In an earlier article* we discussed the long-term causes of the goods famine. We now want to inquire into the consequences of the goods famine, the problem of equilibrium in our economy, and the question of the economic course dictated by the current economic situation.1
An imbalance in the distribution of productive forces in an economy with commodity—money exchange will be reflected first and foremost in prices. Likewise, in the goods famine that we have been experiencing for the past two years, this disproportion in the economy also shows up in prices, although under our economic system price movements display characteristic features of their own. Before going into the specific price movements determined by the structural features peculiar to this economy, let us pose the following question. Suppose that socialized industry and transportation did not exist in Russia. How could we attain equilibrium in the economic system if there were a shortage of industrial commodities, that is, if the country were underindustrialized? Through the operation of the law of value, equilibrium would be attained as follows. A long-term rise in the prices of industrial commodities would have to lead, on the one hand, to increased imports of the commodities in short supply and, on the other hand, to a redistribution of productive forces between town and countryside through the influx of fresh capital into branches with underproduction of commodities. Thus, production would adjust to the country's expanding effective demand through the spontaneous operation of the law of value. But under our conditions, where industry has been nationalized, equilibrium cannot be attained in the manner outlined above. We ourselves run our industry, and if in our planning we do not ensure the necessary level of accumulation in it, we ourselves lend force to the goods famine. By nationalizing industry we have restricted the operation of the law of value in the state economy, yet we are not replacing the operation of that law by a requisite rate of planned socialist accumulation. That is, we are not following a conscious planning policy of distributing labor power and material resources in the country in such a way as to ensure economic equilibrium. In this case, rather than annulling the law of value, we are creating conditions for its operation in its most distorted and, for us, most unprofitable form. In the sector of private trade—that is, above all in retail and wholesale-retail trade—prices of commodities in short supply are rising sharply. Yet instead of leading to a spontaneous redistribution of the country's productive forces in the interest of industrialization, that rise is leading only to the rapid accumulation of private capital. Private capital is raising prices to the limits of effective demand and is diligently profiting from the economic disproportion.
Underaccumulation and too slow a rate of expanded reproduction in industry are thus inevitably leading to a drop in the purchasing power of our money in a particular sphere of commodity circulation. But in addition to this cause, the depreciation of the currency has two other causes, whose analysis will make it much easier to understand the economic difficulties we are presently experiencing. These causes are the following.
By lowering the single agricultural tax, we tipped the balance of payments between town and countryside in favor of the latter. That tax cut alone would have had appreciable consequences in terms of the relative increase it caused in the monetary resources within the peasant economy. Added to this is the circumstance that 1925 was, first of all, a year of good harvest; second, there was a general increase in sown acreage that year; third, the peasantry continued to expand its production of industrial crops and industrial raw materials in general; and fourth, prices in the private economy began to rise. The combined result of these factors, compounded by an undersupply of industrial commodities on the market, was that the peasants received more money than they could spend. The balance of payments between the town and the countryside showed a deficit. Had the currency exchange rates been normal, that would have had to lead to an increase in the amount of paper money accumulated in the countryside. The peasants would have accumulated money for future purchases, deposited their excess money in state savings banks, and so on. But with a depreciating or simply fluctuating currency, the peasants abstained from money accumulation for reasons that are fully understandable. Selling 100 poods of grain for 100 rubles, depositing those 100 rubles in a savings bank, and after one year withdrawing 104 rubles plus interest—all this while the price of grain was on the rise—means perhaps being able after one year to buy no more than 80 or 90 poods of grain for those 104 rubles. With the market moving in that direction, it is more profitable for the peasants to sacrifice a few percent of their grain to the mice and rats than to be seduced by the 4 percent interest on the money they deposit in a savings bank.
Moreover, grain prices were much higher last spring than they had been in the autumn of 1924. The peasant who sold his grain at the fixed prices in the autumn was clearly a loser compared to his neighbor who held on to his grain and sold it for twice the price the next spring. All year long the unfortunate fellow's wife nagged at him for "being a poor businessman," for "not knowing how to make a deal," and she would point to the example of their neighbor who held back his grain and got twice as much for it. The memory of all that is undoubtedly etched very deep in the peasant's mind, and this year he will be very cautious in selling his grain, waiting for prices to rise in the spring. All this has reduced the peasantry's paper-money accumulation to a minimum. The peasant knows quite well that when prices are rising, it is more profitable to keep your surpluses in commodities rather than in money. He knows that the only time it is more profitable to keep your surpluses in money is when prices are falling and when 100 rubles deposited in the bank in January 1925 will buy more commodities when it is withdrawn in January 1926. It is quite obvious that the conditions that have now developed—that is, a halt in paper-money accumulation in the countryside—are also going to upset, at least for the coming year, all plans based on using that accumulation in the interests of industry.
