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Gold in the service of Soviet Union, part 1

2025-01-15
Gold in the service of Soviet Union, part 1
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This time we have a pleasure to present subject from the field of historical economy for connoisseurs and not only. What we’d like to discuss in this series of articles is history of gold and its usage in Bolshevik Russia and USSR between 1918-1991.


As an introduction, why even write about USSR?

Why to write about gold in the Union of Soviet Socialist Republics at all?

First, gold was an important economic aspect in the homeland of internationalist communism. Its extraction (often forced and slave-based), robbery and requisitions were an important pillar of the country's economy and financing of international communist movements. At the same time, it turns out that sometimes its acquisition was not based on any profit and loss calculation but primarily on ideological considerations.

Secondly, example of the USSR clearly shows certain mechanisms of requisition and prohibition of possession, and consequently also terror aimed at possession of hard-earned assets. In an era of constant tax tightening, this could be considered as type of lesson.

Thirdly, despite the pompous nomenclature containing references to the planned utopian "bright future", it seems that certain sectoral activities carried out in the USSR have analogous reflection in sector in contemporary times.

Fourth, for most of the post-war pegging of the US dollar to gold – the result of the Bretton Woods agreement – there were fears in the West that the USSR could start massive sell-off of the precious metal, causing a collapse of the exchange rate and thus attacking western monetary system. In our curiosity we want to see was that really possible or considered.

Fifth and finally, because this topic is interesting from the gold’s point of view, but also in the scope of historical economy. Of course, it is directly related to the tragic fate of tens of millions of victims of communist and socialist regimes around the world.

On this occasion we’d like to clearly state that series is intended solely to present a subject from the historical economy point of view, strictly concerning yellow metal or precious metals in general. It should in no way be considered as referring to current geopolitics, ideology or the situation in the world in general. It also in no way constitutes support for the criminal totalitarian system that was communism, responsible for the death, forced labour and tortures that our compatriots experienced among many. For this reason alone, it will not be entirely possible to remain a neutral commentator.

Series will contain some simplifications, because although we would like to discuss all aspects in detail, it is simply not possible. The unavailability of materials should also be considered. In addition to the secrecy of production data in the Soviet era and the overestimated estimates of Western analysts, it was also necessary to deal with paranoid thinking in the style of a "besieged fortress" and an ideology that said one thing on the one hand and did the opposite on the other.

In addition, one cannot forget about the "duality" of Soviet extraction - the official sector and forced labour, which is one of reasons that distorts data and cause some data gaps and volume estimations.

We tried to rely on both non-Russian and Russian sources based on Soviet archives. The former are mainly declassified American analyses and journalism from the described times. The latter are scientific works by Russian academics created before 2020. We’ve made some attempts to try to verify certain data.

Aiming our analysis not to be just a factual compilation of data, we tried to add lot of comments, interesting facts and trivia. Hence, for your consideration.

Revolution feeds on not its own gold

Let us skip reasons of the Bolshevik revolution in Russia and go straight to the facts. New communist authorities, who had consolidated their position because of the revolution known since as the October Revolution, thought on gold with great importance since the very beginning. First government decree "On Gold and Platinum" (1918) established state control over the trade in precious metals, although yet without nationalizing sectoral entities. In the same year, Committee for Precious Metals was established, which was to provide "general conditions" for the development of the industry. Although the Ural mines - the dominant source of gold and platinum in tsarist Russia - were not under Bolshevik control at that time, but rather on the "white" side of the front. Control over the implementation of the decrees was entrusted to local councils, which were responsible for preventing the "leakage" of gold from mines. Obviously, due to the collapse of Russian-German front, civil war and Bolshevik terror, the only available option to enforce such regulation was a system of penalties. Only later in 1918 authorities issued a decree on nationalization of gold mining companies, but for the reasons already mentioned and regional separatist tendencies, it remained temporarily unenforceable.

As a result of the raging world and civil war, mining infrastructure had been significantly destroyed, which effected in decrease in production - from 63.6 tons in 1913 to a minimum of 1.8 tons in the initial years of the "reds" rule. But revolution does not feed itself just on ideas, it needed gold. A special resolution of the Council of People's Commissars introduced regulations regarding the fineness and weight of gold products. Maximum permissible standards (weight, content of precious metal, etc.) were determined. Jewellery and related sectors were obliged to appropriately convert existing products. If this was not possible, these were ordered to be sold at a centrally determined price ( unfavourable) to local Commissions. Surpluses of precious metals obtained in this way were sent to Moscow. It was not until June 1921 that the Council of People's Commissars issued a decree "On the distribution of gold and platinum," which introduced a ban on trade in precious metals "in any form".


