THE BANK STRUCTURE

OF THE U. S. S. R.

A Monetary Science Publication

CENTRAL BANKS . . .
It might be of interest to note that, contrary to a widespread idea,
the central banks are not owned by governments. As a matter of
fact, neither the English, French, German nor the United States
government owns any stock in the central bank of its country.
The Bank of England is run entirely as a private corporation, the
stockholders elect the board of directors, who rotate in holding
the governorship office. In the United States the Federal Reserve
banks are run by the stockholders, the commercial banks, which
elect the boards of directors, who in turn govern the respective
Federal Reserve banks.
From a 1908 assay by Paul Warburg, reputed author of 1913 Federal
Reserve Act; updated 1991 by Peter Cook, M. Sc.

Compiled and edited by: Peter Cook, M. Sc, C.M.E.

THE BANK STRUCTURE OF THE U.S.S.R.
From an "Official Paper" published in American Affairs
January 1946 — Edited and updated by Peter Cook
This statement about banking in the Soviet Russia is from
the Information Bureau of the Embassy of the U.S.S.R. What it
describes is a conventional and necessarily solvent banking
system under a regime of absolute State Capitalism. Marxian
ideology has nothing to do with it. The principles, the methods
and technique, even the terms are all from the book of capitalism
— for example, central bank, gold reserves, note issue, cash
balances, working capital, long and short-term credit for industry
and agriculture, savings, surplus, profit and loss. Almost you
might think you were reading an elementary text on banking in a
system of free private enterprise banking; and in fact the only
technical difference is that here the State is everything. It owns
the bank, all the cash balances, all the reserves, all the working
capital. Industry belongs to the State-Bank. All profits go to the
State-Bank. When there is borrowing and lending at interest, it is
the State borrowing from itself and lending to itself. And, when
you read, that the funds, with which the State Bank finances the
economy "are chiefly derived from labor and the free resources of
the economy" you need a moment's thought to make the
translation. What it means, that the State monetizes its abundant
labor and its natural resources. It means that whatever is
intellectually possible and physically feasible is never financially
limited to the State — because, the domestic ruble derived from
monetizing labor and natural resources can mobilize the total
Soviet economy behind any State-targeted plan, project or
endeavor.
The basis of the present banking and currency mechanism
of the Soviet Union was laid at the end of 1921, when the State
Bank of the U.S.S.R. was

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 founded and authorized to issue State Bank currency notes. By a
separate law passed at the same time, the new bank of issue
(similar in power as the Federal Reserve's) was endowed with the
monopoly-right to acquire both home-produced and imported
gold, as well as silver and foreign legal tender currencies.
The foundation of the State Bank was the first step toward
the reform of the currency, which was completed in 1924 ...
Subsequently, when the currency had been definitely stabilized,
the State Bank took over the old state treasury issue, maintaining
the regulation cover for the joint issue. The State Bank thus
became the sole repository of currency-stock and the responsible
regulator of the entire Soviet money and currency system.
Once the currency had been firmly stabilized, it became
possible to proceed to introduce a more effectual organization of
short-term and long-term credit. Of the two, short-term credit was
the more important problem to tackle; fore, the management of
production, largely depended on the short-term credit and
currency stability.

The First Decade . . .

In the first ten years or so of its existence, the State Bank
was only one of the banks engaged in the economic financing. ...
Furthermore, in addition to bank loans, there was a system of
financing by bills of exchange drawn by one business concern on
another. The existence of this system naturally interfered with the
utilization of the bank's ... rigid control over the financial
activities of the business organizations.
Accordingly, in 1930, steps were taken to reform the
whole credit-money system. The reform was based upon two
underlying principles: (1.) All short-term financing was an
exclusive prerogative of the State Bank (note: not of the
Communist Party), and (2.) bills of exchange were abolished and
no business had the right to grant credit to another. All short
and long-term financing thus

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became bank financing, concentrated in the State Bank, of which
all the business organizations in thecountry became direct clients
of the State Bank.