The second cause of the instability of our currency is the mistake made by Narkomfin in the issue of paper money. If we take the volume of money in circulation at the end of 1924 and compare it with that at the end of 1925, we see that the total amount of money in circulation has increased by 70 percent at the same time that the output of our state industry has increased barely 40 percent, and total commodity circulation by even less. Obviously, this too has contributed to inflation. And although the exchange rate of the chervonets ruble (taking the average of the wholesale and retail indexes) fell by only 8 percent during the same period, that merely proves how stable our currency is in general and how slowly it still reacts to the experimenting being done with it.
It is evident from the previous remarks that there have been more than enough causes for the depreciation of our currency. Now we have to ask what is so unique about the price movement of which we spoke earlier. Let us assume that as a result of all the causes listed above we have a total of 15 percent more money in circulation than the minimum. How is currency equilibrium attained in such a case if no artificial measures are taken to reduce the volume of money circulating in the country? A balance is normally reached spontaneously, by price rises on all commodities, at all levels of commodity circulation. If commodity circulation in the country remains constant, a 15 percent price rise (and, consequently, a 15 percent drop in the purchasing power of all money in circulation) would lead precisely to currency equilibrium. The entire volume of money would be devalued by the percentage by which that volume of money exceeded the necessary minimum of circulation. But for us this entire process assumes unique forms, which are highly unprofitable for the state economy. Our trusts have fixed and stable disposal prices; consequently, currency equilibrium cannot be attained spontaneously in the territory covered by our state economy. But this entire process is thereby artificially transferred to the private economy, whose price movements are outside our control or are subject to our control to only a negligible degree. Thus, the private economy is obliged to achieve currency equilibrium by raising prices. Or, in other words, we are granting the private economy a monopoly on price rises. The result is quite obvious. Grain prices are rising in the private economy; prices are increasing for industrial raw materials over which we have little control; and the private economy is getting more in paper money for its entire output. The state economy, on the other hand, is selling its entire output at fixed prices, that is, at a fixed total amount. And that means that the balance of payments between the state and private economies is being tipped sharply in favor of the private economy and against that of the state.
It is also quite obvious that under existing market conditions not only the state economy as such loses, but state workers and employees lose too, to the extent that they buy their food on the free market. Hence, real wages are falling, and in the cases where we carry out planned wage increases, they are only capable of maintaining the old real minimum wage.
What, then, are the conclusions to be drawn from this situation for our economic policy?
Here we have to distinguish between measures of a purely conjunctural character, which we have to adopt for the immediate future, and the long-term measures that are associated with the general line of our economic policy.
As regards immediate measures, we must first of all see to it that the state economy recovers all the losses it has incurred because of the depreciation of the currency. We have to adjust the balance of payments in the interests of the state economy, recover its losses, and ensure it against losses in the future. In practical terms, we can imagine two main ways to attain that goal: first, by increasing taxes on private economy (which is, of course, the most difficult method to apply), and second, by raising the disposal prices of the trusts on those consumer items that are in shortest supply and that yield the greatest profit for private capital. As undesirable as this second operation is, it remains the only way out of the situation if we want to limit accumulation by private capital and stop the flow of values from the state economy into the private economy. Of course, we are talking about a price rise that cannot be reflected in higher retail prices. On the other hand, this is the only way we can obtain the necessary resources to reimburse the working class for what it lost because of price rises in private trade, and it is the only way we can guarantee the working class a particular level of real wages for the future.
As regards long-term measures, we must pose for ourselves clearly and firmly the task of attaining a level of accumulation in state industry that will ensure equilibrium within the entire economic system. We must draw up our state budget for the coming economic year in such a way that industry first and foremost will be ensured that portion of the funds necessary for new construction that it itself is unable to raise. Our budget must be the budget of a socialist state; that is, the interests of socialist accumulation must stand in the forefront. Second, our policy on the disposal prices of the trusts must be such as to ensure socialist accumulation from that quarter. If the currency is stable, this will mean at first a stabilization of wholesale prices and then a careful lowering of those prices so as not to threaten in any way either the necessary proportion of accumulation or the growth of wages.
