The financial policy during the Soviet period was highly centralized under the planned economy system, with key characteristics including state monopoly, planned regulation, a limited financial market, and a core goal of serving the national economic plan. The financial policy of this era had the following main features:
1. Monetary Policy: Money was a tool under the planned economy. The state completely controlled the supply of money, and the issuance of currency was led by the state bank (i.e., the Soviet State Bank, Gosbank), not determined by market supply and demand. A fixed exchange rate system was implemented, with the ruble's exchange rate set by the government, and strict controls were placed on foreign exchange flows. With limited circulation of currency, the Soviet Union adopted a system of material distribution and price controls, and the role of money in circulation was restricted, mainly used for wage payments and consumption expenditure.
2. Banking System: The Soviet Union implemented a single state bank model, with Gosbank monopolizing the financial system. Gosbank performed the functions of both the central bank and commercial banks, responsible for credit, payment settlements, currency issuance, and other financial affairs. Sectoral banks operated as auxiliaries, such as the Construction Bank (Stroybank, primarily serving infrastructure development) and the Agro-Industrial Bank (Agroprombank), but all were under the direction of the central plan. More importantly, banks did not aim for profit but allocated credit resources according to the national plan.
3. Credit Policy: Completely controlled by the plan, non-market-based. Enterprise financing relied on state budget allocations and policy-based loans, with companies having no independent financing rights. Personal credit was extremely limited, and ordinary citizens had difficulty obtaining bank loans. Large consumer expenses, such as housing, were mainly dependent on state allocation. There was no capital market, no independent stock exchanges, and companies were not allowed to issue stocks. Bonds were primarily issued by the government and were used for internal distribution.
4. Fiscal Policy: The economy during the Soviet period was highly centralized, with finance and fiscal policies closely integrated. The national budget led all economic activities, and the fiscal and banking systems were tightly interconnected, with banks effectively serving as an extension of fiscal management. The tax structure was mainly based on corporate profits, with personal income tax being relatively low. However, it is important to note that since profits were already handed over, incomes were determined by the state. Fiscal deficits were rare, and strict balance was maintained, though this was a theoretical balance. In the 1980s, due to the arms race and economic difficulties, the fiscal burden increased.
5. Foreign Exchange and International Finance: The Soviet Union operated in a strictly closed environment, with the ruble not freely convertible. Foreign trade and foreign exchange flows were tightly controlled. International financial relations relied mainly on intergovernmental agreements, and the Soviet Union established ruble zones in Eastern Europe and developing countries, though its influence was limited. In the late 1980s, due to the increase in foreign debt, mainly borrowed from Western countries, the Soviet foreign exchange crisis intensified, eventually becoming one of the key factors leading to the economic collapse.
6. Impact and Issues of Financial Policy: The centralized planned economy system, on one hand, ensured the state's comprehensive control over the economy and prevented the disorderly expansion of financial capital. During times of war and early industrialization, the concentration of funds helped drive heavy industry and infrastructure development, playing a certain role in special periods. However, the drawbacks were also evident. There was a severe lack of market mechanisms, and the financial system was rigid, making it difficult to adapt to structural economic adjustments. Investment efficiency was low because credit was allocated according to the plan, leading to resource waste and a lack of competitiveness in enterprises. There was a lack of financial innovation, no capital markets, and limited avenues for diversified financing, which meant that economic development ultimately depended on the responsibility of a small number of people within the power center. More seriously, the closed foreign exchange system hindered foreign economic cooperation, which ultimately led to economic stagnation and worsening debt problems. Therefore, the most serious issue with the Soviet-era centralized and planned system was that it resulted in inefficiency and an inability to meet effective demand.
Crucially, one key lesson from the Soviet era is that economic laws do not cease to function, but rather take on different forms and variations during crises.
Strictly speaking, the Soviet Union did not experience typical capitalist-style economic crises such as financial collapses, large-scale bank bankruptcies, or stock market crashes. However, the Soviet Union was far from being free of economic crises; rather, it faced crises of its own type. Throughout its history, the Soviet Union underwent multiple severe difficulties and structural crises, primarily manifested in economic stagnation, low production efficiency, material shortages, and fiscal distress. Particularly in the later years, these crises gradually accumulated, ultimately leading to the collapse of the Soviet Union.
