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# The Theory of the Emission Economy Bolshevik roots of "Modern Monetary Theory"

Nikolay Nenovsky

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Nikolay Nenovsky. The Theory of the Emission Economy Bolshevik roots of "Modern Monetary Theory": MPRA Paper No. 113048. 2020. hal-04084551

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# The Theory of the Emission Economy
# Bolshevik roots of "Modern Monetary
# Theory"

Nenovsky, Nikolay

Université d'Amiens, LEFMI, France, SU HSE, Department of
Theoretical Economics, Russia, RUDN, Department of Political
Economy, Russia, Bulgarian National Bank, Bulgaria

March 2020
# The Theory of the Emission Economy
## Bolshevik roots of "Modern Monetary Theory"

Nikolay Nenovsky*

Published in Bulgarian by as Discussion Paper 2020/N°116, Bulgarian National Bank

https://www.bnb.bg/bnbweb/groups/public/documents/bnb_publication/discussion_2020_116_bg.pdf

[Неновски, Н. (2020). Теорията за емисионното стопанство Болшевишките корени на „модерната парична теория“, БНБ Дискусионни Материали №116, 2020, 42 стр.]

"Religion is opium for the people."

K. Marx/V. Lenin

"Emission is opium for the national economy",

P. Bark/G. Sokolnikov

## Introduction. MMT one hundred years earlier

When I came across Randall Wray's book 'Understanding Modern Money' in 1998, it seemed strange compared to what Bulgaria had experienced a year earlier a deep financial crisis, hyperinflation and the establishment of a Currency Board (Hanke, 2012). The new restrictive monetary regime was introduced after a large-scale monetisation of the public debt accumulated as a result of transferring the losses of privatised enterprises to the state. The government's deposits were left on the balance sheet of the Currency Board and thus fiscal policy influenced the monetary base. We viewed this as detrimental to the functioning of the automatic monetary equilibrium (Nenovsky and Hristov, 2002). In this setting, most of the ideas in Wray's book were a misunderstanding to us. At this time Wray's ideas took me back to a bygone period, that of the socialist monetary system, and later brought me back to monetary theory and history from the early years of Bolshevik rule. Particularly popular then was a monetary theory called the "Theory of Emission Economy (TEE/Теория эмиссионного хозяйства)," most fully formulated by Semyon Falkner (1890-1938).

Later, after 2008, the main ideas and proposals put forward by Wray became popular and became the so-called "Modern Monetary Theory, MMT" (Wray, 2015; Mitchell and al., 2019). The pandemic crisis of 2020 confirmed changes in the pattern of monetary policy, with central banks injecting vast amounts of liquidity, monetizing government and large private debts virtually without limit (Congdon, 2020). Today MMT is gaining momentum and becoming the "new normal monetary theory."

<footnote>* Professor, LeFMI, University of Picardie Jules Verne, France and SU HSE and RUDN, Moscow, Russia
Email: nenovsky@gmail.com. Special thanks to William Burrus (Master's student at the University of Amiens, France) who helped me edit the English version of the text.</footnote>
In this line of thought, it is interesting to make a comparison with the Bolshevik theory, formulated exactly a century ago, which is strikingly reminiscent of MMT (it is interesting that *Falkner* himself also calls his theory "modern"). Like MMT, TEE has had both supporters and critics. More importantly, during a certain period of time (1918-1920), the TEE was put into practice, and the "consolidation hypothesis" of MMT, that of the unification of the central bank with the treasury, became a reality (January 1920). The Bolsheviks' brief experience with MMT ended disastrously. Lenin himself, who at the beginning shared its basic ideas, was forced to undertake monetary stabilization based on the parallel introduction of gold money, the *tchervonetz* (Goland, 2006).

The task of this paper is to present the theoretical discussions surrounding the TEE as well as the monetary policies of Bolshevik Russia in order to derive some useful patterns for today. It is often argued that there is insufficient empirical evidence on the functioning of *MMT* (see the Latin America article by *S. Edwards*, 2019). In my view, Bolshevik Russia can be seen as a specific historical example of the application of MMT.

The text is organized as follows. First, we lay out the theoretical elements of the TEE, most clearly articulated in *S. Falkner* and partially in the mathematical model of *O. Schmidt*. We also present the criticisms of this theory made both by adherents of the Austrian school (e.g., *V. Novozhilov*) and by a number of Marxists (e.g., *B. Livshits*). In the second part, I present the practice of the Bolshevik "Emission economy" and its results. These led to the need for reforms to stabilize the ruble, undertaken by the Bolsheviks in order to preserve power.

# I. The theory of the emission economy

The TEE was born as part of a theoretical debate among Russian economists that gained momentum in the years of the First World War and was related to the clarification of the nature of paper money. Paper money is known to dominate Russian history in one form or another (in practice paper money dominated the period 1769-1897). However, for most Russian economists, the brief period of the gold standard (1897-1914) was extremely successful. After the war, they did not question its restoration (*Lomeyer*, ed., 1918). Only a few "pre-revolutionary" economists saw a new stage in the development of money and believed that an era of "managed paper currency" detached from its metallic content was coming. Among them were *M. Tugan-Baranovsky* and *M. Bernatsky* (*Nenovsky*, 2020).

The Bolsheviks' rise to power radically changed the attitude towards money. Added to the turmoil in the monetary system, a result of the war, was the Marxist ideology that money had no place in the new communist society (Yurovsky, 2008 [1928/1924]). According to the leading understandings of the time, during the transition period money would be used as an instrument to destroy the capitalists and capitalist relations. Very quickly, however, they would die out and there would be a shift towards moneyless exchange, i.e., to labour or in-kind accountability. There are similar understandings of the place of the state as an organisation, which at first will also exist only as an instrument for subjugating the capitalist class and eliminating the class enemy (this is why the Bolsheviks do everything they can to distinguish themselves from the anarchists, Preobrazhensky, 1920). The main elements of the transitional
period, including the policy towards money, are presented in N. Bukharin and E. Preobrazhensky's The ABC of Communism (2008 [1918]).

In the early years of the Bolshevik regime, monetary income (seignoriage) became practically the only way to finance state expenditures (see Table 1). The fiscal base was destroyed by the war and the subsequent Bolshevik nationalisation of the main industrial enterprises. The economy was closed and there were no customs revenues. The issuance of interest-bearing debt securities was unrealistic (in fact, the emission of paper money can be seen as interest-free debt of the government). It was in this period that the emergence of "an emission economy" began to be discussed (Hensel, 1935).

<table><caption>Table 1. Dynamics of the budget and financing through money emission (Million roubles)</caption><thead><tr><th></th><th>Revenue</th><th>Expenditures</th><th>Deficit</th><th>Deficit as % of expenditure</th><th>Currency Emission</th><th>Proportion of deficit financed by currency emission, %</th></tr></thead><tbody><tr><td>1914</td><td>2 961</td><td>4 859</td><td>1 898</td><td>39.1</td><td>1 283</td><td>68</td></tr><tr><td>1915</td><td>3 001</td><td>11 562</td><td>8 561</td><td>74.0</td><td>2 670</td><td>31</td></tr><tr><td>1916</td><td>4 345</td><td>18 101</td><td>13 756</td><td>76.0</td><td>3 480</td><td>25</td></tr><tr><td>1917</td><td>5 039</td><td>27 607</td><td>22 568</td><td>81.7</td><td>16 403</td><td>72</td></tr><tr><td>1918</td><td>15 580</td><td>46 706</td><td>31 126</td><td>66.6</td><td>33 500</td><td>100.1</td></tr><tr><td>1919</td><td>48 959</td><td>215 402</td><td>166 443</td><td>77.3</td><td>164 200</td><td>98</td></tr><tr><td>1920</td><td>159 604</td><td>1 215 159</td><td>1 055 555</td><td>86.9</td><td>943 600</td><td>89</td></tr><tr><td>1921</td><td>4 139 900</td><td>26 076 816</td><td>21 936 916</td><td>84.1</td><td>16 375 300</td><td>75</td></tr></tbody></table>

Sources: Katzenelenbaum (1924), p. 66; Yurovsky (ed.), (1926), pp. 15; Shmelev (1931), p. 126, and my calculations.