Russian Civil War
Very general map of the Russian Civil War. Source: https://www.cadtm.org/Russia-Origin-and-consequences-of-the-debt-repudiation-of-February-10-1918

In 1920, the Bolsheviks officially emphasized comprehensive and forced requisitions, although these in the form of robbery had been taking place since first days of the coup. Above as per decree of July 1920 - "On the confiscation of precious metals, money and various valuables". According to above, old coins, bars, but also items made of precious metals weighing more than 63 g. were subject to confiscation. However, "compensations" paid (if any) were disproportionate to the value of stolen precious metal.

At the same time, party members juggled lofty, revolutionary slogans about the need to rebuild industry destroyed by bourgeois sabotage, class struggle against luxury and, of course, financing revolutionary movements in other countries, and on need to help the Red Army "carrying the revolutionary torch". It is true that Lenin wrote in 1921…

I imagine that when we achieve victory on a global scale, we will build public toilets out of gold on the streets of several of the world's largest cities. This would be the "most just", most instructive and demonstrative way of using gold for those generations who have not forgotten that in the fight for gold ten million people were murdered and thirty million maimed in the "great liberation" war of 1914-1918, in a war that was to decide the momentous problem: which peace is worse - Brest or Versailles; in the fight for this gold, preparations are certainly being made to murder twenty million people and maim sixty million in a war that will break out somewhere around 1925 or 1928 and will be fought between Japan and America, or between England and America, or between other powers

…but creation of global communist “utopia” was still far away, which is why even the highest revolutionary authority himself expressed strong interest in reports on the activities of Gokhran – newly established central entity for precious metals and stones.

Esteemed readers, please forgive us lengthy quote from the communist ideologist and criminal. We have deliberately quoted it in its entirety, because often only the first sentence is quoted. And taken out of context unnecessarily vulgarizes and simplifies the whole thought.

As the civil war progressed, communists adopted further regulations: "On the confiscation and requisition of private property in territories liberated from the enemy" and also the decree "On the confiscation of all movable property of emigrants and persons equal to them". Whether as a result of the defeat of the "white" armies or the march through Polish lands stopped near Warsaw in 1920 - wherever boot of the people's commissars stood, gold was robbed and requisitioned,. And it was eventually sent abroad to obtain financing.

Data can attest to the scale of requisition: In the years 1918-1922, 15.4 tons of gold were mined in Soviet Russia, while further 15.7 tons were obtained from robbery and requisitions. According to American sources, between 1920-22, approx. 500 tons were sold abroad via Estonia, Lithuania and Latvia. These countries became the main transfer route, bypassing the imposed economic blockades (at the initial stage gold also did flow through Iran and Turkey). Through a chain of intermediaries and refineries, stolen gold and works of art made their way to the West, thus financing revolution, espionage network and partly deficit in foreign trade.

But, Bolsheviks' also had additional expenses:

• The Brest-Litovsk Peace Treaty obliged Soviet Russia to pay Germany 6 bln marks, and a significant part of the payments was made in gold (total volume was at 694 tons).

• Peace with Estonia did cos 10 tons of gold worth 14 million rubles. Latvia and Lithuania received gold worth 4 and 3 million respectively.

• The Treaty of Riga also obliged Bolsheviks to pay Poland 30 million rubles in gold. Although this payment was never made.

Requisitions of the nations' gold

Another aspect that needs to be emphasized here is of a bigger scale. At the outbreak of World War I in 1914, Tsarist Russia had the third largest gold reserves in the world. Bars of yellow metal accumulated by the Tsars before World War I were at approx. 1,400 tons. Of this number, however, about 1/3 were directed to the UK to repay war loans, and another third was spent, lost or stolen. Only 500 tons remained in country.

Accumulated in St. Petersburg, they were taken east to Kazan and Nizhny Novgorod in 1915. At the outbreak of the October Revolution, the "Whites" evacuated gold further east. Although Bolsheviks eventually captured Kazan, local bank vaults turned out to be empty. Bolsheviks began pursuing the "white" transport, which was then in the territories controlled by the "white" general Alexander Kolchak. He redirected it towards Irkutsk.


Tzar Gold
Evacuation of the Tsar's Gold. Source: https://www.bbc.com/travel/article/20171022-in-search-of-russias-lost-gold

It was here, in the Siberian city of Irkutsk, that the plot took a turn. The so-called Czechoslovak Legions, formed during the war by the Tsarist administration, mostly from Czech and Slovak prisoners of war, and distinguished in battles against Bolsheviks "arrested" train with the treasure and General Kolchak himself. These soldiers did not want to take part in a war that was not theirs, they simply wanted to go home.

It was 1920, Austria-Hungary had fallen, Czechoslovakia had been independent since 1918, and soldiers were bleeding for a cause that was not theirs on the other side of the world. They therefore began negotiations with the Bolsheviks. As a result of which they handed over the Tsar's gold and an important prisoner, in exchange for permission to freely evacuate through Vladivostok. In the Russian Far East, there was a puppet Bolshevik Far Eastern Republic, but road to the West... let's just say that apart from the infrastructure destruction, negotiating sides didn’t have much trust nor sympathy towards each other.