A well-known example of a "Soviet-style crisis" includes the agricultural collectivization that led to the food crisis in the years 1932-1933. During this time, under Stalin's rule, the Soviet Union implemented agricultural collectivization, forcibly confiscating land and livestock from peasants and establishing collective farms (kolkhoz) and state farms (sovkhoz). This policy led to large-scale resistance, with peasants engaging in passive resistance, slaughtering livestock, and agricultural production plummeting. The Stalin era also saw the Holodomor, the man-made famine in Ukraine in 1932-1933, during which millions of people died from starvation.
The focus on developing industry and prioritizing industrialization led to a shortage of essential goods in the Soviet Union. For example, the First and Second Five-Year Plans (1928-1937) emphasized heavy industry (steel, machinery, military production) but neglected light industry and the production of consumer goods. Urban supplies were tight, with food and daily necessities distributed through rationing, and workers' living standards were low.
After World War II in 1945, the Soviet Union's territory was devastated by the war, infrastructure was destroyed, and tens of millions of citizens died. The Soviet Union decided to prioritize the reconstruction of heavy industry after the war, leading to shortages of consumer goods and soaring prices. The arms race during the Cold War burdened the economy. In the 1950s, the Soviet Union heavily developed military industry, nuclear weapons, and space technology, which resulted in insufficient investment in the civilian economy. In the late 1950s, Nikita Khrushchev attempted reforms, such as the "Corn Campaign", but agricultural production remained unstable.
The Soviet Union experienced a severe period of economic stagnation (1965-1985) known as the "Brezhnev Era" (1964-1982), during which economic growth slowed significantly and efficiency was extremely low. On the surface, in the 1960s, the Soviet Union's economic growth rate remained relatively high (averaging 5-7% annually), but by the 1970s, it gradually declined (averaging 2-3% annually). The reason for this was the rigidity of the planned economy, with enterprises lacking competitiveness. The management focused solely on meeting planned targets, leading to inefficient production and resource waste. At the same time, agricultural production also faced serious inefficiency. Despite increased investment, the Soviet Union still needed to import large amounts of grain (e.g., wheat from the United States in 1972).
It is worth noting that the West's essential demand for Soviet energy did not save the Soviet Union's inefficient economic system. In fact, starting in the 1970s, the Soviet economy became increasingly dependent on oil exports to earn foreign exchange and drive economic growth. However, with the global decline in oil prices in the early 1980s, Soviet fiscal revenues decreased, and the inefficiencies of the economic system began to explode. Even though the Soviet Union borrowed large amounts of Western loans to maintain its economy, this only exacerbated the debt crisis without resolving the inefficiency problem. Fiscal collapse, ruble depreciation, and worsening shortages of goods followed. By 1991, the Soviet economy completely collapsed. At this point, the Soviet national budget could no longer sustain itself, and the government was unable to pay wages and pensions. Prices were completely out of control, hyperinflation was rampant, and the market became increasingly black-market-driven. In December 1991, the Soviet Union dissolved, and the entire system collapsed.
From a historical perspective, the essence of economics is ultimately the pursuit of efficiency to meet demand. Without efficiency, demand cannot be satisfied, and this is the most fundamental nature of economics. Although societies undergo transformations and changes over time, the dynamics of the economy are not swayed by individual or societal will. The core principle of economics, i.e., seeking efficiency to fulfill needs, remains ever-present. Though its forms may vary, crises continually emerge in one form or another, reminding us of the critical importance of efficiency. Without it, demand cannot be met, ultimately leading to the collapse of both the economy and society.
Therefore, from this standpoint, any reform must prioritize efficiency in order to succeed. Viewed from this perspective, a geopolitical order that lacks economic efficiency cannot be sustained. Similarly, any key project, regardless of its rationale, becomes meaningless without efficiency. Thus, when we look at today through the lens of history, the market economy remains the most crucial economic model, precisely because it is the most conducive to fostering efficiency.
This conclusion is, of course, merely common sense. However, when viewed in light of the historical context above, it becomes clear that underlying economic laws concerning efficiency and demand continue to play a crucial role, even beneath the surface of apparent brilliance and importance. Thus, common sense retains its positive significance, as it reflects the enduring principles that govern economic systems.
Final analysis conclusion:
From a historical perspective, economics ultimately revolves around the pursuit of efficiency to meet demand. Without efficiency, demand cannot be satisfied; this is the fundamental essence of economics. Therefore, when examining the history of the Soviet Union and other examples, it becomes clear that the market economy remains the most important economic model today, precisely because it is the most conducive to fostering efficiency.