At this point various projects emerged to limit the role of money not only as a medium of exchange and means of payment, but also as a unit of measurement (unit of account) (Bogomazov, 1974, Boettke, 1999 [1990], Nenovsky, 2020)<fnref n="1" />. Within the framework of the destruction of money as a medium of exchange and means of payment, two theoretical approaches stand out. The first can be called the "currency nullification approach". The main proponent of this approach is E. Preobrazhensky, ("Paper Currency in the Epoch of Proletarian Dictatorship", 1920). This approach is first of all ideologically justified - money is the main instrument for destroying capitalist elements, and inflation is a lever for achieving this goal. Preobrazhensky himself is eloquent enough in the dedication to his book:

<footnote n="1">¹ The discussion on the cashless economy is extremely rich and interesting, I note here only some of its main points. For theoretical conceptions that propose the destruction of money as a means of measurement and calculation, and their critique, see Lavoie (2015 [1985]), De Soto (2010 [2001/1992]), and Magnin and Nenovsky (2020). For a comprehensive review, see Pasvolsky (1921), Manevich (1986); Shukhov (1991); Goland (2006); Arnold (1937); Malle (1985), Nenovsky (2009, pp. 154-183). P. Boettke is the most complete and interesting study of this period from the positions of the Austrian school (Boettke, 1999 [1990]).</footnote>
"I would like to dedicate this imperfect work to the one who gave occasion to write these pages, the printing press of the People's Commissariat of Finance. [...] In the archives of the great proletarian revolution, alongside the guns, rifles and machine guns of our epoch that struck down the enemies of the proletariat, the printing 'machine gun' of the Narkomfin, which shelled the monetary system of the bourgeois system in the rear, turning the monetary circulation of the bourgeois regime into a means of destroying that regime and into a source of financing the revolution, will stand in a place of honour." (Preobrazhensky, 1920, p. 4.)

The second theoretical approach to the function of money as a medium of exchange and means of payment can be called the "monetarist approach". It puts the managed and controlled "depreciation of money" at its centre. This was what TEE is - the theory of the economy of emission. It finds its fullest development in the writings of Falkner (1918, 1918/1919, 1919, 1919a, 1919b, 1919c, 1920, 1920a, 1920b, 1921, 1922, 1924a), later summarized in his book *Problems and Practice of the Emission Economy* (Falkner, 1924). A mathematical attempt to verify the TEE was made by O. Schmidt in "*Mathematical Laws of Monetary Emission*" (1923)<fnref n="2" />. Before stating the basics of this theory, I will note that Falkner began working on the subject of paper money as early as 1914 and 1917 and conducted an extensive historical study of the French Revolution's laws of paper currency issue in connection with the so-called assignats<fnref n="3" /> (1789-1797). Subsequently, he was an active participant in the creation of the Supreme Board of the National Economy (Высший совет народного хозяйства (BCHX)/VSNKh), and the subject of paper money was designated as the leading research topic of the new institution (NKh, 1918, p. 45).

The main propositions of TEE can be reduced to the following.

First, there are four ideal types of economy through which the state is financed - (a) a natural tax economy, (b) a natural production economy, (c) a monetary tax economy, and (d) an emission economy (see Table 2). Among these four types, the last, the issue economy, stands out, in which the state itself produces new currency (rather than seizing through taxes the currency already circulating). According to Falkner, although common in history, the emission economy model has rarely been analysed.

The emission economy gives the state unlimited possibilities to finance its spending. Falkner's analytical formulations are the result of observations he had on paper currency during the war years, when convertibility into precious metal (mainly gold) was interrupted. According to Falkner, non-convertible paper money underlies a specific regime that is not a deviation from the norm, but rather an independent, stable (albeit transitory) system. This regime is an unique economic category and has its own

<footnote n="2">² In his analysis of the monetary reform of the Hungarian Revolution, E. Varga speaks of three monetary strategies - 1) cancellation of money, 2) devaluation of money, and 3) withering away of money (Varga (1922 [1921]).</footnote>

<footnote n="3">³ Assignats - paper currency put into circulation in France during the Revolution of 1879 and in Tsarist Russia from 1789 to 1843. See the history of French assignats and the economic processes associated with them presented in *Aftalion* (2007).</footnote>
mathematical laws (Falkner, 1920). According to the author, the emission economy is the opposite of the tax economy<fnref n="4" />.

"Emission economy, paper currency [...] has the features of a completely peculiar and internally closed financial system that can and should be opposed to other systems. [...] The idea is to oppose the tax system as its antithesis. The state can obtain the funds it needs either by the forced withdrawal from circulation of the currency already circulating (a tax system) or by the forced introduction of new, arbitrarily created currency (an emission system). In the first case, the purchasing power of each monetary unit remains stable, constant. Only the quantity of privately held currency is reduced; in the second case, the quantity of privately held currency is not changed, but its purchasing power is artificially reduced at the expense of the newly created purchasing power, that of the new currency. [...] The emission of paper currency appears to be the strongest and most effective state-financial method of the decentralized commodity-exchange economy" (Falkner, 1919, p. XIII, pp. 267-268).

<table><caption>Table 2. Types of economy and government financing systems</caption><thead><tr><th>Funding principles<br>Form of financing</th><th>Seizure from the private sector<br>(Tax economy)</th><th>Self-production<br>(Production economy)</th></tr></thead><tbody><tr><td>Natural form<br>(Subsistence, natural economy)</td><td>Seizure in kind<br>(Natural tax economy)<br>(1)</td><td>Production of products<br>(Subsistence, natural, economy)<br>(3)</td></tr><tr><td>Monetary form<br>(Monetary economy)</td><td>Seizure in currency, money<br>(Monetary tax economy)<br>(2)</td><td>Production of currency, money<br>(Emission economy)<br>(4)</td></tr></tbody></table>

Source: author's adaptation from Falkner (1924, pp. 35-36).

Second, the emission economy is a stationary state of a transient and disorganized economy caused by wars, social revolutions and other social upheavals<fnref n="5" />. According to Falkner, post-war Europe "will for a long time be in the state of the EU" and so until "the financial situation of Europe is radically changed" (Falkner, 1920, p. 24). The emission economy has its own laws of development. According to the author:

"The possibility of an arbitrarily continuous development of the economic system of emission is conditioned by two factors: first, by the absolutely exceptional and incomparable importance of currency circulation (in all its distorted forms) for the exchange economy as a whole; and, secondly, by the adaptability of the exchange economy to every external influence, owing to the mobility of the elements and units of which it is composed" (Falkner, 1924 [1920], p. 25).

<footnote n="4">⁴ According to Falkner, the emission system can be approached in three ways: a) as a method of financing, b) as a monetary phenomenon and c) as an organisational form.</footnote>

<footnote n="5">⁵ According to the author's calculations, "in 1919, in continental Europe (adding Russia), out of a population of 462 million, 340 million were living under conditions of intensive EU development, and only 122 million, i.e. about 27%, under conditions of a barely stable monetary circulation" (Falkner, 1920, p. 24).</footnote>
"It may be argued that just as the criterion of a sound monetary economy is the sustainable value of the monetary unit, so likewise such a criterion of a normal emission economy is the sustainable rate of its depreciation. [...] What is the significance of the commodity depreciation of our currency as a whole? The depreciation of issued money is primarily a form of economic compensation for the emission itself. [...] This reaction (depreciation) is not only inevitable but necessary, because it constitutes a way of maintaining the normal operation of the national economic mechanism" (Falkner, 1924 [1919], pp. 45-46.)

According to Falkner, the sustainable state of the emission economy is determined by the fact that Soviet power is fully sovereign, the leading industrial sectors are nationalised and domestic savings are negligible. That is, the basis for taxes and for mobilizing interest-bearing debt is weak<fnref n="6" />. Also, it is only the peasants who have savings and can pay taxes, but doing so is extremely difficult. *E. Varga*, a well-known Soviet economist and formerly a financial commissar in the Hungarian Bolshevik Republic (1919), notes:

"In the beginning the proletarian state economy inevitably runs a large deficit, just as the capitalist economy did after the war. Capitalist states can cover part of their deficit by contracting new loans. The proletarian state cancels old state debts. It understands that it cannot contract new ones, to create new sources of non-labour income. Thus, to cover the deficit, no mean remains other than the issue of new paper money. [...] The function of money as a medium of exchange is preserved. This makes it possible to cover the deficit of the state economy by means of new issues of paper money" (Varga, 2019 [1920], pp. 121, 123).

Third, Falkner presents an analysis of the limits of the emission economy, the limits of the production of currency (type 4 in the table 2).

"The distrust of the possibility of the continued self-preservation of paper-money finance is the unconscious reason why all theorists of economics and finance have regarded it as an accidental anomaly in the general course of financial development, and have predicted its speedy and inevitable collapse" (Falkner, 1919, pp. XIV-XV.).

