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Russian Monetary Policy and Industrialization, 1861-1913

Published online by Cambridge University Press:  11 May 2010

Paul Gregory  and
Joel W. Sailors
Paul Gregory
Affiliation:
University of Houston
Joel W. Sailors
Affiliation:
University of Houston
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Abstract

Some recent critics of Russian industrial policy argue that the costs of the Witte System may have been excessive relative to its benefits and that similar rates (or perhaps higher rates) of industrial growth could have been attained if alternate fiscal and monetary policies had been adopted. Once differential rates of growth of prices and real national income are considered, it appears that the Russian money supply was not unduly constrained. The authors also demonstrate that foreign capital inflows made a substantial contribution to Russian economic development, as did the decision to adhere to the international gold standard.

Type
Articles
Information
The Journal of Economic History , Volume 36 , Issue 4 , December 1976 , pp. 836 - 851
Copyright
Copyright © The Economic History Association 1976

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References

1 Laue's, Theodore H. vonSergei Witte and the Industrialization of Russia (New York, 1963)Google Scholar describes the evolution of the Witte System from 1862 through Witte's tenure in office. Olga Crisp, in a review of von Laue's book, in Soviet Studies, 6 July 1964), 90-94, disputes von Laue's contention that the Witte System was abandoned after Witte, arguing instead that it in fact continued almost to 1914.

2 This summary is derived from: Gerschenkron, Alexander, “Agrarian Policies and Industrialization: Russia 1861-1917,” in The Cambridge Economic History, Vol. VI, Part II (Cambridge, 1965)Google Scholar; idem, “The Early Phases of Industrialization in Russia: Afterthoughts and Counterthoughts,” in Rostow, W. W., ed., The Economics of Take-off into Sustained Growth (New York, 1963)Google Scholar; idem, Economic Backwardness in Historical Perspective (Cambridge, Mass., 1962); Laue, Theodore von, “The State and the Economy,” in Black, Cyril E., ed., The Transformation of Russian Society (Cambridge, Mass., 1960), 209–55Google Scholar; idem, “A Secret Memorandum of Sergei Witte on the Industrialization of Imperial Russia,” Journal of Modern History, 26 (March 1954)Google Scholar; idem, “The High Cost and Gamble of the Witte System: A Chapter in the Industrialization of Russia,” this Journal, 13 (Fall 1953), 425–44Google Scholar; Nötzold, Jürgen, “Agrarfrage und Industrialisierung am Vorabend des ersten Weltkrieges,” Saeculum, Jahrbuch für Universalgeschichte, 17 (1966), 170–90CrossRefGoogle Scholar; Portal, Roger, “The Industrialization of Russia,” in Cambridge Economic History, Vol. VI, 801–74Google Scholar; McKay, John P., Pioneers for Profit: Foreign Entrepreneurship and Russian Industrialization, 1885-1913 (Chicago and London, 1970)CrossRefGoogle Scholar; Falkus, M. E., The Industrialization of Russia, 1700-1914 (London and Basingstoke, 1972)CrossRefGoogle Scholar; Bonwetsch, Bernd, “Handelspolitik und Industrialisierung: Zur aussenwirtschaftlichen Abhängigkeit Russlands 1890-1914,” in Geyer, D., ed., Wirtschaft und Gesellschaft im vorrevolutionären Russland (Köln, 1975), 277–301Google Scholar.

3 On this point see , Gerschenkron, Economic Backwardness, and Alexander Gerschenkron, Europe in the Russian Mirror (Cambridge, 1970), Essay 1Google Scholar.

4 Soviet authors have stressed the mechanization of cotton textiles as the first “industrial revolution” of Russia, in particular Strumilin, S. G., Statistika i ekonomika, Izbrannye proizvedenia, I (Moscow, 1963)Google Scholar, and idem, Ocherki ekonomicheskoi istorii Rossii (Moscow, 1960).Google Scholar This claim has been disputed by Falkus and Portal: Portal, “The Industrialization of Russia,” and Falkus, The Industrialization of Russia. For a survey of the Soviet literature on this subject see: Bovykin, Valerij, “Probleme der industriellen Entwicklung Russlands,” in Geyer, Wirtschaft und Gesellschaft, pp. 188–209Google Scholar.

5 This conclusion is drawn from Falkus and Gregory: Falkus, The Industrialization of Russia, and Paul Gregory, “Economic Growth and Structural Change in Tsarist Russia: A Case of Modern Economic Growth?”, Soviet Studies, 23 (January 1972).

6 Kahan, Arcadius, “Government Policies and the Industrialization of Russia,” this Journal, 27 (December 1967), 460–77Google Scholar.

7 Barkai, Haim, “The Macro-Economics of Tsarist Russia in the Industrialization Era: Monetary Developments, the Balance of Payments and the Gold Standard,” this Journal, 33 (June 1973), 339–71Google Scholar.

8 Barkai's reference is to Lyashehenko, P. I., History of the National Economy of Russia, Herman, L. M., transi. (New York, 1949), p. 718Google Scholar, which comes from an earlier study by Engeev, T., “O platezhnom balanse dovoennoi Rossii,” Vestnik finansov, 5, 1928Google Scholar.

9 For an elaboration of the neoclassical model see Crouch, Robert L., Macroeconomics (New York, 1972)Google Scholar.

10 In view of the importance of these price data, we have prepared an appendix dealing with the reliability of the Russian data which we will supply to interested readers on request.

11 We are ignoring here the possibility of significant expectational effects due to unanticipated inflation or deflation.

12 See Hodgson, John S. and Phelps, Patricia, “The Distributed Impact of Price-Level Variation on Floating Exchange Rates,” The Review of Economics and Statistics, 57 (February 1975), 58–64CrossRefGoogle Scholar.

