How did banks work in the Soviet Union?

Banking in the Soviet Union was provided by a state-run and owned bank, Gosbank (literally: The State Bank.) Gosbank was an interesting entity that evolved from the Tsarist Russia’s State Bank in that it was a central bank owned and operated by the government, so the transition to Soviet control was not as jarring as many might think. Tsarist Russian had private banks as well, but the State Bank was used in a manner to improve the Russian economy by loaning money at low rates to industrialists and facilitating foreign investment in Russia, as well as providing support to the landed class and industrialists by providing modern banking practices and facilities.

The concept of a bank was part and parcel of many Russian revolutionaries thinking, Lenin himself was in favor of a single banking entity. For them a singe banking entity was to be fully integrated into the centrally planned economy of the Soviet Union by becoming part of the government apparatus and assisting in controlling the economy in providing a stable currency and foreign exchange. The bank would be essential to help keep an accounting of production and distribution of goods, providing the infrastructure needed to create a socialist society.

With a central bank, you could determine someones ability/contribution, and pay out to their need, as it were. Now, after the Revolution and Civil War, the existing state bank collapsed and the modern Gosbank did not arise until the beginnings of the 1930’s. It was then joined by Sperbank (“Savings Bank”), the sole bank for household savings deposits, which earned a positive but very low rate of interest. Stroibank (“Investment Bank”), was responsible for disbursing funds to enterprises for long-term investment, according to the dictates of the central plan and the Vneshtorgbank (“Foreign Trade Bank”) which handled all transactions involving imports and exports.

Gosbank operated on what can be called a “bookkeeping system”. Whenever one state enterprise shipped its goods to another state enterprise, the Gosbank account of the “output-enterprise” would be credited, while that of the “input-enterprise” would be debited.For ordinary workers, there was cash, which was used for only two purposes. First, the state industries paid their workers with cash provided by Gosbank (the account of the state enterprise would be debited), then workers purchased goods with cash, which was then turned over to Gosbank (the account of the store would be credited).

Here is an example by Marc Liberman to show how this would work in practice: When farm delivered its milk output, it would obtain a document from the cheese factory verifying that the latter had received its milk input. The document was then turned over to Gosbank, which credited the farm’s account according to the value of the milk delivered, and debited the cheese factory’s account by the same value. Likewise, after the cheese was produced and shipped to the State food store, the cheese factory obtained a document verifying its delivery of cheese. Again, the document was turned over to Gosbank, which this time credited the cheese factory’s account and debited the store’s account. Finally, when households purchased the cheese with cash, the State store deposited its cash receipts with Gosbank and was given a credit of equal value.

As you can see, banking was an important part of keeping track of the production and consumption of a planned economy, every transfer of physical output from one location to another was mirrored by an associated financial transfer through Gosbank. If less than the planned amount was delivered on any given day, Gosbank would know. If delivery were late, Gosbank would know. If inputs or outputs were stolen and diverted to the black market, Gosbank would know (well, maybe Gosbank would know…). This type of control was needed for a planned economy, as a result inter-enterprise credit was simply not allowed; one enterprise could not “lend” bookkeeping money to another by permitting late payment for goods received. Also, enterprise accounts with Gosbank could only be used to pay for the type and quantities of inputs that were specified in the plan. Otherwise, Gosbank would refuse to release the credits.

This control was designed to prevent deviations from the central production plan. But since the plan itself was often inconsistent, providing an enterprise with too little of one input and too much of another, managers in order to meet their output requirements were forced to develop sources of supply that could bypass Gosbank, sources that required neither bookkeeping money nor cash. Hence, the extraordinary adaptive and enterprising Soviet productions managers engaged in an immense amount of interfirm bartering. An enterprise with excess coal might be lucky enough to trade it for some desperately needed steel. More likely, it would trade its excess coal for some rubber that it didn’t need, and would then go about finding an enterprise that had excess steel but needed rubber. Or, worse still: it would trade coal for rubber, then trade rubber for steel knives, and finally melt down the knives to obtain raw steel.

As a side note as to cash, state enterprises were forbidden to hold it for any purpose other than payment of wages, the cash receipts collected by State stores had to be deposited with Gosbank, and then withdrawn again to pay the wages of the store workers. The whole process of banking basically worked like this: State Bank – payments to State enterprises – payment to workers – payment for retail sales and services – State Bank.

As for imports and exports, all goods produced for export were “sold” to Vneshtorgbank, which credited the producer’s account with bookkeeping money. Vneshtorgbank would then sell the goods abroad for foreign currency. In turn, the foreign currency was used to pay for imports into the Soviet Union, which were then sold to a Soviet enterprise whose bookkeeping monies would be debited. The authorities could as a result carefully monitor foreign currency exchange, and ensure that scarce “hard currency” (i.e., freely convertible currency like U.S. dollars or German marks) was used only for “desired purposes.”

Now about Stroibank, the state bank for financing the capital investments made by enterprises and organizations, basically any industry or state enterprise for construction outlays, expansion, etc. Stroibank grants these credits/loans/money to state enterprises, within in central planning limits, for the reserving of material assets and for outlays on construction. State enterprises and new construction projects are authorized to place orders on these credits allowing them to increase their allotment and outlay of equipment and materials. Storibank did loan money to individuals for residential construction. So basically as a borrower you would be debited for the new equipment/work beyond your normally allowed allotment and the State enterprise doing the work would be credited. So you would have to go to the bank with list of all the things you needed to expand or build your project, the bank would review, and if approved you would not be given money, but would be given the opportunity to requisition the appropriate goods and services needed.

Individuals generally could not get a loan, some were allowed in the early days of the first Five Year Plans to acquire farming equipment, seed, maybe housing and such through Selkhozbank (Agricultural Bank) which was basically a Storibank for farming. However, the State Bank would at times issue things similar to loans in order to reduce the rate of savings and to increase production or reduce surplus goods, for example flat-out subsidies for durable goods or long-term repayment of credits awarded.