Financing Of Business . . .
Simultaneously there was begun the gigantic undertaking
of reconstructing the working capital of business enterprises. Its
effect was to set limits to bank financing. Every enterprise was
assigned definite working funds essential for the fulfillment of its
production program. These funds formed part of its assets and
were at its full disposal and management. The funds originally
provided to the production enterprises were/are derived from the
State Bank's power of issue, to issue new State "Bank Credit"
denominated in "rubles" to the credit of the production
enterprises' checking accounts (much like when the Federal
Reserve in the U.S. creates "reserve account credits" to the credit
of the commercial banks reserve accounts). And it is from the
same source, that the State Bank of issue provides additional
ruble-credit capital, when the production program of an
enterprise is increased.
Although the producing enterprises may have sufficient
working capital to insure normal operation, nevertheless, at times
the need for additional funds arises, which need the enterprises
are unable to meet out of their allotted working capital. This is
due chiefly to expenses involved in seasonal production
processes, or in the accumulation of seasonal stock of raw
material, fuel, semi-manufactured goods and the like. These
sporadic and seasonable expenses are also financed by the State
Bank. Furthermore, the State Bank finances the producing
enterprises to the full value of the finished goods between the
time they leave the factory to the time they are delivered and
sold. Thus the working funds of the enterprise are not tied up
while its goods are in transit to the market.

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Production Loans . . .
Lastly, the bank comes to the aid of a producing
enterprise, when, there is a deviation from its targeted program,
by which level the financing was determined, providing the
deviation was not the fault of the enterprise itself. However, if the
deviation from the production program are due to the fault of the
enterprise, the bank refuses to supply additional credit, and the
financial difficulties of the enterprise become the object of
investigation by competent Communist government authorities.
As bank loans are provided to the enterprises, on the basis
of an analysis of the borrowing enterprise's financial and
economic position, the bank loans become one of the most
valuable and effective forms of control over the activities of the
Soviet State enterprises. Much like in the United States, where
the commercial banks, by raising or lowering the prime and other
interest rates, are a very potent control over the economic activity
of the Nation. The financial tragedy being, that in the U.S. there
is no "State" or "Government" control over the bankers' "Credit
Money" lending interest rates, and thus leaving the United States
business and industry at the financial and economic mercy of the
commercial banking industry which includes the Federal Reserve
banks.
However, there are branches of industry in the Soviet
Union whose production processes are not subject to seasonal
fluctuation, such as the machine building, which are of great
importance to the country's economy. Such branches of industry
could almost be self-financing from their sales. This would
render such industries practically immune from the control of the
bank. An experiment was recently made in reconstructing the
working capital of these non-seasonal industries. A Certain part
of their working capital is contributed by the bank, in the form of
repayable, or revolving, ruble-credits. Whenever a particular
enterprise is forced to utilize any portion of this
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working capital, it automatically comes under the control
of the State bank.

Interest - Not For Regulating Credit . . .