13 See Bloomfield, Arthur, Monetary Policy Under the International Gold Standard, 1880-1914 (New York, 1959), pp. 19–20Google Scholar.

14 Drummond, I. M., “The Russian Gold Standard, 1897-1914,” this Journal, 36 (Sept. 1976), 633–88Google Scholar.

15 Estimates of market economic activity (65 percent of NNP) suggest that Barkai's lower-rates of monetization growth are the most reasonable, and they indicate a 2 percent annual difference in the 1880s and 1890's growth rates. See Gregory, Paul R., “Russian National Income in 1913—Some Insights into Russian Economic Development,” Quarterly Journal of Economics, 90 (Aug. 1976)CrossRefGoogle Scholar.

16 They would be even closer if Barkai's more extreme estimates of monetization growth are used.

17 Drummond, “The Russian Gold Standard,” Table 1.

18 Ibid.

19 , Lyaschenko, History of the National Economy of Russia, p. 718Google Scholar.

20 Vainshtein, A. L., Narodnoe bogatstvo i narodnoe nakoplenie predrevoliutsionnoi Rossii (Moscow, 1960)Google Scholar; Sodorov, Arkadij, “Zur Finanzlage Russlands vor 1914: Staatshaushalt und Staatsschuld,” in Geyer, D., ed., Wirtschafl und Gesellschaft, 252–76Google Scholar; and Gregory, “Russian National Income in 1913.”

21 For such international comparisons see Gregory, “Russian National Income in 1913,” Table 1.

22 These calculations are made from: Sidorov, “Zur Finanzlage Russlands vor 1914”; and Gregory, “Russian National Incom e in 1913.”

23 Von Laue, Sergei Witte; Crisp, Olga, “Russian Financial Policy and the Gold Standard at the End of the Nineteenth Century,” Economic History Review, 6 (1953), 156–72CrossRefGoogle Scholar; and idem, “Russia, 1860-1914,” in Cameron, Rondoet al. Banking in the Early Stages of Industrialization (New York, 1967), 183–238Google Scholar.

24 Condliffe, J. B., The Commerce of Nations (New York, 1950), p. 364Google Scholar.

25 Kindleberger, Charles P., in International Economics, 5th ed. (Homewood, Ill., 1973), pp. 237–42Google Scholar, notes that one should not compare new lending with old interest payments but new lending with new imports for capital development and old interest payments with increases in exports and decreases in imports arising from productivity of old investment in cases of foreign loans mad e for productive purposes. Foreign capital flows into Russia wer e quite large and, whe n combined with a relatively high profit rate and a given capital-output ratio, resulted in large additions to national income that also left relatively large amounts for reinvestment. It is this cumulative effect on national income, exportable production, and import substitution that one must use in assessing th e effectiveness of foreign loans.

20 Yeager, Leland B., International Monetary Relations (New York, 1966), Ch. 14Google Scholar.

27 , Condliffe, The Commerce of Nations, p. 366Google Scholar.

28 , Yeager, International Monetary Relations, Ch. 14Google Scholar.

29 Kalian applied the 1897 conversion ratio of the old paper ruble to the gold ruble (.67 to 1) to the average of notes in circulation to obtain domestic gold cover requirements of approximately 500 million rubles which, subtracted from average gold holdings of 1.1 billion rubles, left 600 million rubles free for variations in domestic and foreign requirements. Apparently, Kahan observed the fluctuations in the State Bank holdings of gold and noted that for every two-year period th e change never exceeded 200 million rubles, except for 1906-07 whe n th e figure was 300 million rubles. This variation of 200 million rubles annually may be ascribed to use for domestic and balance of payments purposes equally divided, leaving his annual “excess” reserves of 400 rubles. Estimation of reserve requirements in such a manne r is not convincing, as argued below; additionally Russia, having substantial foreign exchange holdings, probably used them to absorb most balance of payments impacts, thereby economizing gold use for that purpose.

30 , Bloomfield, Monetary Policy, pp. 29–34Google Scholar.

31 Ibid, p. 17. Finland had to maintain relatively large holdings of reserves since it had legal reserve requirements not only on note issues but also against other deman d liabilities. England was the overwhelmingly dominant financial center, analogous to a world bank where all reserve drains are internal, in contrast to other nations where the drains were external, allowing England to keep a much lower reserve ratio than others.

32 Ibid, pp. 15-16. It seems that Russia, instead of possibly erring in holding too many gold reserves, as claimed by Kahan, may have risked holding too little.

33 Ibid, p. 22.

34 Bloomfield indicates that by 1913 the world ratio of gold holdings to foreign exchange was eight to one, with Russia one of the most substantial holders of foreign exchange in the world. Since Russia, as one of the few countries well below the world average, was included in the computation of that average, it is likely that th e ratio for Russia was nearer to four to one. Applying this ratio to Russian gold holdings one would obtain a rough estimate of average Russian foreign exchange holdings of approximately 300 million rubles that earned interest. Except for Belgium and the special cases of Finland and Britain, apparently Russia was prominent among gold standard countries in managing external reserves so as to earn interest. Granting the claim of Kahan of annual “excess” gold reserves of 400 million rubles, whose cost was foregone interest on that sum, one must reduce this cost as a consequence of the removal of the risk of exchange loss on the sizable Russian foreign exchange holdings. The net cost to Russia would then be the difference between the interest rate on 400 million rubles and approximately 3 percent per annu m on the rough estimate of 300 million rubles in foreign exchange holdings. For a case unde r different conditions, wher e holding large metallic reserves restrained growth, see Cameron, Rondo, “France, 1800-1870,” in Cameron et at, Banking, pp. 100–28Google Scholar.

35 The figures cited in this paragraph are from Gregory, “Russian National Income,” Table 1.