*Nikolai Nikolaevich went to the Caucasus as viceroy. He would play a minor role in the events leading up to the February Revolution.
*Sidorov, Ekonomicheskoe polozhenie, 117–19. As will be noted in the next chapter, a significant portion of the shells available in 1916–17 came from foreign suppliers.
7
Toward the Catastrophe
The whole purpose of the Progressive Bloc was to prevent revolution so as to enable the government to finish the war.
—V. V. Shulgin1
In the second year of the war, Russia succeeded in solving her most pressing military problems. The shortages of artillery shells and rifles were largely made good by the efforts of the Defense Council and imports. The front which in the late summer of 1915 had seemed close to collapse, stabilized once the German High Command decided to suspend offensive operations in the east. By the summer of 1916, the Russian army had recovered sufficiently to launch a major offensive. But just as the front stiffened, the rear displayed alarming symptoms of malaise. In contrast to 1915, when disaffection had been largely confined to the educated elite, it now spread to the mass of the urban population. Its causes were primarily economic—namely, growing shortages of consumer goods, especially foodstuffs, and inflation. The government, treating these problems as transitory and self-correcting, did next to nothing to correct them.
The urban inhabitants of Russia, having had no previous experience with shortages and rising prices, had difficulty grasping their causes. Their instinct was to blame the government, an attitude in which they were encouraged by the liberal and radical intelligentsia. By October 1916 the discontent in the cities reached such intensity that the Department of Police in confidential reports compared the situation to 1905 and warned that another revolution could be in the offing.
In the hope of averting an explosion, the Duma resumed pressures on the government to concede it the power to make ministerial appointments, something that had become an idée fixe with a good part of its membership. This demand, which Nicholas and Alexandra stubbornly resisted, added fuel to popular passions, with the result that economic discontent acquired a political dimension. The sudden contact between the restless urban masses, with the mutinous military garrisons, and the frustrated politicians which occurred in the winter of 1916–17 produced the short circuit that sent the Imperial regime up in flames.
Although compared with the major industrial powers, Russia was poor, before the war her currency was regarded as one of the soundest in the world. The Russian Treasury followed stringent rules for the issuance of paper money. The first 600 million rubles of notes had to be backed 50 percent with gold reserves: all bank-note emissions above that sum required 100 percent gold backing. In February 1905, the Treasury had in its vaults 1,067 million rubles’ worth of bullion; with 1,250 million paper rubles in circulation, the ruble was 85 percent gold-backed.2 On the eve of World War I, Russian bank notes were 98 percent backed by gold. At the time, Russia had the largest gold reserve in Europe.3
The outbreak of World War I threw Russia’s finances into disarray from which they never recovered.
The steep inflation in the latter stages of the war can be traced partly to national poverty and partly to fiscal mismanagement. Unlike the richer belligerents, Russia could not extract much of the money needed to pay for the war either from current revenues or from internal loans. It has been estimated that whereas the national per capita income of England in 1913 was $243, of France $185, and of Germany $146, Russia’s was a mere $44. And yet Russia’s war costs would be equal to England’s and inferior only to Germany’s.4 Even so, the government could have done more to pay for the war from revenues had it imposed direct taxes, made a greater effort to sell war bonds, and maintained state income at the prewar level. As it was, a good part of the war deficit had to be covered by emissions of paper money and foreign borrowing.
One cause of the decline of state revenues was the introduction at the outbreak of the war of prohibition on the manufacture and sale of alcoholic beverages. Russia took this measure—the first major country in the world to do so—in an effort to reduce alcoholism, which was believed responsible for the physical and moral degeneration of her inhabitants. Prohibition, however, had little effect on alcohol consumption since the closing of state-owned outlets immediately led to a rise in the output of moonshine. During the war, in addition to homemade vodka, a popular beverage was khanzha, made of fermented bread reinforced with commercial cleaning fluids. But while alcoholism did not decline, the Treasury’s income from alcohol taxes did, and these had formerly accounted for one-fourth of its revenues. These and other losses of income, such as declines in customs duties, caused a sharp drop in revenues.
During the war, the “ordinary” income of the Russian Treasury more than covered the “ordinary” part of the budget; but this part did not include the costs of the war. In 1915, “ordinary” revenues were 3 billion rubles and “ordinary” expenditures 2.2 billion; in 1916, they were 4.3 billion and 2.8 billion, respectively.5 But, of course, the bulk of expenses went for the war, and here “ordinary” revenues were of little help. Russia’s total wartime deficit is estimated at 30 billion rubles, half of which was covered by domestic and foreign loans and the rest by emissions of paper currency.
On July 27, 1914, the government suspended for the duration of the war (but, as it turned out, permanently) the convertibility of paper rubles into gold as well as the gold-reserve requirements for the issuance of bank notes. The Treasury was empowered to print notes upon receipt of authorization without regard to the amount of gold in its vaults. The immediate effect of this ruling was the disappearance from circulation of specie. On the outbreak of the war, the Treasury issued 1.5 billion rubles in bank notes, which had the effect of doubling the quantity of paper money. This procedure would be repeated several times in the course of the war. By January 1917, the quantity of paper in circulation had increased fourfold, according to some sources, and fivefold or even sixfold according to others.* The gold backing of paper currency declined proportionately, from 98 percent (July 1914) to 51.4 percent (January 1915), 28.7 percent (January 1916), and 16.2 percent (January 1917).6 This development contributed to the drop in the exchange rate of Russian currency abroad: in Stockholm, between July 1914 and January 1916, the ruble declined by 44 percent; it stayed at this level until the summer of 1917.†
Thus, in two and a half years, the amount of paper notes in Russia increased by as much as 600 percent. This compares with a 100 percent increase in France, a 200 percent increase in Germany, and no increase at all in Great Britain during the four years these countries were at war.7 Russia printed more money than any other belligerent power and, as a consequence, suffered more severely from inflation.
In theory, the sale of domestic bonds covered slightly more than one-quarter of the Russian wartime deficit. This sum, estimated (through October 1916) at 8 billion rubles,8 was, however, in some measure fictitious, for neither the population nor the banks showed much enthusiasm for Russian war bonds. The government cajoled banks to make purchases, but even so, the bonds were difficult to move. A German expert estimates that the 3 billion bond issue of October 1916 brought in only 150 million rubles.9 Thus, the deficit had to have been larger than the official statistics indicated.