In this way, Bolsheviks acquired about 500 tons of Tsar's gold, although according to other sources it was much less, about 200 tons. Whether Czechs and Slovaks hid part of the tonnage, took it with them, or maybe sank it in Lake Baikal, remains a speculation and a legend, to which we do not know the answer.

But this is not the end of the story about seized volumes. It is necessary to mention Bolshevik’ confiscation (1919) of gold that Romanian government had delivered to Moscow during the war for safe keeping. After all, Russia and Romania were members of the same Entente camp. The key to the claims was Bessarabia (the territory of present-day Moldova), which the Tsarist regime had held since 1812. After the outbreak of the revolution in Russia, Romania occupied the area which it claimed to be theirs, to which the Bolsheviks responded by seizing Romanian gold reserves.

Economic look onto “home of the working class”

Demand for gold to pay for trade with the West, increased after the economic blockade of the Soviet Republic was lifted, and several trade agreements were signed. As decisions were made at conferences in Brussels (1920) and Genoa (1922) to restore pre-war currency parities based on the gold standard, gold was considered optimal, preferred form of payment. Soviet delegation was present at the latter conference. Fearing economic shocks, European governments actively accumulated gold reserves and consistently were removing metal from domestic monetary circulation. This way, Soviet gold made its way in a wide stream to the West, as payment for imported goods - heavy equipment, logistics, agriculture, industry or grain. However, there was little Soviet gold left and domestic production did not cover the gap.

This meant that after largely uncontrolled flows that had taken place during the civil war, gold would once again have to be harnessed to the revenue and expenditure ledgers. Therefore, ban on its expenditure issuance without prior consent of the Politburo was introduced. Ideological considerations dictated that communists would continue to be “abhorrent” to gold, but to use it, because it would lead to higher goals – world revolution.

And here another problem appeared, namely where to get the precious metal from? Inflow from robberies and expropriations was drying out, and the tightened control over circulation was not bringing expected results. After the experiences of recent years, those who still had any gold left, buried it and did not admit to the fact of ever having any. State therefore had to focus on the mining sector. In 1921, a new decree “On the gold and platinum industry” confirmed that deposits were now state property. At the same time, however, every cooperative, private trust, artel, person and entity had a free hand in the right to search for and study deposits, on the basis of a concession. In order to encourage that, since 1925 all these entities were exempt from taxes, state entities did not have to pay taxes for land, and for private entities above tax amounted to 3%. In addition, the resolutions of the Council of People's Commissars "On benefits for state enterprises extracting gold and other minerals" (1927) and "On the gold and platinum industry and on the storage and circulation of gold and platinum" (1927), as well as a number of other legal acts, concerned additional benefits for people working in mining. Moscow even turned a blind eye to illegal mining in the Urals, as long as the ore was sold at designated points. And this, generally throughout the history of the USSR, could only be purchased by the local central bank, Gokhran, appropriate central structures established for this purpose, and that's it. All "Soviet" gold was to pass through the hands of the authorities.

In order to stimulate production, purchase price for gold had been increased in the temporary paper currency Sovznak – one of the parallel Soviet currencies at the time. However, for those selling gold, limited barter was also made possible – gold for food and goods. After all, having new money did not guarantee it would be possible to buy scarce goods with it.

However, despite the loosening of the structures at the bottom, the general centralist principles in force were not changed. In this way, the entire mining and refining sector, together with the mint, came under the management of the centralized State Committee for the Gold, Platinum and Silver Industry.

The more liberal approach was result of the infrastructural collapse in the sector. Extreme wear and tear of equipment, war damage, staff shortages, depletion of existing deposits and lack of geological research, combined with the strained financial state of the Soviet government, required transferring financial responsibility for technical modernization to concessionaires. Aim of the above actions was to increase gold reserves and supply of precious metals, which determined administrative and regulatory policy for a long time. The Central Committee's theses "On the main tasks of the development of the gold industry and the organization of gold purchase in the country" explained that accumulating gold reserves is "the most important task of strengthening the international and domestic position of the USSR" and that "the state does not have the funds for mechanization", then in the next few years gold mining should develop wherever possible based on manual labour. And this meant targeting the most accessible near-surface alluvial deposits, which do not require significant infrastructure investments. The assumption was - as much as possible and as quickly as possible.