Based on his historical analyses (of the French Revolution's paper money), and because of the existence of Soviet Russia's sovereignty, Falkner believes that the emission economy's collapse can only occur in three ways, viz:

"First, in the event of the abandonment of any circulation of which the given currency serves as an instrument; secondly, in the event of a change from a monetary to a natural circulation; and, thirdly, in the event of the exchange of the given currency for some other circulating medium, i.e., in the event of the economic displacement of the given monetary system by another which has legally or illegally assumed the performance of circulatory functions. [...] Only the third case is real - the case of a complete depreciation of the paper money mass by virtue of the population's turning to other circulatory means, competing with the paper ones and victiously pushing them out of circulation. But outside of a diversion to better circulatory means that can be used to mediate commodity circulation,

<footnote n="6">⁶ In reality, paper money is a kind of interest-free government debt.</footnote>
no "complete collapse" of the paper money system is possible today. This would mean that
the population would voluntarily give up all exchange, or go over to natural exchange"
*(Falkner, 1919, pp. XIV-XV.).

Completely in the spirit of his theory, three years later, in 1922 (in the discussions
surrounding the NEP<fnref n="7" />), Falkner opposed the introduction of new "hard" bank currency
alongside the devalued Soviet paper currency, the paper rouble (the *sovznak*). At a
meeting of specialists on 26 January 1922, Falkner and L. Yurovsky voted against the
legalization of transactions in gold and silver, as well as those in a foreign currency
(Falkner, 1922, pp. 67, 76-78, 87, 88-89).

Fourth, active management and control of the EU requires that the devaluation of money
be studied scientifically. This means calculating the optimal rate of emission by
discovering the laws of money issuance. In his article "The Economic Functions of the
Depreciation of Money" (1919), Falkner wrote:

"The question of the speed, consistency and pace of the decline in the value of the currency is brought to the fore by the overall logic of the emission and serves as crucial material for predicting the future fate of the issued currency. Just as a sudden change and acceleration of depreciation is a signal of distress and an indicator of the emergence of certain new factors making the situation of paper currency dangerous, so the persistence of the rate of depreciation (manifested in a certain numerical coefficient) is an indicator of the credibility of the general emission economy situation. [...] Currency depreciation is a method of counteracting the excessive increase in the purchasing power of certain population groups. By counteracting the overaccumulation of currency, the decrease in the economic importance of the currency becomes a tool for the forced restoration of the country's exchange of goods. Conversely, where the real depreciation of the currency is halted by the slower upward movement of commodity prices due to their settling at the same level for too long, a blockage of commodity circulation immediately occurs. [...] Prices must be periodically revised in accordance with the rate of use of the monetary system for the purpose of financing the state apparatus" (Falkner, 1924 [1919], pp. 45-47.)

A number of mathematical modelling attempts have been made to predict the emission.
Among the authors are V. Bazarov, E. Preobrazhensky, S. Strumilin, E. Slutsky et al. One of
the most interesting models is that of mathematician and geophysicist O. Schmidt (1891-
1956), who held important economic posts in the early years of Soviet power. Schmidt
introduces his model in italicize the title of his paper Mathematical Laws of Monetary
Emission (1923[1922]), in a paper presented to the Socialist Academy on 23 November
1922:

"The laws of monetary issuance are poorly understood. The economic science of the past
has been limited to describing the harm resulting from the issue and to mild advice on
how to restore a 'normal' monetary system after the emission has ceased.

<footnote n="7">⁷ New Economic Policy (Novaya ekonomicheskaya politika, NEP) - economic policy introduced in 1921 in
Bolshevik Russia that to some extent liberalized the post-revolution economy and returned its dynamism.</footnote>
These studies viewed the emission as a transient and severe disease of the national economy, but were not interested in the pathology of this phenomenon.

At the same time, large countries have repeatedly had to live under the conditions of an issue. [...] No doubt, during the period of the emission and until the ruble is restored, we should not stop theoretical work. The period of the issue will last a long time, during which time significant reforms will take place and colossal changes will take place in the national economy. We must not shirk the task of studying the laws of emission, both for the best orientation today and for the fuller justification of measures to stabilize the currency" (Schmidt, 1923 [1922], pp. 3-4.)<fnref n="8" />

In his paper, *Schmidt* proposes and empirically verifies a mathematical model of the quantity theory of money that practically overlaps with that of Phillip Cagan in 1956 (Cagan, 1956). According to *Schmidt*, "the size of the issue depends on time" in a geometric progression, or:

> "The issue reflects the transition from one economic form to another, so that three periods can be clearly distinguished: 1) the transitional period (1918-March 1919), 2) the period of "war communism" (April 1919-June 1921), and 3) the NEP (from July 1921). Within each period - a striking fact! - the issue proceeded as if all other factors had no discernible significance. Emission grows only in relation to time. [...] The magnitude *n* (the rate of emission - note N.N.) for each of the three periods can be easily calculated. Taking one year as the unit of time, *n* is approximately equal to 0.81, 1.55 and 5.31 respectively" (Schmidt, 1923[1922], pp. 5, 16.).

So:

> "We may consider that the state appropriates by the issue per unit of time always the same definite part of the aggregate of commodities found in the market" (Schmidt, 1923 [1922], p. 6.)

According to Schmidt, in the NEP period things become more complex because there is also a withdrawal of currency through revenues and taxes. Then the dynamics of the formula change and a factor is introduced at which the issue stops<fnref n="9" />.

## II. The Critics of the Theory of the Emission Economy

The basic propositions of the TEE are immediately criticized by many. I will limit myself to two of them, V. Novozhilov and B. Livshits. My choice is motivated, first, by the fact that they are among the few authors who devote special in-depth attention to this theory, and they are proponents of different theoretical schools of money. One is a proponent

<footnote n="8">⁸ Similar ideas and patterns are presented in Preobrazhensky's book (1920), which draws on early research by Schmidt.</footnote>

<footnote n="9">⁹ In his book, *A Tract on Monetary Reform*, published in 1923 (Keynes, 2000 [1923]) Keynes paid special attention to the dynamics of money supply, inflation, and real money demand, as well as the monetary income (seigniorage) that could be derived from the currency emission. Many of his analyses are similar to those of Russian economists during the debate on the issuing economy. Keynes illustrates much of his theoretical hypothesis with the behaviour of variables in Russia during inflation and monetary stabilization. For me personally, there is no doubt, adding his interest in Russia, that Keynes was influenced by a number of ideas and observations he received during his communication with Russian delegates at the Genoa conference in April / May 1922.</footnote>
of the Austrian school (V. Novozhilov) and the other shares the ideas of Marxism (B. Livshits). B. Novozhilov in the 1920s was a young economist, but later became one of the most famous Soviet economists - the founder of the mathematical branch of Soviet economic theory. In fact, Novozhilov was known more as a mathematician economist, but in his early years he can be seen as a strong supporter of the Austrian school<fnref n="10" /> (Kovalev, 2014). B. Livshits, on the other hand, was a strong supporter of the Marxist theory of money; he was very active in methodological debates about the nature of money in the new communist society. He sought to adapt Marx's positions on money to the new Soviet society, affirming Marx's position that money is always based on a particular metal, in this case gold<fnref n="11" />.

The criticism of Novozhilov (1892-1970) resembles in many ways today's critics of MMT. Of particular interest is the article "Limits of Inflation" (1924, written in 1923)<fnref n="12" />. Novozhilov analyses the two cases of inflation - fiscal and banking, i.e., an increase in the volumes of paper currency and bank credit, respectively<fnref n="13" />. I will confine myself to the analysis of fiscal inflation. Commenting on Falkner's TEE (Novozhilov considers the TES more dangerous than the money-zeroing approach because it claims that money printing has no limit), he notes the following main problems.

First, the emission economy cannot be limitless. Inflation has very clear and "natural" internal limits. These limits are linked to the fact that the emission economy deforms and destroys the structure of the economy. The end result is a curtailment of the "productive forces of the country" (Novozhilov, 1924, p. 97). In the author's words:

> "Inflation has "natural limits". The collapse does not come in the form of currency turning into simple paper, but otherwise. The national economy as a whole puts an end to inflation. [...] For fiscal inflation there are no limits within the currency circulation. It is not the decomposition of the monetary system, but the decomposition of the national economy, of society and of the state apparatus, that sets limits to the issue. The history of money is the history of inflation, but it knows of no case of a long existence of a pure emission economy. And this is not an accident, but a natural law of economics: "an issue economy as a stand-alone financial system is impossible."