Third, we must reexamine the question of tax increases, above all, tax increases for the well-to-do elements of the countryside. From this standpoint, Narkomfin's planned rates for direct taxes are patently insufficient.
Fourth, we must begin immediately to work out an import plan that will completely guarantee industry all the necessary equipment and raw materials in the year in question. Not until all of industry's needs have been met in full can we begin discussing how to meet other claims upon the import plan.
If we do not take all these vital measures, of whose urgency the goods famine is the most telling witness, we will not only fail to eliminate that famine for next year, but we will in 1926 already be preparing the ground for a goods famine in 1930. It must be pointed out that we have already fallen far behind in our new construction. Within a year we will no longer be able to increase the output of our metal industry on the basis of the equipment of old factories. And yet, new factories cannot begin to turn out goods for another three years, even if we begin their construction immediately. The socialization of industry and transport is not to be taken lightly. If we limit or eliminate the operation of the law of value—that spontaneous regulator of capitalist production relations—then we have to replace it with planned socialist accumulation in the proportions dictated to us by the entire national economy.
The idea that we can limit our capital expenditures and concentrate on developing light industry is a reactionary Utopia. That idea lives on mainly through analogy with 1921, that is, with the period when our industry had just barely begun to get on its feet again after its unprecedented collapse. When a man is lying on the ground and has to get up, it makes sense to ask whether he should get up on one arm or one leg at a time. But when a man has gotten up and is walking along at full stride, you do not recommend to him that he put his left foot down faster than his right unless he is lame or paralytic. And yet, people are recommending that our industry today, which is moving along at full stride, put down one foot, light industry, faster than the other, heavy industry. Such advice is either economic illiteracy, which is more easily laughed at than refuted, or a cover for a repressed thought of something else. That repressed thought can only be the following. If our agriculture displays an effective demand in excess of the productive capacity of our industry, then, given the current level of accumulation, equilibrium can only be attained by increasing the import of ready-made consumer goods, that is, by following the line of least resistance. This path is not the path of industrialization of the country, but the way to bind our effective demand for consumer goods to foreign industry. If we continue for long to postpone rapid industrialization, if we content ourselves for long with the systematic underdevelopment of our heavy industry and with a deficit in the area of socialist accumulation, if we stubbornly close our eyes to the economic and political dangers of such a situation, then the argument about more rapid development of light industry and about a moderate pace of capital construction makes sense. But in that case we should also be forthright enough to foresee all the consequences that such a path of development will have for our economy. As our harvests grow in size and quality, and as our possibilities for export grow, we will inevitably have such pressure from private economy on our tariff system and on our foreign trade monopoly (that is, on the barriers with which we paralyze the operation of the law of value of the world economy), that our artificial barriers will be shattered to their very foundations and our import plan will not be drawn up in accordance with a plan for industrializing the country, but will be rather like Trishka's caftan, in which patches in the form of exports2 of consumer goods will play an ever-growing role from year to year. We agree that such an economic policy makes sense in its own way, but it has no relationship whatsoever to the decisions of the Fourteenth Party Congress regarding the industrialization program, and it is dictated by petit bourgeois pressure on the economic policy of the proletarian state. This line is leading us right where the capitalist countries want us, namely, to abolition of the foreign trade monopoly, abolition of socialist protectionism, integration of the USSR into the world system of division of labor based on the workings of the law of value, and maintenance of the present level of industrialization of Europe by making our country relatively more agrarian. The party must decisively and categorically repudiate not only such an economic policy, if someone presents it quite consciously, but also any policy of vacillation and opportunism in the area of industrialization that would unconsciously lead to the same, objectively inevitable result.
I would now like to present my objections to Comrade Stetskii's feuilleton "Economic Difficulties," in Pravda of February 6 this year [1926]. It contains many true statements, but it makes no clear distinction between the immediate conjunctural tasks and the central problem of our economic policy over the long term. Similarly, in explaining the causes of our present economic difficulties, Comrade Stetskii does not draw a precise distinction between the consequences of economic disproportion and the consequences of currency fluctuations. Comrade Stetskii's article is a rather typical example of the policy of balancing between two stools.