The conditions under which the bank (not the Communist
Party) grants loans are not governed by hard and fast rules, but
are based upon a review of the general conditions prevailing in
the given branch of industry. Since interest rates in a bank-
planned economy do not need to play the role of a credit
regulator, (as they do in western economies) the interest rates can
remain stable at one level year after year, thus guaranteeing the
stability of the credit ruble money system. These interest rates at
present vary between two per cent and four percent, depending on
the nature of the loans. These interest rates are regulated, not to
generate a certain revenue for the State Bank, nor to control
credit in circulation — but to consume out of circulation, the
State Bank's expenditure rubles, to prevent a redundancy of free-
rubles in circulation, which free-rubles would tend to dilute the
bank's control over the Soviet economy.
The State Bank finances the economy of the Soviet Union
to an amount of many billions of rubles annually — as seen from
various reports, over a trillion rubles annually. All funds are
originally derived from the State Bank's "currency issue power"
to create new credit rubles, either as loans or grants to the credit
of the Soviet enterprises, including to the credit of Soviet
Government, fore, the Soviet Government, like all other
enterprises, also has its checking account with the Gosbank,
which is the formal name of the Soviet State Bank.
Every producing enterprise and business organization is
obliged to maintain its bank balance (checking account balance)
with the State Bank and to make all payments (with the
exception of minor cash rubles currency) through the bank. Thus,
all taxes, including the Turn-over Taxes, all enterprise loan and
interest payments, and all other dues to the State or the Bank
flow to and through the
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Gosbank — thus enabling the Gosbank to have accurate financial
statistics, required to govern the Soviet State's monetary
equilibrium via the interest rates, Turnover (a form of national
sales tax) and other taxes.
The economic and financial nature of the funds i ni t i al l y
loaned and granted to the Soviet enterprises and the Government,
all end up in checking and savings accounts at the Gosbank and
its thousands of branches. Those billions and billions of ruble
funds circulate in the Soviet economy as wages, profits, losses
etc. The Soviet Government and the Bank's expenditure funds
function to subsidize the Soviet entrepreneurs interest and tax
payments, due to the State and the Bank. Thus the Soviet
enterprises statistically do not consume their own loan principals,
in paying their interest and taxes to the Bank.
Once the economy is fully ruble-funded, and those ruble
funds have found their way through wages, profits and losses etc.
into the checking and saving accounts of the Soviet economy —
the Credit or accounting ruble-funding of the Soviet economy is
maintained by the Gosbank, by routinely rolling over loans, and
increasing or decreasing the enterprises' loans as the planned
production programs require.

Some Comparison Of The Soviet

"LABOR MONETIZING" System, To
That Of The U. S. Banks'
"ASSETS AND TAXES MONETIZING"
Money And Banking System:
The comparison of the Soviet "labor" monetizing money
system, to that of the U. S. commercial banks "assets and taxes"
monetizing money and banking system, is based on the 1946
Soviet Embassy's Official Paper titled: "The Banking Structure
of the U.S.S.R. and on the 1939 edition of: The Federal Reserve
System, Its Purposes and Functions published by The Board of
Governors of the Federal Reserve System; and on the books:

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Money, Banking and Credit in Eastern Europe, published 1966 by
the Federal Reserve Bank of New York; and on: The Soviet
Financial System Its Development and Relations with the
Western World, published 1951 by The Bureau of Business
Research, of The Ohio State University; and on the Soviet
General Secretary Gorbachev's Press Conference in Paris, of
October 1st, 1985 — where he told the conference and TV
audience, that the "Soviet State runs no deficits"; and on, over a
quarter of a century, of research and study, in the Science of
Money, Banking and the Credit-Money Mechanisms of history.
First, the Soviet Government is the only government that has its
own State Bank and its own government (rubles) money that cost
the Soviet Government nothing to use — and therefore, the
Soviet Government generates no domestic government debt. The
United States Government does not have a State Bank nor a
money of its own, except the metal coins, from the dollar coin
down to the lowly penny. And, since the U.S. Government does
not have a money of its own, it (the government) must borrow its
money from others, namely, from the reserve and commercial
banks. And consequently, due to the interest load, the U.S.
Government by the end of 1990, has incurred a domestic
Government-debt of over $3.2 trillion.
The Soviet Government's State bank, the Gosbank is "a
bank of issue" just as are the Federal Reserve "Banks" in the
United States, which were incorporated May 18th, 1914 as 12
private bank corporations. The Gosbank (which is the official
name of the Soviet State bank) funds itself and the State's
operating expenditures with newly created ruble funds.
Conversely, the Federal Reserve "banks" of the United States do
not fund any part of the U.S. Government operating expenditure.
However, the 12 Federal Reserve banks of the U. S. do fund
themselves and the nation's commercial banks, with newly
created dollar funds, generally referred to as "Reserve Bank
Credit"