<footnote n="10">¹⁰ Novozhilov was influenced by the ideas of Mises. He entered an economic essay contest in the United States (Novozhilov, 1927) and his ideas from this essay were noted by Hayek (Hayek, 2012 [1929], pp. 145-146, 153). In my opinion, Novozhilov was influenced by all three studies of B. Brutskus, published in 1922 (and later in an English version, in 1935, and edited by F. Hayek).</footnote>

<footnote n="11">¹¹ The controversy over Marx's positions on the question of money continues to this day (for more on this debate, see Nenovsky, 2019, 2019a).</footnote>

<footnote n="12">¹² Novozhilov has another famous article related to the subject, namely "The Scarcity of Goods" (1926). In it, the author develops similar themes by linking the scarcity of goods to the scarcity of currency. For example, "It seems to us that it is enough to extend credit to make all the adversities of the crisis pass away, so that the growth of production may continue at the same rate. However, this appearance is false. The scarcity of money capital is itself a symptom of a serious disorder in the whole system of capitalist industry. Inflation can only increase this disorder, can only intensify the main evil of the crisis, make it more difficult to overcome" (Novozhilov, 1926).</footnote>

<footnote n="13">¹³ Inflation is defined as: 'an excess of money - excess compared to the state of commodity circulation. An external manifestation of inflation is the increase in commodity prices" (Novozhilov, 1924, p. 83.)</footnote>
Unlimited fiscal emission may repeat itself in history, but it cannot continue uninterrupted. For to become again a profitable instrument of the treasury, the national economy must be restored. This is impossible without limiting or temporarily abandoning all fiscal emission. [...] Fiscal inflation causes wasteful consumption and ends in a crisis of overproduction" (Novozhilov, 1924, pp. 85, 98, 120.)

According to Novozhilov, the emission economy is undermining the country's productive forces by changing the structural proportions in the economy. The emission economy distorts relative prices, which act as signals (they are a "language") for economic agents (entrepreneurs and consumers).

"Economy is impossible without proper accounting of costs and revenues, means and ends. Any error in calculation is inevitably punished; inflation redefines all the basic data for calculation in a monetary economy: prices and incomes. The movement of prices and incomes performs an economic function of great importance in the exchange economy. What to produce, how much to produce - all this is dictated by the language of prices. [...] Inflation redefines all price ratios, it redefines the only criterion of the correctness of the organisation of the economy. With inflation, language begins to lie" (Novozhilov, 1924, pp. 88-89.)

Further:

"Fiscal inflation creates a false appearance of abundant resources available to the state. [...]. The emission economy can be seen as a single tax: a tax on money taken per unit time of holding it. [...] The impracticability of a uniform unequal tax is an elementary truth of financial science. It is therefore all the more surprising that the idea of the possibility of a single tax was resurrected a few years ago in the emission economy." (Novozhilov, 1924, p. 98.)

Novozhilov criticises the EU not only for being an aggregate model, i.e., not taking into account structural effects: he also highlights problems of the emission economy (today's MMT) as (a) ignoring inflation expectations, (b) failing to take into account the "real" demand for money, real incomes, real seigniorage, and in general the real dimensions of variables, and (c) thinking in a closed economy (where there is a political monopoly).

Fairness demands that we note that the criticized Falkner was aware of the structural and redistributive effects of his model, but either overlooks them or thinks they can be overcome technically. Technical in the sense that it can be done through planned centralised change, i.e., relative price management. It is no coincidence that Falkner wrote a number of papers on fixed price issues and that the Committee on Prices at the Supreme Council of National Economy dealt with fixed prices.

And while Novozhilov's criticism may seem natural for an adherent of the Austrian school, the assessment of another Russian economist of those years is telling. We are talking about B. Livshits, who attacked the EU from the positions of Marxist methodology in his article "Towards a Statement of the Monetary Problem from the Point of View of the Law of Equilibrium" (1924). In practice, Livshits makes the same accusations against the EU model. This article is part of the fundamental debate among Marxists about the nature, value and purchasing power of paper currency (and especially about the theory of R. Hilferding on the independent value of paper money, a value independent of gold). In a part of his article called "Prof. S. Falkner's 'Theory of the 'emission economy''", Livshits
denies the independent existence of the EU and analyses its harmful character.
According to the author, the emission economy leads to "economic disorganization"
(Livshits, 1924, p. 239). He states:

"The common way of calculating the value of money by means of an index is theoretically incorrect [...] because the general level of prices is the result of a whole series of complex interrelations of forces acting in the economic organism. [...] The change in the general level of prices cannot serve more or less as an accurate indicator of the qualitative and quantitative changes that have taken place in the social economy. Apart from anything else, this general level does not reflect the relative weights of individual commodities on the market. [...] The same rate of depreciation of paper money in relation to the general level of commodity prices may not at all correspond to the same qualitative and quantitative change in the distribution of productive forces" (Livshits, 1924, pp. 235, 238.)

Emission economy borders cannot be controlled and managed (as Falkner and Schmidt suggest<fnref n="14" />). They occur spontaneously and people abandon paper currency. Livshits notes:

> We believe that this moment [the limits of for the emission economy - N.N.] can come also purely spontaneously. It is when the reduction in the purchasing power of paper money is subjected to too sharp a deviation from the rate of the preceding depreciation compared to an objective measure of value. And the rate of depreciation is not proportional to the issue. It is then that there is a spontaneous refusal to accept a currency and the introduction into circulation of a stable foreign currency or of other securities which have not been circulating up to that time" (Livshitz, 1924, pp. 235, 238.)

Like Novozhilov, for Livshits the EU model is built on the assumption of a closed economy and does not take into account the monetary circulation between countries (exchange rates ("inter-currency rates") and balance of payments dynamics). Like Novozhilov, Livshits thinks that it is necessary to think in real rather than nominal terms and analyses the "real" money income generated by the emission<fnref n="15" />.

In the first years of Soviet power, economic events developed extremely dynamically. Despite the theoretical efforts of Falkner, Schmidt and others, and the practical actions of the Bolshevik businessmen, the possibilities of the EU were exhausted very quickly. Inflation was out of control (see Table 1). In this critical situation, Lenin was the first Bolshevik politician to see the limits of the EU, and the need to move towards a partial restoration of the private sector and the market. This was done by stabilizing currency and restoring taxes (the "tax economy" according to Falkner's model).

<footnote n="14">¹⁴ Livshits also criticizes various approaches to measuring the optimal rate of emission and its "efficiency," including those of Yurovsky, Schmidt, and Bazarov (Livshits, 1924, p. 239).</footnote>

<footnote n="15">¹⁵ In reality, the "nominal-real" dichotomy is debatable. We are not discussing it here.</footnote>
### III. Lenin against MMT: Monetary Stabilization (1921-1924)

After four years of civil war and military communism, the economic and financial condition of Bolshevik Russia was catastrophic. In mid-1921 there was a real threat that the Bolsheviks would lose political power. The EU provided almost 100% of the budget revenue. For example, at the beginning of 1922, 98% of revenues came from the issue. At the same time, the issue brought in less and less real income, i.e., its marginal yield starts to tend towards zero. The issue of unsecured paper money from the Treasury (representing interest-free debt) yielded practically nothing (Tables 3 and 4).

<table><caption>**Table 3. Dynamics of currency emission and its revenues**</caption><thead><tr><th>Year</th><th>Currency emission (nominal), in paper rubles</th><th>Currency emission (real), in gold rubles (data of N. Krestinsky)</th><th>Currency emission (real), in gold rubles (data of E. Preobrazhensky)</th><th>Currency emission (real) deflated by the labour index (data by L. Yurovsky)</th></tr></thead><tbody><tr><td>1919</td><td>168 billion.</td><td>300 million.</td><td>386 million.</td><td>224.6 million.</td></tr><tr><td>1920</td><td>955 billion.</td><td>200 million.</td><td>186 million.</td><td>122 million.</td></tr><tr><td>1921</td><td>10,000 billion.</td><td>200 million.</td><td>145.8 million.</td><td>149 million.</td></tr></tbody></table>

Sources. 12; Preobrazhensky (1922), p. 255; Yurovsky (2008 [1927]), p. 339. There are small discrepancies in the calculations, but overall, the dynamics of real revenues from the currency emission are similar.

