Hyperinflation in early Soviet Russia

In March 1917 the so-called February Revolution overthrew the regime of Tsar Nikolai II, which was replaced with a provisional government headed by a succession of leaders ending with Alexander Kerensky.

The economy remained disrupted and Russia failed to disengage from the bloody European war, and on November 7, 1917 the Kerensky government fell in a second revolution, this time led by the Bolshevik Party of revolutionary socialist Vladimir Ulyanov (Lenin).

While use of the printing press to produce paper money was employed as virtually the sole means of state finance, manufacturing output simultaneously dropped precipitously, exacerbating the collapse of currency value.

[2] Concurrently with this decline in the purchasing power and function of money, private trade was formally declared illegal and efforts made to nationalize all industries.

According to one estimate, that of P. Popov of the Central Statistical Bureau of Soviet Russia, by 1920 the total production of Russian industry had fallen from a pre-war level of 6.059 billion[note 1] gold rubles to the equivalent of just 836 million — a decline of more than 85%.

[13] Facing starvation in the cities and the death of industry as peasant-workers returned to their villages, the Soviet state resorted to the use of force to obtain necessary grain to maintain its urban economy.

[12] This resort to forced requisitioning had the effect of further decimating agricultural production, already seriously weakened by the loss of millions of able-bodied peasant men to the front.

[16] The decree shutting down the People's Bank made provision for continued use of the offices of Narkomfin for private finance on a limited and seemingly temporary basis:

"The nationalization of industry has concentrated in the hands of the government all the most important branches of production and supply...thereby excluding any necessity for the further utilization of the People's Bank as an institution of state credit in the accepted sense of the term.

The system of banking credit still remains in force for small private industrial enterprise and the needs of individual citizens who place their money in state savings institutions.

Part and parcel of NEP would be a return to a functional currency and monetary payment of wages rather than compensation of workers through rations and free services, as was the case under War Communism.

[20] From November 1921 onward Narkomfin pegged the value of the Soviet ruble in terms of this theoretical unit each month, allowing wages to be automatically adjusted to compensate for the steadily depreciating currency.

Adding to the complexity of the situation, the State Planning Committee (Gosplan) continued to make use of a pre-war "goods ruble" of its own creation, using it as a payment calculation mechanism in many Soviet contracts.