Comrade Stetskii holds that the main cause of our present economic difficulties is "the complexity of the task of establishing and discovering the proper relations between the socialist nucleus of our economy and the petit bourgeois encirclement, between large-scale state industry and the peasant economy."
What, then, was the specific mistake we made in "discovering the proper relations between large-scale state industry and the peasant economy?" Comrade Stetskii answers this question as follows: "In analyzing the present situation we cannot in any way disregard our 'miscalculation' of last autumn, or rather last summer, for it played a major role in the development of the difficulties now facing us. . . . We cannot deny that underlying our present difficulties is a disproportion between industry and agriculture. But neither can we forget how our grain procurement policy has aggravated that disproportion.. . . The attempt to disregard this circumstance is an attempt to avoid recognizing and analyzing our errors by recourse to general, empty discussions about the disproportion between industry and agriculture."
There can be no question but that last autumn's miscalculation had a very harmful effect on our economic construction; in particular, it contributed to the depreciation of the currency, since the volume of the currency issue was calculated on an assumed commodity circulation that turned out to be unjustified. One of the conclusions to be drawn from this experience is that Narkomfin's policy on currency issue has to be discussed by all planning organs, and discussed five times more carefully than has heretofore been the case. But all this is just one side of the matter, and not its main side at that. We had a goods famine even before last autumn's miscalculation; therefore, to shift the center of attention to that last concrete miscalculation means "to avoid recognizing" some other miscalculation that preceded that of last autumn. And that leads us to the general necessity of maintaining a rigorous distinction between conjunctural miscalculations and a more fundamental one with more far-reaching and more profound consequences.
The underestimation of the growth of the effective demand of the peasantry and the city is just such a fundamental miscalculation. This underestimation was made as early as 1923-24; in economic policy it led to the slogan "Industry, don't get ahead of yourself!" and in practice it resulted in systematic underaccumulation in industry. Consequently, the fundamental miscalculation that has been the major cause of our economic difficulties was made in 1924, not in the autumn of 1925. In 1925 we simply reaped the fruits of that fundamental error, which is still having effects even now and for which, apparently, no one is willing to bear the responsibility. And this means that in the debates of 1923—24, and in the later debates on the same topics conducted within the planning organs, it was the "industrializers" who were completely correct, and not those who hoped to establish an alliance with the peasantry by means of industrial underproduction.
Comrade Stetskii admittedly does not deny the role of disproportion between industry and agriculture. In the quote above he writes: on the one hand, "we cannot deny," and on the other hand, "we cannot forget." In short, two "cannot's": we cannot but recognize, and we cannot but admit. But then, Comrade Stetskii, can you not admit that you were not right in the main debate with the industrializes in 1923–24? Is it not obvious that if we had in 1924 prepared the elements for expanding the production of commodities designed to meet peasant demand for 1925, if only for 70 or 80 million rubles more than present production, we could have in 1925 bought 70 million more poods of grain from the peasantry and exported 100 million more poods of that grain abroad? Is it not obvious that we might not have been obliged to cut back our import of industrial equipment and to cut back production and lay off workers in branches that depend on the purchase of foreign raw materials?
Comrade Stetskii formulates one of our next tasks in the area of economic policy as follows: "The only proper and admissible course for us is to implement a general reduction of prices within the country and to strengthen the chervonets." I agree entirely with that line of economic policy, insofar as we are concerned with formulating our programmatic tasks with regard to the economy. But Comrade Stetskii's formulation, though correct in general, by no means answers the concrete question facing us right now: if the state economy has already lost, I would think, no less than 100 million rubles from the depreciation of the currency, if the level of real wages has been reduced by the rise in prices in the private economy, then from what sources does Comrade Stetskii propose to cover the deficit in the balance of payments between the state and private economies—a deficit that is already a fact? We do not find an answer to that question in Comrade Stetskii's article. It is not a matter of declaring for a stable currency and reduced prices, but one of showing in practice how, with insufficient socialist accumulation, we can have a stable currency and a normal level of retail markups over the disposal prices of the trusts.