<caption>**Table 4. Money circulation in the period 1918-1921.**</caption>

(RUB in million, all data are as of the first day of the respective quarter)

<table><thead><tr><th>Year, quarter (Q)</th><th>Currency in circulation</th><th>Emission during the quarter as a share of total currency in circulation, in %</th><th>Real value of circulation, in gold rubles</th><th>Real value of the new emission, book ruble index</th><th>Price index (1913=1)</th></tr><tr><th></th><th>(1)</th><th>(2)</th><th>(3) = (1)/(5)</th><th>(4)</th><th>(5)</th></tr></thead><tbody><tr><td>1918 Q1</td><td>27 650</td><td>22.9</td><td>1 317</td><td rowspan="2">62</td><td>21</td></tr><tr><td>Q2</td><td>33 975</td><td>28.7</td><td>790</td><td>43</td></tr><tr><td>Q3</td><td>43 711</td><td>17.9</td><td>491</td><td rowspan="2">21</td><td>89</td></tr><tr><td>Q4</td><td>51 525</td><td>19.0</td><td>548</td><td>94</td></tr><tr><td>1919 Q1</td><td>61 326</td><td>22.6</td><td>374</td><td rowspan="2">19</td><td>164</td></tr><tr><td>Q2</td><td>75 185</td><td>34.4</td><td>224</td><td>336</td></tr><tr><td>Q3</td><td>101 030</td><td>46.7</td><td>154</td><td rowspan="2">18</td><td>656</td></tr><tr><td>Q4</td><td>148 201</td><td>51.8</td><td>161</td><td>923</td></tr><tr><td>1920 Q1</td><td>225 015</td><td>51.4</td><td>93</td><td rowspan="2">10</td><td>2 420</td></tr><tr><td>Q2</td><td>340 662</td><td>50.2</td><td>71</td><td>4770</td></tr><tr><td>Q3</td><td>511 816</td><td>45.6</td><td>63</td><td>10</td><td>8 140</td></tr></tbody></table>
<table><tr><td>Q4</td><td>745 158</td><td>56.8</td><td>77</td><td></td><td>9 620</td></tr><tr><td>1921 Q1</td><td>1 168 597</td><td>44.3</td><td>70</td><td rowspan="2">6</td><td>16 800</td></tr><tr><td>Q2</td><td>1 686 684</td><td>39.2</td><td>47</td><td>35 700</td></tr><tr><td>Q3</td><td>2 347 164</td><td>-</td><td>29</td><td>-</td><td>80 700</td></tr></table>

Source: Davies (1958), p. 31; the author makes a careful synthesis of data from various sources. In my observation the table is correctly constructed.

Under the NEP that was launched, the first step towards legalising private business was taken and taxes payable in kind began to be introduced. Due to inflation and differences in geographic purchasing power, speculators emerged, the so-called "meshotschiki" (bag people), i.e., traders who carried goods from one place to another and speculated on the price difference<fnref n="16" />. There was an acute (small) currency famine. Means of exchange begin to appear spontaneously, and these are primarily foreign currencies, the gold Tsarist rubles and various types of commodity currency. According to Zachary Atlas:

> "The study of market relations of this period shows that the market, together with the abandonment of sovznaks (Soviet currency – N.N.), sought to create commodity-money that was beyond state control and regulation" (Atlas, 1969, p. 165).

Lenin continued to insist on experimenting with models of moneyless exchange, suggesting that the known local experiments of exchange should be studied, and then a general choice made (Lenin was not yet talking about a "monetary system").

> "Lenin: In a few months we should have practical results to compare and study" (Atlas, 1969, p. 171.)

But only a month later, in August 1921, Lenin saw that currency was becoming more and more spontaneously imposed and abruptly changed his position - a new retreat in the direction of a "money economy" was needed. In a report to the Seventh Moscow Party Conference Lenin said:

> "It has turned out - now you all know this perfectly well from practice, but it is also evident from all our press - that the exchange of goods has failed: it has failed in the sense that it has become a sale and purchase. And now we are obliged to realise this if we do not want to bury our heads in the sand, if we are not afraid to look danger in the face. We have to realise that the retreat has not been enough, that a further retreat is needed, another step backwards, as we move from state capitalism to the creation of state regulation of purchases and sales and of the circulation of money. Nothing happened with commodity exchange; the private market proved stronger than we were, and instead of commodity exchange we got mere buying and selling, trade" (Lenin, T. 44, pp. 207-208.)

The decision to reintroduce a currency was taken. It was a question of how to control this process and which monetary system to choose. It is clear that economic reform could not be expected to succeed without stabilising the currency and restoring the

<footnote n="16">¹⁶ After the collapse of Tsarist Russia and during the first two years of Bolshevik rule, between 3,000 and 6,000 types of currency circulated, issued by a variety of institutions, and this is a particularly interesting period (see Pogrebetsky, 1924, Chuchin, 1927, Nenovsky, 2010, Khodiakov, 2018, for details).</footnote>
central bank. These become conditions for stabilising the budget and for introducing
taxes payable in money.

*Lenin's* early hesitations about the place of money in communist society are well known (see *Bogomazov, 1974, pp. 37-42*). By the end of 1921, however, he strongly supported proposals for monetary stabilization, and on the basis of his own repudiation of the gold standard. Proceeding from the types of financial holdings (presented in Table 2), it can be argued that *Lenin* was aware not only of the inevitability of the transition from an issue (Form 4) to a subsistence economy (Form 1), but also of the subsequent transition to a monetary tax economy (Form 2). Most economists supported the idea of ending the experiment with the emission economy. Without going into details, we note the following points.

In the development of monetary reform, the best Russian economists were involved,
some of whom had worked in bourgeois Russia and participated in the reform of S. I.O.
*Witte* (for example, N. *Kutler*). The mobilization of the country's economic elite resulted
in one of the most interesting theoretical and applied debates on the paths of monetary
reform<fnref n="17" />. The discussions are presented in detail in the seminal (unfortunately
untranslated) book by *Yuri Goland* "Discussions on Economic Policy in the Years of
Monetary Reform 1921-1924" (2006)<fnref n="18" />. Generally speaking, the main controversial
topics boil down to where to start stabilization - from the budget to the currency or vice
versa, from the currency to the budget, as well as whether to stabilize the circulating
government paper currency (called "falling currency/падающая валута") or to
introduce new, stable bank money ("new hard currency") in parallel.

Following the failure of the Genoa Conference in April/May 1922 (relying on a large
external loan to stabilize public finances) it was decided to start with money
stabilisation, i.e., from money to the budget, and to do this by issuing new gold-fixed
banknotes (called *tchervonetz*). The *tchervonetz* were issued by the restored central
bank, while the paper money (sovznaks) continued to be issued by the Treasury.
Initially, the two types of money circulated in parallel, and their turnovers were
deliberately separated. Paper money served the nationalised sector, while 'hard' notes
served the new private sector. In this first phase, one can speak of "monetary
complementarity" (Nenovsky, 2010, see Kuzovkov's fundamental book on the subject,
1925).

Very quickly, however, there comes a moment when we move to a phase of monetary
competition and after a short battle the "hard" money defeats the "falling currency"
(sovznaks, the Treasury's paper currency). The "agony of the sovznaks" rapidly came to
an end. In March-April 1924 several decrees put an end to the "double standard".
Sovznaks and all other monetary substitutes were withdrawn from circulation. The
rouble was anchored on a red-note basis, inflation was overcome, and the exchange rate

<footnote n="17">¹⁷ I consider this to be one of the most remarkable theoretical monetary debates in Europe in the twentieth century for its depth, diversity and, paradoxically, for its ideological liberation (see also *Trifonov* and *Shirokorad*, eds. (1983) and *Nenovsky*, 2010).</footnote>

<footnote n="18">¹⁸ Of course, the exclusive source are the following books: the participant in these debates L. Yurovsky (2008, edited by Y. Goland); that of Arnold (1937); and the recently published works of M. Nikolaev (2018) and M. Khodiakov (2018); see also Jaconis (2017).</footnote>
against the dollar and the pound was stabilized. The Bolsheviks' monetary reform was welcomed by a number of Western economists, including J.-M. Keynes, who wrote a special essay on Russia, and in several newspaper articles.

« At about that date I had the opportunity of discussion at Genoa with some of the Soviet financiers. They have always been more self-conscious and deliberate than others in their monetary policy. They maintained at that time that, with the help of legal compulsion to employ paper roubles for certain types of transaction, these roubles could always be maintained in circulation up to a certain minimum real value, however certain the public might be as to their ultimate worthlessness. According to this calculation, it would always be possible to raise (say) £3,000,000 to £4,000,000 per annum by this method, even though the paper rouble regularly fell in value at the rate of a tenfold or a hundredfold a year (one or more noughts being struck off the monetary unit annually for convenience of calculation). [...] At the same time, in order to furnish a reliable store of value and a basis for foreign trade, the Soviet Government introduced in December 1922 a new currency unit (the tchervonetz, or gold ducat), freely convertible on sterling-exchange standard principles, alongside the paper rouble, which was still indispensable as an instrument of taxation. So far, this new bank note has kept respectable. [...] Russia provides an instructive example (at least for the moment) of a sound money for substantial transactions alongside small change for daily life, the progressive depreciation on which merely represents a quite supportable rate of turn-over tax. (Keynes, 2000 [1923], 56-58.

