Financial Reforms Drove the Soviet Union Into the Grave

Economics Financial System Society

Who of the famous people in Russia's modern history said the phrase: "I wanted the best, but it turned out as always"? There is quite a list of names that comes up in this connection, although it is associated with only one man - the Minister of Finance of the USSR, Valentin Pavlov, who once upon a time intended to stabilize currency in the country.

Many details of that story have been forgotten, although one should always keep such events in mind not to step on a rake again.

The formal reason for the currency reform was the fight against counterfeit rubles, which were allegedly brought to the USSR from abroad to undermine the Soviet economy. As a matter of fact, the cause for the collapse of the economy of the world's first-ever country of workers and peasants was much more prosaic: a low level of labor productivity in the USSR. When the Reagan administration managed to agree with Saudi Arabia to derail global oil prices, the situation became very bad. The production of money was growing, but it was not backed with the industrial production of essential commodities. In short, guns and tanks were produced in excess, but ordinary butter was hard to find.

Under these conditions, Mr. Pavlov decided to stabilize the currency circulation in the Soviet Union by removing a part of money from workers to thus solve (partially) the problem of shortage of goods on the commodity market of the USSR. Moreover, on 14 January 1991, shortly before the start of the reform, Pavlov was promoted and became the Prime Minister of the Soviet Union.

Thus, the desire of the administration of the country to reform the financial and political system was officially enshrined at the highest level.

On January 22, 1991, Soviet President Mikhail Gorbachev signed the decree about the withdrawal of 50- and 100-ruble notes issued in 1961." The exchange of those notes was to be accompanied by a number of strong restrictions.

The period of exchange was a very short one - only three days, from 23 to 25 January, that is, from Wednesday to Friday. Secondly, not more than 1,000 rubles per person could be exchanged, whereas the exchange of other bills was considered in special commissions before the end of March 1991.

All in all, 51.5 billion rubles from 133 billion cash paper money was subject to the exchange, or about 39 percent of cash assets. The amount of cash available for withdrawal at the Savings Bank of the USSR (Sberbank) was restricted as well - people could debit not more than 500 rubles from their accounts.

To conduct the reform, new 50 and 100 ruble notes were issued in 1991. The notes from 1991 in denominations of 1, 3, 5, 10, 200, 500 and 1000 rubles were issued soon afterwards. Old notes of 1, 3, 5, 10 and 25 rubles from 1961, and all Soviet coins continued to circulate along with the new ones, issued in 1991.

However, "it was smooth on paper, but they forgot about the ravines that they had to cross." As a result, the government's plans were realized only in part. The confiscatory procedure allowed to withdraw 14 billion rubles in cash from circulation (approximately 10.5 percent of the total mass, or slightly less than 17.1 percent of the planned withdrawal of 81.5 billion). The surprise effect of the reform was supposed to help in the struggle against speculation, unearned income, counterfeiting, smuggling and corruption. In practice, though, the main consequence of the reform was the loss of people's confidence in their government.

The international image of the USSR suffered too, a lot. For example, there were hundreds of thousands of shuttle traders, who were conducting trade with China at that time, and the Chinese were always happy to accept Soviet 50-100-ruble notes as payment. It is clear that the Chinese could not exchange their capitals in this way in three days just. They lost a lot of money because of the reform. The buses, on which shuttle traders would come, would be papered from top to bottom with paper money. Needless to say that all prices on Chinese goods immediately rose for Soviet buyers. The attitude to Soviet shuttle traders in Poland and other countries was similar.

Having realized the grand failure of his reform, Pavlov pronounced his famous phrase. However unpopular "shock" reforms in the Soviet Union continued under his leadership. On April 2 (just as unexpectedly), new prices were set in the country; they were about three times higher than the old prices. The inflation rate made up 12-35 percent a month.

Afterwards, there was a coup in August 1991. Pavlov took part in it - he was one of its organizers. Here is what General Valentin Varennikov wrote on this subject: "On August 18 overnight, the country's leadership, given Gorbachev's position, was forced to create the National Emergency Committee. This type of government agencies could be created by two figures: either the President of the USSR or the chairman of the Cabinet of Ministers of the USSR. The head of the Cabinet of Ministers, Pavlov, claimed responsibility, set up a committee and became one of its members."

He became a member of the committee, but he never became an active member of it.

According to the certificate from the Central Clinical Hospital of the Cabinet of Ministers of the USSR, No.200703/218 from August 19, 1991, Mr. Pavlov was diagnosed with alcohol poisoning in the morning of August 19. The next day, on August 20, he was hospitalized in the Central Clinical Hospital with "hypertensive crisis".

On August 29, the former prime minister was transferred to Sailor's Silence Prison (Matrosskaya Tishina), where all other members of the Emergency Committee were already staying. Pavlov was subsequently released from prison and pardoned in February 1994 by the State Duma of the first convocation. Afterwards, he served as the president of Chasprombanka for one year. He left the post on August 31, 1995. Interestingly, the bank's license was revoked on 13 February 1996.

In 1996 - 1997 years, he worked as an advisor at Promstroibank, then worked as a member of a number of economic institutions. Afterwards, he suffered a heart attack, then a stroke, and on March 30, 2003, Valentin Pavlov died. He was buried at the Pyatnitskoye cemetery in Moscow, next to his late relatives.

As for Pavlov's reforms, many politicians and historians agree that they completely undermined people's confidence in the Soviet government. Those notorious reforms showed a significant influence on the course of subsequent events in the country. Pavlov's reforms are considered to be one of the main reasons for the growth of political separatism in 1991 among the leaders of the Soviet republics. They led to the strengthening of centrifugal feelings between them, which ultimately led to the collapse of the Soviet Union.

Vyacheslav Shpakovsky

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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