Somewhat late, Comrade Stetskii is discovering America: he writes that we can use peasant accumulation by developing deposit operations for a part of the peasantry, rather than by means of currency issue, by using peasant savings to help finance industry. The author of these lines discussed that topic back in 1922. The policy of using peasant accumulation is entirely beyond question. But let us hear something more from Comrade Stetskii than pretty possibilities for the future; let him tell us how, with a fluctuating currency and a lack of peasant accumulation in money form, we can ensure the necessary accumulation in industry for expanding production and meeting the necessary capital expenditures. Why, it is clear to everyone that the plan for supplying industry with the necessary resources by using peasant accumulation and new currency issues has failed—at least for this year — because it meant resorting to those methods of financing industry at the expense of the budgetary appropriations for, and accumulation within, industry itself. But rotten as it may have been, this abortive plan, which was based on very great optimism with regard to the private economy and great pessimism with regard to the state economy, was nevertheless a plan. This plan must be replaced by something; it must be replaced by a proposal of concretely defined measures, and not by dreams of how someday in the future we can make good use of peasant accumulation for financing industry.
I must also comment on the section of Comrade Stetskii's article where he talks about the development of heavy industry. The opinion is rather prevalent among us right now that the large appropriations earmarked to cover capital expenditures in state industry have been an important factor in aggravating the country's goods famine. Rather than rattle off empty arguments on this topic, I have tried to calculate the amount of commodities in constant demand that our industry has removed from the market for its capital expenditures. It turns out that to fulfill a plan for capital expenditures of 800 million rubles, we would have had to withdraw commodities in constant demand worth about 5 percent of the total commodity circulation in 1925–26. That, then, sums up the whole argument about us having overextended ourselves in capital construction. As regards this question Comrade Stetskii writes: "The development of heavy industry is the prerequisite for the development of light industry. However, we cannot squander all our resources on developing heavy industry." No one is proposing anything so economically ignorant as to "squander all our resources on developing heavy industry." We need a proportional development of both heavy and light industry. But at the same time we are in dire need of capital construction for combating future goods famines and for lowering prices through technological reequipment of our industry. The thing is to reconcile these two tasks, and not get bogged down in opportunism and make no headway at all toward industrializing the country. Things would have been made much clearer if Comrade Stetskii had answered the question directly: what figure for capital construction does he support? One that will forestall a future goods famine, or one that will perpetuate and aggravate the one we have?
Let us sum up. Comrade Stetskii's article contains many correct ideas, mainly of an academic nature. There is, however, no sign of an understanding—or rather, of acknowledgment—of the fundamental miscalculation in our economic policy that has been responsible for an insufficient volume of socialist accumulation and its inevitable consequence—aggravation of the goods famine. As a result, the economic policy recommended by Comrade Stetskii, though it contains a number of correct proposals on points of detail, means the continuation of a policy of underaccumulation (which will become increasingly dangerous for us as time goes on) — that is, the beginning of a policy of cautious retreat from the decision of the Fourteenth Party Congress on industrialization of the country.
Without wanting to be a prophet, I am nevertheless tempted to conclude with a few predictions. Judging from past examples, the writer of these lines will probably be accused of overestimating one thing, of underestimating another, and of over-underestimating a third—in short, of a deviation. That is inevitable for the present. However, I have the following comments to make in my own defense. Framers of economic policy like Comrade Stetskii desperately need my "deviation." They are looking everywhere for a place to run with their line between the two stools. But to sit between stools one needs a minimum of two, that is, a minimum of two deviations. One deviation, the agrarian deviation, has more or less already been provided for them, both formally and in fact. Now they have to either find the other ready-made or make it up. Then everything will be all right: their work clothes will be ready, sewn together from two deviations, throwing into relief the truth of the golden mean. They can begin formulating and substantiating the arithmetical mean and allocating the proper number of kicks to the right and left.
The only trouble is that in the meantime the country's goods famine will go on. . . .
*Pravda, December 15, 1925. Incidentally, in a feuilleton published in Pravda, Comrade Guloian has taken, without citing his source, all the main conclusions of my first article and presented them to his readers as his own views. But, most importantly, he has presented them as a polemic against the main theses of my feuilleton. I would ask Comrade Guloian to have someone with a literary background tell him what the usual name is for that sort of thing.
1 Unlike the other articles in the "Economic Notes" series, this one bears no subtitle.
2 The word "exports" here is almost certainly an error. The entire thrust of Preobrazhensky's argument, here and in other writings, is that the private sector's demand for imported consumer goods had to be artificially blunted in favor of using the import fund to purchase foreign-produced means of production.