At the same time, the Bolshevik government issued domestic interest-bearing loans, and the payment of taxes in money (especially agrarian taxes) was restored, (Arnold, 1937, p. 242). The failed emission economy was replaced by a normal tax economy.

It is interesting to note that in the parallel launch of the new "hard" money, the emission economy's main "ideologue", Falkner, actively repeats his theoretical arguments (set out in the previous paragraphs). According to him, the emergence of alternatives to paper "hard money" will become the sole cause of its failure, similar to the experience of the past (the example of the French assignees). During the discussions on the issue of money, Falkner was supported by a number of famous economists, including Leonid Yurovsky.

#### IV. TEE and MMT – comparison and its limits

Recently, Sebastian Edwards presented a comparative analysis of Latin American populism and the main elements of MMT in order to show that this theory is not new. It has been applied and with disastrous consequences in Latin America (Edwards, 2019). I will do something similar here by comparing the Bolshevik TES with the American MMT.

In short, to me MMT is nothing but a complex and generally disguised form of TEE. TEE is MMT in its most primal and pure form. TEE (and the monetary model of socialism familiar to us from that era) is the prototype of MMT. Why do I think so? Let's look at the basic tenets of MMT in turn and see how well they match the tenets of the Bolshevik TEE.
**First moment.** The basic tenet at the core of MMT can be stated as follows: there are no constraints for a sovereign state to finance its expenditures to achieve full employment because it can always finance them indirectly or directly through the issuance of money (Tymoigne and Wray, 2013, pp. 2, 40)<fnref n="19" />. This can be done (a) indirectly, when the government's debt is bought by the central bank in exchange for money (it is only domestic debt!), or (b) directly, when the government receives the money directly from the central bank. "Deficit" and "debt" constraints do not exist for a country when it can sovereignly print "its own money". Or:

> "The most important conclusion reached by MMT *is that* the issuer of the money faces no financial constraints. Simply put, a country that issues its own money can never run out of money and can never become insolvent in its own currency. It can make all payments as they become due" (Mitchell et al., 2019, p. 13.)

> "In countries with their own money, the government does not face tight budget constraints; the government can always print extra money to pay for higher spending" (Edwards, 2019, p. 530.)

As Abba P. Lerner, who is considered one of the "fathers" of MMT, says, it is a process "similar to moving money from one pocket to another." TEE and Falkner argue the same thing - the state can always finance itself by issuing money, and that is what an issue economy is. There is indeed no domestic debt within the TEE, but that is irrelevant - monetizing debt is just one additional, roundabout cycle in money issuance. And as we know, money is interest-free and highly liquid debt.

Hence the **second point**. MMT adopts the so-called 'consolidation postulate', where the central bank and the treasury (government) are analytically viewed as one (Tymoigne and Wray, 2013, p. 2). This unrealistic MMT hypothesis has been criticized even by its post-Keynesian sympathizers such as Marc Lavoie (2013). In the TEE, consolidation is not a postulate but reality itself. At that time in Russia, the central bank and the treasury (the Ministry of Finance) were unified, and paper currency was issued entirely by the government and served directly to finance spending. In the theoretical corpus of MMT, monetary and fiscal policy reverse roles - currency is used to manage employment, and fiscal policy is used to control inflation through tax policy (when taxes are increased, the money supply shrinks), i.e., in practice they are merged. It is the same with the TES - here money issuance serves to mobilise natural and financial resources. In both theories, money has a distinct fiscal origin and a fiscal and state-public nature. In both models there is no place for bank and private money.

**Third point.** MMT implies a sovereign, virtually closed state with control over capital movements and active exchange rate regulation. A fixed exchange rate (to some anchor - gold, foreign money or similar assets), and convertibility of national money are seen as dangerous. The TEE starts from the same principles. So, what is more sovereign than the USSR<fnref n="20" /> in those years, where there was a complete detachment of Russian from

<footnote n="19">¹⁹ In pedagogical form, the main points of MMT are set out in the macroeconomics textbook published in 2019: Mitchell, W., L. R. Wray, M. Watts, *Macroeconomics*, London, Red Globe Press.</footnote>

<footnote n="20">²⁰ Union of Soviet Socialist Republics (USSR, Soviet Union) - the official name of Russia in the period 1922-1991.</footnote>
foreign money and total isolation of the Russian economy! MMT is against liberalization and globalization, which is considered natural in TEE as well. When one speaks of monetization of debt, one speaks only of foreign debt. According to the "father" of MMT and of "functional finance" Abba P. Lerner, "only foreign debt, like individual debt, can lead to the impoverishment of the nation" (Lerner, 1947 [1943], p. 305.)

**Fourth point.** Like the TEE, the MMT in veiled and softer forms proposes price and wage controls and generally centralized intervention in market mechanisms, the implementation of macroeconomic planning, etc. The goal is full employment and resource utilization. The TEE does not hide these goals, and the processes mentioned were part of the economic landscape of Russia in those years. There was then a Committee on Prices, a State Planning Committee (Gosplan), and scientific institutes engaged in developing planning methodology and theory.

**Fifth point.** The criticisms levelled at both theories are also similar. Only the participants in the debate change. In the almost century-long interval between the BSovkHE and modern MMT, MMT's postulates have been active in both the Western economic literature (e.g., Lerner) and the political economy of socialism; they are its foundation (Seurot, 1983; Kotsev, 1989).

The criticisms of TEE made by Novozhilov (Austrian school), by Livshits (Marxist), and by Kutler (a "bourgeois" monetarist) essentially overlap with the contemporary criticisms of MMT made by W. Coats and S. Edwards (Coats (2019) and Edwards (2019)), if we restrict ourselves to them both. TEE and MMT are accused of destroying the economic structure (productive forces), that the end of experimentation comes before people start running out of money, and limits are set by the overall disorder of the economy. The main common flaw is the total neglect of the structural effects of money issuance and financing. It is the structural imbalances and the disruption they cause that stop the development of MMT. Added to this is another important problem - both theories deal with the nominal expression of the concepts used (monetary illusion, lack of inflationary expectations, etc.). They do not take into account the dynamics of the demand for money in real terms (a similar shortcoming has been noted by the representative of the modern mainstream, Greg Mankiw (Mankiw, 2020)).

In MMT, inflation control has not been worked out in detail, as if it were assumed that it would not occur. Inflation is generally thought to be controlled through fiscal policy, the money supply is shrunk by raising taxes (conceptually, money in MMT is a function of taxes). Specifically, MMT suggests two phases: phase 1 - money is injected to finance spending and lead to full employment; and phase 2 - money is withdrawn to control inflation. However, BSovkHE practice in the 1920-1922 period shows that phase 2 is unrealistic and if it occurs, it is after inflation, hyperinflation and complete economic disaster. Then new stable money is needed to allow a transition to phase 2, i.e., the possibility of monetary taxes and the emergence of a tax economy. In the case of BSovkHE Russia, as we have seen, this was done by the introduction of the tchervonetz, i.e. after a period of devaluation of fiscal paper currency (sovznaks).
It should be made clear that both theories (MMT and TEE) assume state-centralised and, to varying degrees, planned management of economic processes<fnref n="21" />. In TEE this is explicitly stated, while in the MMT corpus the tendencies mentioned are not explicitly stated. It is clear, however, that the issue of money and artificial full employment inevitably lead to some form of administrative and planned economy. Indeed, the whole practice of socialist countries has shown this. In fact, in Russia from the collapse of the NEP (in 1927) until 1991, as in the other countries of the Soviet Union<fnref n="22" />, the "model of suppressed inflation" was applied in conditions of an almost completely stateless economy. This brings us to the topic of the relevance of the TEE for the socialist monetary system and the possibilities of mobilizing some theoretical concepts from the socialist era in order to analyse the dynamics of today's monetary processes.

## V. TEE, the socialist monetary system and its projections today

The NEP halted the development of the TEE, but this was only temporary. Lenin died in 1924 and very soon, towards the end of 1927, the new leadership of the USSR, led by Stalin, set out to change the economic course. The principles of the gold and gold exchange backed tchervonetz were broken, and the rate of monetary emission accelerated. The TEE quickly returned and became the basis of the Soviet Union's socialist monetary system. After World War II, the TEE also formed the basis of the monetary systems of the new socialist countries (which copied the USSR). The clarity and explicitness with which the TES was originally set out by S. Falkner, would not be repeated (partly because of the pragmatism of the Soviet authorities), the TEE remained the main element of the political economy of socialism. Later, in the 1970s-1980s, a debate began in the Western literature on the "theory of suppressed inflation" under planned economies. This theory is in fact nothing but another name for TEE, rediscovered and launched under another name.

