the Soviet Government has been attempting to find the money necessary to finance the industrialization of the country. As was earlier pointed out, the supply of foreign capital available is inadequate, and though the earnings of Soviet economic enterprises are increasing, they are still insufficient to finance the proposed expansion. Resort is therefore had to a continuous redistribution of the total national income. This process of "pumping" capital from private sources into socialized economy is considered the social-economic rôle of the Soviet budget system. The private share in the total national income dropped from 54.5 percent in 1926-27 to 46.8 percent in 1928-29. Its further reduction to 38.6 percent is one of the features of the plan for 1929-30. These figures indicate the success of the "pumping" process, from the government's point of view.

It should be noted, however, that the budget is also used to pour funds from one branch of economy into another (i.e., agriculture into industry); from one sphere of economy into another of the same branch (i.e., light industry and the production of consumers' goods into heavy industry and the production of means of production); from one region into another (i.e., from the more prosperous districts into the backward lands of Central Asia); and from the bourgeois, kulak and private trader classes into the proletariat class, by expenditures on social-cultural benefits from which the former classes are more or less excluded. This last function of the budget is considered one of the chief means of effecting the social transformation which is the ultimate objective of the revolution.

Now we are prepared to examine the general financial scheme. As typical of the method of financing industrialization under the Five Year Plan we may take the financial plan in the realized figures of 1928-29 and in the estimates for 1929-30 as recently adopted in Moscow. The financial plan describes the work and contributions to the revenue by the many state instruments, the budget system, the credit system and savings banks, the state and social insurance organizations, the state economic enterprises, the trade unions and the coöperatives. To these should be added the price control, though its contribution cannot be measured.

For the purposes of this article it is necessary to note not the contributing agencies in the financial plan, but the ultimate sources of income and the ultimate recipients of expenditure.

 

ULTIMATE SOURCES OF INCOME
(In millions of rubles)
  1928-29 Percent 1929-30 Percent
    of total   of total
Taxes 4,205.6 34.5 5,667.6 31.2
Profits of economic enterprises 3,797.0 31.2 6,663.4 36.6
Attracted funds (borrowings, etc.) 1,625.6 13.3 2,590.0 14.2
Insurance funds 1,360.0 11.1 1,657.0 9.0
Currency issue 200.0 1.6 425.0 2.3
Other sources 1,014.2 8.3 1,219.0 6.7
  -------- ------ ------- -----
  12,202.4 100.0 18,222.0 100.0

 

ULTIMATE EXPENDITURE
Administration and defense 1,637.4 13.4 1,864.0 10.2
Financing national economy [i] 6,646.1 54.5 11,119.5 61.0
Social-culture needs 3,034.7 24.9 4,152.2 22.8
Other expenditures 884.2 7.2 1,086.3 6.0
  -------- ----- -------- -----
  12,202.4 100.0 18,222.0 100.0

It should be noted that the above financial plan of the first two years of the Five Year Plan is distinct from, but inclusive of, the combined budget. For instance, profits of economic enterprises realized in 1928-29 are given as 3,797.0 million rubles, which includes 1,055.6 million rubles profits and rents in the non-tax revenues of the combined net budget, and the profits and returns of autonomous enterprises and institutions under state control, but not figuring in the budget. The sum total of 18 billion rubles, estimated as the amount to be available for financing industrialization in 1929-30, is a 50 percent increase over last year, and will, if realized, constitute 53 percent of the estimated national income.

These staggering figures can be challenged by economists, but there is no way to check either the underlying data or the resulting statistics. As remarked before, the factors involved in socialistic calculation continue to be an unknown quantity x so far as foreign observers are concerned. It has been the writer's experience, however, that statistics prepared by the Commissariat of Finance represent profound study, and compare favorably in accuracy with those prepared by similar institutions in most other countries. Soviet statistics are nowhere subject to such searching scrutiny as in Russia itself, and in the last five years the development of "planning discipline" has come to involve a penalty for overestimation by the lower units of the economic system. The opponents of faster industrialization within the Communist Party lost their political heads not because they questioned the statistics of already realized increase, but because they attempted to prove that the cost would be too great.

CONCLUSION

There is no doubt that the Soviet Government, in undertaking the Five Year Plan, has been influenced by the feverish "bull market" in Soviet industry. The economic profits of the next few years may be greatly overestimated, yet there are reasons for believing that it will not prove impossible to finance industrialization from internal sources without much aid from foreign capital. Take just one item. The total national income, which amounted to 25 billion rubles in 1927-28, was increased by nearly four billions in 1928-29. The increase expected in 1929-30 is six billions, which would make 40 percent of the five year program fulfilled in two years.

Such limited pessimism regarding the Five Year Plan as exists in Moscow concerns the difficulties of procuring adequate building materials and sufficient skilled workmen, technicians and engineers to direct the economic expansion. The actual financing of the gigantic scheme causes less questioning; the resources of the country are exceptionally rich and varied, and the system of economic control permits the state to "mobilize" well over half of the accumulations and reserves. Such a process would be impossible in countries where private property is sacred and where the private stocking is a safe and legal receptacle for savings. It is believed that when the private sector is exhausted as a source of funds the profits of the socialized sector will permit it to carry on by its own momentum.

The Russian people have no alternative to industrialization but continued economic backwardness. The population increases at the rate of three million a year, and the old economy, resting on unscientific agriculture, could not meet present demands for ordinary necessities or furnish the needed employment. In driving the population to industrialization the Soviet Government is consciously sacrificing the welfare of the present generation to that of the next. Its chosen instrument is the Five Year Plan. Under its provisions the Russian nation is stripped to the waist, paying for economic isolation and unprogressiveness in the past, and trying to work out its future economic salvation.

One may nevertheless wonder if, in eliminating so many of the "et ceteras" of life for the sake of industrial development, the Soviet Government is risking too great a sacrifice of humanity itself. The population is on iron rations, has in general an insufficiency of clothing, and lives in discomfort in crowded houses. Although the health of the workers is carefully watched, and clinics and ambulatoria are provided by social insurance, there has been a significant increase of neurasthenia. Should the Five Year Plan, however successfully financed, lower the national resistance to disease, the losses might outweigh the gains. Or should the new generation, for which the welfare of the present one is sacrificed, become a collective society of dehumanized robots, the price of industrialization might prove exorbitant -- even with socialism achieved and thrown in.

[i]In addition to the sums noted under financing national economy it is estimated that the population and enterprises invested 450 million rubles in agriculture last year, which figure is expected to double in 1929-30.

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  • BRUCE C. HOPPER, formerly Instructor at Harvard University, who has just spent two years in Soviet Russia studying the economic situation
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