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funds — gratuitously pumped into the "reserve (cash flow)
accounts" of commercial banks.
The Gosbank funding its own and the State's expenditures
with newly created ruble funds — pumps new ruble funds into
the Soviet economy, which ruble funds then become an addition
to the circulating money volume that, was initiall y loaned or
granted to or for production and economy-developing purposes.
Conversely, the newly created Federal Reserve Bank
Credit dollars pumped into the "reserve accounts" of the
commercial banks, do not add any new money into the economy
— until the commercial banks "monetize" the "collateral assets"
of the borrowing entrepreneurs and investors into new checkbook
dollars, which new checkbook dollars are supported by a fraction
of the Fed-provided (cash flow) reserves — which checkbook
dollars then, as a second step of the Bank (checkbook) Money
creating mechanism enter the economic arena money supply, as
the general public's and Government's checkbook money.
As reported in a 1966 Federal Reserve publication titled:
Money, Banking & Credit in Eastern Europe, and in the 1951
Ohio State University publication titled: The Soviet Financial
System And Its Relations With The Western World, the Soviet
economy is based on "control by the ruble". Therefore, a surplus
of interest-free rubles not indebted to the State or to the Gosbank,
accumulating in the Soviet economy through the State's and the
Bank's own expenditures — would become a threat to the Bank's
"control by the ruble" powers. Therefore, in order to maintain the
"ruble power" of the Gosbank over the Soviet economy, the State
has enacted or established certain taxes and interest rates on
loans — all payable to the State Gosbank.
Therefore, interest on the loans to the Soviet socio-
economic enterprises etc., the Turnover tax, the Income and
other taxes, are not levied and collected (as generally perceived
by the western financial logic) to finance the State's and the

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Gosbank's operations. The interest on loans and the various taxes
as stated above — are designed to withdraw out of circulation,
the redundant interest-free ruble funds, generated into the econ-
omy, via the State's and the Bank's own operating expenditures.
Thus, with the interest charges and the calculated taxation, the
Gosbank governs the Soviet economy and maintains the targeted
residual and circulating monetary equilibrium in the Soviet
economy.

The Fountain Heads Of Money . . .

The Soviet State's bank, the Gosbank is a bank of issue,
just like the Federal Reserve banks in the United States. The
Gosbank, like the Federal Reserve banks are "Fountain Heads" of
New Money — but there is where the similarity ends. The Soviet
Gosbank, instead of monetizing the investors assets and the
taxing powers of governments, like the Western banks do to
provide money to their governments and its the economies — the
Soviet Gosbank "Monetizes the State's Physical, Technical and
Intellectual Labors" by directly funding the State and all its
agricultural, industrial enterprises and defense programs and
targets. The Gosbank by a precise ruble-accounting procedure
"Creates Credit Rubles" (checkbook rubles) to the credit of the
Soviet educational, agricultural, industrial and defense complexes
checking accounts — which checking account rubles are then
used by the enterprises to "Monetize (pay for) the services of
labor" — which Monetized Labor Wages then become the Soviet
economy's circulating ruble-money supply.
Any nation or government, whether it be a Republic,
Democracy, Socialist, Communist or a Dictatorship — if it (the
nation's government itself) adopts "Monetizing of its Labor" as
the source of its Credit Money — would never be financially
limited in the quality of its defense, nor in what is socio-
economically desirable, intellectually possible and physically
feasible. It may be