In fact, after the publications of S. Falkner, two Soviet authors contributed to the theoretical development of TEE. In 1926, starting from quantitative theory (it is considered Marxist because Marx was a continuator of Ricardo's work), S. Strumilin put forward the hypothesis that under a regime of controlled prices and an over-emission of uncovered paper money, equilibration within the quantitative equation takes place not through an increase in the price level but through a reduction in the velocity of money. It was through the rate of decline in the velocity of money that one can judge the "potential" inflation in the system. In turn, V. Novozhilov (whom we have already mentioned) in the same years (1924 and 1926) theoretically deduced the scarcity of goods as a function of the excess of money. These two theoretical dependencies were "rediscovered" in the 1970s-80s by some Polish and Hungarian economists. In their most developed form, they were formulated by János Kornai in his "shortage theory"

<footnote n="21">²¹ Similar is another unrealistic assumption: that of an almost completely closed economy, etc.</footnote>

<footnote n="22">²² Council for Mutual Economic Assistance (CMEA, known in Western countries as COMECON or Council for Mutual Economic Assistance, CMEA) - an economic union of former socialist countries that existed between 1949 and 1991.</footnote>
and on "suppressed inflation" within his "Disequilibrium Model of Planned Economy" (Kornai, 1980)<fnref n="23" />.

Joseph Stalin adopted a number of Strumilin's ideas and from the outset made them the basis of his new economic course. It began with the financial and monetary reform of 1930-1931, which moved to the monobank model. All enterprises, organizations and institutions opened accounts with Gosbank (the Monobank). Payments between enterprises were cashless, in the form of clearing, and within the credit and money plan. This is the first, cashless money (round) circulation.

The second, money turnover, or sector, is that of cash. Available money serves households and the consumer sector. In terms of volumes, this sector was considerably smaller than the first sector, that of enterprises and establishments. The consumer sector kept market relations ('commodity-money relations') within certain limits. In addition to the population, cooperatives and other individual economic entities participated in it. Households had access to certain consumer goods and services (most notably car and housing purchases), which were paid for in cash, in which the population received its wages within the first plan segment. The 'balance of income and expenditure of the population' was formed, which was controlled by the Monobank. Prices in the consumer market are controlled and generally depressed because stable and low prices are the conquest of real socialism. Financial markets and assets do not exist, they are capitalist phenomena.

The link between the two money turnovers (flows), the two sectors, is actively planned, especially the outflows from the non-cash to the cash sector in the form of wages, and the reverse flow, from the cash to the non-cash sector in the form of payment of taxes and fees. Cash is also controlled by the monobank through the 'cash plan', which formulates the issue of cash. It is the net result (balance)<fnref n="24" /> of the implementation of the plan for the "money income and expenditure of the population" and of the available transactions under the cooperative sector and payments with foreign countries.<fnref n="25" />

Due to the internal limits of planning ("soft budget constraints"), and as a consequence of Lenin's famous "law of the anticipatory development of the production of means of production over the production of objects of consumption", the available money supply inevitably grows faster than the volumes of the consumer market. This comes by way of wages outstripping labour productivity, and the emergence of budget deficits. The outflow of purchasing power from the non-cash sector (enterprises and state departments) to the cash sector has been called by Kornai the "siphoning effect". There

<footnote n="23">²³ Some of Kornai's publications have been translated into Bulgarian (Kornai (1996) and (1998, which is a collection of articles). See *Seurot* (1983). In fact, Kornai's non-equilibrium analysis of the planned economy (where 'excess demand' dominates the goods market) is an application of non-equilibrium Keynesian approaches in Western economic thought (e.g., *E. Malinvaud*), where 'excess supply' dominates. Interestingly, this possibility of linking *MMT* to non-equilibrium models is noted by Mankiw (2020).</footnote>

<footnote n="24">²⁴ When receipts are more than payments under the cash plan, the issuance result indicates a withdrawal of money from circulation; conversely, when receipts are less than payments under the cash plan, the net result is a release of additional cash (Kotsev (1989), pp. 45-46).</footnote>

<footnote n="25">²⁵ These are familiar principles from textbooks on money and finance under socialism, see Kotsev (1989), Kotsev and Nikolova (1983) and Kotsev, Nikolova and Radkov (1975). A clear exposition of the principles of money flows under socialism is given in the remarkable book by Garvy (1977). For a summary of Kornai's ideas, see Lindbeck (2007).</footnote>
have been repeated attempts in the literature to empirically measure this phenomenon
(Kim, 2002).

The end result of all the dynamics of "overhang money supply" and "suppressed inflation" is the emergence of a structural deficit in the consumer market. The concrete manifestations of this phenomenon are queues, the poor quality of goods, the substitution of good with bad goods, the forced co-sale of desirable and undesirable goods<fnref n="26" />, privilege (specialty shops) and the black market, pointless investment projects, artificial employment, masked unemployment, and above all the considerable forced savings of the population. The latter are primarily in the form of deposits in the savings bank (sometimes cash was hoarded). These savings are the result of there being nothing to buy, i.e. of there being solvent demand without a corresponding supply. Savings were a kind of form of monetary sterilisation.

The velocity of available money was slowing, and this trend was clearly reflected by the statistics of socialist countries (see tables in *Nuti*, 1986, 56), and by empirical evidence (*Birman*, 1980, 1980a)<fnref n="27" />. Moreover, this system leads to the favouritism of communist elites. According to D. M. Nuti:

> "The persistence of excessive demand, indeed the elevation of scarcity to a systemic characteristic, leads to the suspicion that it is maintained mainly because it hides the privileges of the elite through privileged access to luxury goods and possessions at unusually low prices. In fact, equilibrium market prices would reveal and quantify this privilege, since its maintenance would require dramatically more unequal income and wealth" (*Nuti*, 1986, p. 76).

In order to maintain the equilibrium of the system and to avoid social tensions (due to deficits) or outright inflation, apart from several attempts at structural reforms (aimed at self-sufficiency of enterprises and greater productivity), mostly monetary measures were used. These consisted of one-off periods of price increases, a reduction in the money supply (deflation) or monetary reform (exchange the old currency with the new one). Through currency exchange (currency reform), the accumulated sums of money were devalued (e.g. the Soviet reform of 1947, the Bulgarian reforms of 1947, 1952 and 1962, etc.)<fnref n="28" />). All these palliative measures ended in 1989, when the planned system exhausted its partial counterbalancing possibilities and potential hidden inflation became apparent. This was the apogee of the TES.

More than thirty years later, now within the European Union and the eurozone (if we restrict ourselves to them, although what I am about to point out can be applied to other developed countries), we can find some of the elements of the above dynamics of "suppressed inflation", as well as apply similar analytical tools. With all the limitations and with all the complexity of the modern European economy, it can be assumed within the framework of a working hypothesis that signs of depressed inflation and deficit can

<footnote n="26">²⁶ A common practice in the years of shortages in the USSR was to sell highly sought-after goods in a set with obsolete ones (with a load/"с нагрупкой"). For example, a bottle of vodka was sold together with shoes (regardless of whether it had the dimensions needed by the buyer).</footnote>

<footnote n="27">²⁷ See *Willes* (1962), *Seurot* (1983), *Nuti* (1986), *Dembinski* (1988), and *Kim* (2002) for more information.</footnote>

<footnote n="28">²⁸ See, for example, *Chudnov* (2018), *Velyov* (1952), and *Tsarevsky* (1975, pp. 45-46).</footnote>
be found in the financial and especially in the debt market<sup>29</sup>. This process started after
the 2008 crisis, but has significantly intensified since 2014. Especially today, during a
pandemic, the pattern of suppressed inflation has even greater analytical potential. The
European Central Bank (ECB), within the framework of its programmes, purchases,
together with the national banks of the eurozone countries, huge volumes of debt
securities. It has thus become a lender of first resort for banks and governments<sup>30</sup> (see
Panchev's analysis, 2020). The ECB introduced systemic "soft monetary constraints" (to
draw a parallel with Kornai's "soft constraint", which he considered a manifestation of
a socialist planned economy).

