The Soviet Banking System – and Ours

Featured, Popular Articles, Resources — By on July 25, 2012 at 12:33 PM

By JUDY SHELTON

Many in America today fear that our nation is going the way of Europe—becoming more socialist and redistributionist as government grows ever larger. But the most disturbing trend may not be the fiscal enlargement of government through excessive spending, but rather the elevated role of monetary policy.

Our central bank, the Federal Reserve, uses its enormous influence over banking and financial institutions to channel funds back to government instead of directing them toward productive economic activity. For evaluating the damaging effects of this unhealthy symbiosis between banking and government, the more instructive model is the Soviet Union in its final years before economic collapse.

We can draw lessons from the fact that the Soviet Union went bankrupt even as its fiscal budget statements affirmed that government revenues and expenditures were perfectly balanced. Under Soviet accounting practices, the true gap between concurrent revenues generated by the economy and the expenditures needed to sustain the nation was obscured by a phantom “plug” figure that ostensibly reflected the working capital furnished by the Soviet central bank, Gosbank.

The problem for the Soviet government was that financing provided by the state-controlled bank was supporting an increasingly unproductive economy—bailing out unprofitable enterprises that had long since quit producing real economic gains that might have raised living standards. The extension of credit to these entities had little to do with merit or potential usefulness.

The Soviet central bank was making up for the difference between government revenues and government expenditures by creating empty credits to be disbursed by central-planning bureaucrats. By the time Mikhail Gorbachev came to power in 1985, vowing to address the disastrous financial situation of the Soviet Union through “perestroika,” or restructuring, the budget deficit being financed through the nation’s central bank amounted to more than 30% of total government expenditures.

Lenin had been wise about the uses of banks. Shortly before the October Revolution, he wrote: “Without big banks, socialism would be impossible. The big banks are the ‘state apparatus’ which we need to bring about socialism, and which we take ready-made from capitalism.” …

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