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strange to the Western financial thought, to realize that — a
Nation that monetizes its "Physical, Intellectual and Scientific
Labors" — would never be financially limited, to landing men on
other planets — but would be limited only by the technologies,
arts and sciences at its command.
Not generally recognized, that in the United States, the
Federal Reserve supplies the National Government with money
(directly and indirectly) by monetizing (at high interest cost)
Government debt (bonds) and its taxing powers. Therefore, the
socio-economic benefits, that the U.S. Government can afford to
extend to the people, are limited by its taxing capability.
To the economic arena entrepreneurs and general
commerce, the Fed, through the commercial banks, supplies the
money by monetizing (at high interest cost) the "assets and labor"
of the productive of society. Therefore, the general economic
growth of our Nation is limited — not by the inventive genius of
our productive society — but by the volume of "assets" that the
productive society still has left to be monetized.
When the taxing powers of Government are exhausted,
and when there are no more assets of the productive society left
to be monetized — the history of ancient Greece, Rome, France
of 1776, Russia of 1917 will repeat itself ... not because the
people, as often recited, forgot history — but because the people
had been denied the knowledge and understanding, that within
"the private bankers' Asset and Taxes Monetizing business"
resides the "seed" of its own and its debt-enslaved peoples
financial and economic destruction.
The die is cast. The course is set, it's only a matter of time
and the march of ancient history will repeat itself. That is why, I
believe, Robert H. Hemphill, 8 years Credit Manager of The
Federal Reserve Bank of Atlanta, in a statement before the House
banking and Currency Committee, some time ago warned: "Our
money and banking problem is the most important subject
intelligent persons

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can investigate and reflect upon. It is so important that our
present American way of life may collapse, if our Nation's money
issue is not better understood and its defects remedied soon."

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THE STATES OF GUERNSEY . . . GOVERNMENT-CREDIT-
CURRENCY EXPERIMENT
In the early 1900's, the Guernsey States Fathers — forced by
bankrupting indebtedness to banks, and dire poverty and
unemployment — against the will of bankers, the erudite
professionals and economists — the Guernsey States Fathers —
instead of selling bonds to banks to raise money — issued their
own States of Guernsey "interest-free" Government-Credit
currency notes and thus stopped the Guernsey States from
drifting deeper into debt to the banks. Upon wise deliberation, the
Guernsey States Fathers issue enough interest-free Government
Credit currency notes to wipe out poverty and unemployment.
The States planners and managers built homes for the homeless,
built and rebuilt schools, colleges, roads and rebuilt the sea docks
and land erosion walls — and to the chagrin of bankers and the
erudite economists, the States of Guernsey incurred no additional
debts to the banks. Some of the interest-free Government Credit
currency notes in the State of Guernsey are still in circulation.
The complete story of: The Guernsey Monetary Experiment by
Olive & Jan Grubiak is available from Monetary Science book
catalog, book #17. published by: Monetary Science Publishing,
Box 86, Wickliffe, OH 44092-0086

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THE FEDERAL RESERVE BANK OF BOSTON, in a 1977
publication t i t l e d : The Federal Reserve, Putting It Simply,
writes:

"The most important thing to understand about money is

that money is artificial — that is to say, that money is entirely a
man-made creation. It isn't an element of nature (such as gold or
silver). It is simply a creation of civilized man; it always has been
and it always will be."

It is also important to understand, that all artificial money,

better known as "Bank Credit" is created by the commercial
banks, first in the form of checking account "deposit credits" —
either as bank expenditures, bank loans, or bank investment
monies — and most Bank Credit money remains and circulates in
that deposit credits form by means of checks — until some is
(temporary) converted into physical cash currency notes.
The Treasury's Engraving and Printing Bureau, tailor-
prints the Federal Reserve notes cash currency for the 12 Federal
Reserve banks at the cost of printing about 2c per note. The
Federal Reserve banks then distribute the cash currency amongst
the commercial banks by charging it to their (Fed provided)
reserve accounts.
The banks then distribute the cash currency amongst the
general commerce and public, by exchanging their obtained cash
currency for the public's checking or saving account deposit
credits. In other words, the general public gets its cash currency
from banks, or from someone who got it from some bank by
having it charged, either to his checking or saving account.

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