The logic of the analysis may be as follows. Structural imbalances in the public sectors of the eurozone economies and structural imbalances between countries, as well as the desire to preserve consumer market equilibrium (in order to avoid social shocks and the loss of voters), are absorbed by the monetary and financial sectors and transferred to financial intermediaries. Within the analytical parallel with the socialist planned economy, the ECB can be seen as a kind of planning authority (monobank) that creates deficits and suppresses inflation in the debt market. The position and behaviour of banks and investment intermediaries in the financial market is similar to the position and behaviour of households and the population under socialism<sup>31</sup>. In recent years, the ECB has seized the functions of the interbank market. Commercial banks do not communicate with each other, but only with the ECB. Interest rates are artificially and administratively fixed and controlled (they are zero and negative) and this "repression" is transmitted to yield curves<sup>32</sup>. Government bond prices become artificially inflated. In this configuration, interest rates and bond prices do not reflect the actual risk level of their issuers. Financial assets where there is a mismatch between yield and risk can be seen as "sub-quality", as "uncertain assets". There is a shortage of quality and safe assets (*safety assets*) in which banks and institutional investors (e.g., pension funds) can invest. In this sense, similarly to Keynes's "liquidity trap", Ricardo Caballero and Emmanuel Farhi talk about the existence of a so-called "safety trap" and of *safe asset shortages*, presenting their model (Caballero and Farhi, 2017).

In sum, while there were no quality goods under socialism, there are no quality debt assets today. The lack of safe and profitable assets also puts most central banks, and above all those of peripheral or semi-peripheral countries, to the test. They are finding it difficult to invest the foreign exchange reserves they maintain to support their exchange rate and service their external liabilities. Currently, most central banks are loss-making, i.e., their monetary income (seigniorage) is negative.

The parallels with forms of deficit and suppressed inflation under socialism can be extended. For example, we can also find the "phenomenon of forced substitution" in the case of swapping good for bad debt assets (Greek, Italian and Spanish paper replacing German paper on the ECB's balance sheet), the bundling of bad and good assets within structured assets (a kind of "bust"), etc. The attempts to launch joint Eurobonds, the

<footnote n="29"><sup>29</sup> I have presented some of my initial thoughts in *Nenovsky* (2020a).</footnote>

<footnote n="30"><sup>30</sup> For details see *Panchev* (2021).</footnote>

<footnote n="31"><sup>31</sup> It should be recalled that under socialism there were no money and financial markets, including the debt market. There was only a consumer market and monetary disequilibria were concentrated on it.</footnote>

<footnote n="32"><sup>32</sup> In research on Latin America, this phenomenon is referred to as "financial repression" (Fry, 1995([1988]).</footnote>
European Commission's May 2018 initiative to launch sovereign *bond-backed securities* (SBBS)<fnref n="33" /> and various *Europe safe assets* projects are proof of the joint selling of good and bad assets. Of course, the European Commission motivates these ideas through the diversification of portfolios, reduction of the overall level of risk, integration of European financial markets, etc.<fnref n="34" />.

The huge liquidity overhang (similar to that under socialism) is also manifesting itself today in the form of "forced savings", only by the banks. This is evident in the huge overdraft reserves they maintain at the ECB, even though this is losing them money. Banks also store large volumes of cash (banknotes), which requires storage costs. In addition, the balance scissors in the TARGET2 payment system are dissolving (Sinn, 2020), etc. All phenomena are forms of overhang liquidity (coming from monetization of public debts) that is artificially and temporarily sterilized, i.e., parked, in the central bank. The precautionary behaviour of banks in the face of systemic uncertainty is also demonstrated by the fact that 95% of banks in the European Union do not intend to use capital buffers.

To the forced savings of banks and financial intermediaries we can today add the forced savings of households - the result of the pandemic and the pause in consumption. For example, in 2020 alone, as a result of the pandemic, households in France have accumulated an unprecedented EUR 130 billion in savings, which are expected to reach EUR 200 billion by the end of the year. According to *Patrick Artus*, for example, the strong precautionary saving is evidenced by the fact that while France's GDP declined by around 10% in 2020, the real income of the population remained at the same level (*Artus*, 2020).

The precautionary savings of households can be added to the precautionary savings of enterprises, more precisely the phenomenon of "precautionary loans". For example, in most countries of the European Union, enterprises resort to bank loans, which are not subsequently used for real investments, but kept in liquid form. It can be assumed that part of these loans will be used to pay taxes and other financial obligations deferred by the state.

The velocity of money, like that under socialism, has been declining for years. Today, unlike under socialism, this can be seen in the decline of the money multiplier. A number of other current developments, such as the debates surrounding central banks' digital money, the proliferation of convertible bonds (the right to convert into shares), the development of the real estate market, the price of gold, etc., can also be interpreted within the framework of the "theory of suppressed inflation".

<footnote n="33">³³ "SBBS are a diversified pool of euro area sovereign bonds, which include sovereign bonds from all euro area member states according to their economic weight. When buying SBBS backed by this pool, investors can choose to buy securities with higher or lower risk depending on their risk appetite. The securities with the highest risk would be the first to bear any losses from the underlying pool, should they occur, but in return investors would pay a higher return. As a result, the 'senior' securities, which would only suffer losses once the riskiest securities were completely wiped out, would be low risk. (https://ec.europa.eu/commission/presscorner/detail/en/IP_18_3725.) See the discussion in De Grauwe and Ji (2018).</footnote>

<footnote n="34">³⁴ Here we have looked only at the ECB. If we turn to the US and Japan, examples of this type of hybrid assets also abound.</footnote>
Basically, just as households lost out under socialism in the consumer market, today banks and investment firms are losing out in the financial market (and of course these losses are ultimately borne again by consumers).

My aim in this paragraph was not to develop a comprehensive theory, but rather to put the issue up for discussion and show that TEE is making its way into our present-day economy in various forms. This leads me to think that there are common economic patterns, independent of ideological and political principles, which can be found in seemingly different socio-economic systems, in different countries and during different historical periods.

## Concluding remarks

We have seen in this article that *MMT* is not new, the basic tenets of this theory have always existed, at least since the early years of the Bolshevik revolution. The TEE presented above is perhaps one of the first fully constructed theories of controlled monetary issuance, through which government spending is financed without limit. But that is not all. The TEE, *MMT* and their principles were also the basis of the political economy of socialism and of monetary practice in the former Soviet bloc. They were repeatedly studied by Western economists in their models of the shortage and suppressed inflation under planned economies. As we know, socialist economies collapsed because of their low efficiency and structural imbalances. This was not without the influence of monetary imbalances and disequilibria, which were both the result and the cause of the system's deep structural defects.

The advent of *MMT* (Lerner's pioneering article appeared in 1943) did not go unnoticed. Novozhilov, who as a young scientist made one of the most articulate, and in an «Austrian» spirit, critiques of the TEE (Novozhilov, 1924), may not have known that his "teacher" Mises, seeing the danger, reacted as follows:

> "They just want to reduce the purchasing power of the currency at an accelerated pace. Such a policy of radical inflationism is, of course, extremely popular. But its popularity is largely due to a misunderstanding of its effects. [...] To the naïve brain there is something miraculous about issuing fiat money. A magic word uttered by the government creates out of nothing something that can be exchanged for any commodity one would like to obtain. How pales the art of magicians, witches, and conjurers before that of the Treasury! The professors tell us that the government "can raise all the money it needs by printing it" (note by H. Nenovsky: see Lerner, A. P. The Economics of Control, New York, 1944, 307-308). "The income tax, declared the President of the Federal Reserve Bank of New York, is obsolete." How wonderful! And how malicious and man-hating are those stubborn supporters of outmoded economic orthodoxy who demand that the government balance their budgets by covering all expenditures through tax revenues! [...] If there are unemployed, says the progressive doctrine, the government should increase the amount of money in circulation until full employment is achieved. They say it is a grave mistake to call inflation an increase in the amount of money in circulation made under these conditions. It is simply "a policy of full employment." (Mises, 1980 [1952/53], pp. 457, 458, 465.)
Although unstated, the basic principles of MMT have been behind central banks' monetary policy for the past ten years. The central banks of not only the leading countries, but also of almost all emerging market countries have been conducting large-scale operations to monetize public and private debts, to colossally increase the money supply, to have negative interest rates, etc. (see Panchev, 2020). The financial crisis of 2008 and the pandemic of 2020 fit into the general upward trajectory of debt accumulation and money issuance (Congdon, 2020). This has led to a deepening of the structural problems of modern economies.

A considerable part of the analytical apparatus accumulated in the analysis of the planned and administrative socialist economy would help us to build a conceptual framework and, consequently, to have a better view of what is going on in contemporary monetary theory and monetary policy.

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