Lets extend the concept of relative "liberalization" to the whole of Soviet Russia (the name USSR has been in use only since 1922). It was ruined, starving, and in addition, peasants, workers and Kronstadt sailors were raising their heads against the Soviet government. Of course, the "counterrevolutions" were crushed in a ruthless and unprecedentedly bloody manner - drowning Kronstadt sailors under the ice, or extermination of the population fighting against the Bolsheviks in Tambov uprising. However, "Reds" understood that a certain amount of economic easing had to be carried out. Otherwise, same soldiers, peasants and workers who had supported revolution few years ago could now overthrow it. Liberalization became the basis of the temporary Leninist NEP policy, carried out under the not-so-communist slogan "get rich". In other words, the good old capitalism, albeit in a reduced form, was supposed to help rebuild the "homeland of the working class".

Gold, non-money and money

During civil war, Bolsheviks "printed" system to the level of hyperinflation, while rejecting the monetary role of gold. As Mikhail Bukharin, one of the party's ideologists, explained:

A socialist government must use mint printing presses like machine guns to attack the bourgeois system from behind.

After the chaos of the world war, bloody revolution and then civil war, territory of Soviet Russia was in a monetary chaos reflecting recent events. In parallel, tsarist credit notes, money issued by decree of the Duma, Kerenki (money issued during the three months of the existence of the provisional government of Alexander Kerensky) and "money" printed en masse by the communists – all were in circulation.

As soon as power was consolidated, within the framework of Lenin's NEP policy, one of the most important priorities was the implementation of a gold-based ruble. Initial, hurray-optimistic declarations about securing the money in full precious metal gradually began to be toned. As a result, monetary reform initially conceived as based on securing the money with gold was implemented based on 50% securing with a currency-gold basket. In fact, however, securing with precious metal stood at 25-30%. This is how the "chervonets" came into being.


Chervonetz
Three chervonets, already partially secured with gold. Source: https://www.monetnik.ru/obuchenie/istoriya-rossii/vse-denejnye-reformy-sssr/

Chervonetz
Chervonets in gold version (7.74 g.) for trade with foreign countries. Source: https://www.monetnik.ru/obuchenie/istoriya-rossii/vse-denejnye-reformy-sssr/

In previous chapter we also mentioned a different currency - „Sovznak”.

Sovznak
100k roubles, Sovznak / not-money. Source: https://www.monetnik.ru/obuchenie/istoriya-rossii/vse-denejnye-reformy-sssr/

To explain: ultimately, communism promised to delegalize cash – after all, the “bright future” was supposed to guarantee everyone according to their needs, and therefore money as such would not be needed. However, during the so-called transitional period, settlements had to be made somehow. Therefore, payment tokens not secured by gold were introduced, acting as money, named Sovznaks. Of course, this took place during civil war, so there was no question on securing them with gold. Associations with the “greenback” from the time of the US Civil War seem to be reasonable.

For the “red” gold of distant Siberia

In the 1920s, approximately 90% of sector capital investments were devoted to platinum, which enjoyed demand abroad. It was not until the middle of the decade that focus also turned to gold. From a legal point of view, resolutions of the Council of People's Commissars “On the measures for the development of the gold and platinum industry” (1923) and “On the revival of the state and private gold industry” (1924) were passed.

The decentralized and free approach to gold mining based on the activities of private entities changed in 1928 with the final consolidation of power by Joseph Stalin. And he expressed a direct interest in the issue of gold mining - for reasons of financing the first five-year plan, the re-linking of world currencies to gold in 1929 and the subsequent devaluation of, among others, the USD. Therefore, Glavzoloto (Main Directorate for the Gold and Platinum Industry) was established. It was planned as the main trust, an entity with a high degree of autonomy, self-sufficienct and with special powers. It had its own factories, capital, assets and agricultural enterprises. The relevant People's Commissariats were obliged to cooperate with the organization on preferential terms and to treat Glavzoloto's shipments as a priority. The "crown jewel" of the former Tsarist gold mining sector - Lena GoldFields - was also redirected to the organization's management – which was British before 1918, and nationalized in the same year.

Speaking of, back in 1917 company ordered world-class mining equipment from the United States, which was to be delivered and installed within 1.5 to 2 years. Process was interrupted by the civil war and nationalization. However, in 1920 Soviet authorities approached the former owners with a proposal to reactivate the business, to which British agreed. After the installation of the previously ordered equipment, production start-up and reaching full capacity, another re-nationalization took place, for symbolic compensation.

In 1925, Glavzoloto specialists prepared a draft plan for the development of the gold industry for the years 1925-30. This first plan already defined the most important principles of the Soviet gold mining policy: granting special powers to the bodies managing the industry, finding ways to activate the unemployed to work in the sector and encourage potential employees, focusing on the most accessible gold deposits, and giving priority to state mining over that granted under the concession.

Activation and encouragement of potential employees... it really looks like a time for remarks on forced labour in "Gulag Archipelago", and Dal'stroy, but we will do that in the next part of our series.

To be continued…

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