5: Credit and Interest
5: Credit and Interest
As in the case of production assets in the form of means of production, the rate of profit made by an enterprise could have no reality if finance of varying amounts continued to be allocated to enterprises by the state without cost, as had been the practice under the socialist system which formerly existed in the Soviet Union. In order that the rate of profit might be made a reality, therefore, the demand was put forward in the propaganda campaign which preceded the "economic reform" that finance should be made available to enterprises almost exclusively in the form of
bank credit, repayable by the enterprise with interest:"Gratuitous financing -- a form of financing that is scarcely connected with cost accounting -- will be increasingly replaced by credit, i.e., by a form of loan to the entrprise that must be returned".
(L. Gatovsky: "Unity of Plan and Cost Accounting", in: "Kommunist" (Communist), No. 15, 1965, in: ME. Sharpe (Ed.): "Planning, Profit and Incentives in the USSR", Volume 2; New York; 1966; p. 82).
This principle was adopted in the "economic reform" instituted from Septemebr 1965:
"The use of credits must be expanded".
(A.N. Kosygin: "On Improving Industrial Management, Perfecting Planning and Enhancing Econmic Incentives in Industrial Production", in: "Izvestia" (News), September 28th., 1965, in: M.E. Sharpe (Ed.): op. cit., Volume 2; p. 21).
Particular emphasis was laced in the "economic reform" on ending the free allocation of
circulating funds to enterprises, and on replacing this by the allocation of bank credit:"It is proposed to abolish the practice of providing free supplements to the circulating assets of enterprises from the state budget and, instead, where necessary, to grant them credits for this purpose. Such a system will encourage enterprises to use the assets allocated to them more thriftily".
(A.N. Kosygin: iid.; p. 23).
Already by 1965
40% of the circulating assets of enterprises came from bank credit:"Credit resources must also be more extensively used for providing enterprises with circulating assets. Already approximately 40% of their total volume is formed from bank credit. In future this share will doubtless grow".
(V. Garbuzov: "Finances and Econoic Stimuli", in: "Ekonomicheskaya gazeta" (Economic Gazette), No. 41, 1965, in: M.E. Sharpe (Ed.): op. cit., Volume 2; p. 55) and by 1976 this proportion had grown to 50%:
"At present, every second ruble of circulating assets in industry comes from credit, with the share of credit in agriculture, trade and other branches being even higher".
(A.N. Kosygin: "Guidelines for the Development of the National Economy of the USSR for 1986-1980", 25th. Congress CPSU; Moscow; 1976; p. 42-3).
But, as has been noted in the previous section on "Payment for Production Assets", where enterprises resolved to pay for their
fixed production assets in a lump sum and were unable to do so from their own funds, the "economic reform" provided that bank credit was to be used here also:"Financial grants made by the state to enterprises for capital investment must be restricted and the use of credits must be expanded...
The financing of capital investment is currently handled by free grants from the state budget...
We need... to switch from free allocation of means for capital construction to long-term crediting of the enterprises. It is suggested that the credit system will, first of all, be introduced for capital investments in operating enterprises. As for new constructions, it appears that it might be expedient to employ long-term crediting for those construction sites where expenditures can be recouped in a comparatively short period of time".
(A.N. Kosygin: "On Improving Industrial Management, Perfecting Planning and Enhancing Economic Incentives in Industrial Production", in: "Izvestia" (News), September 28th., 1965, in; M.E. Sharpe (Ed.): op. cit., Volume 2; p. 21, 23).
"According to preliminary calculations, more than half of the present total volume of capital investments -- 20 to 25 thousand million rubles -- can be effectuated through credit".
(V. Garbuzov: ibid; p. 54).
"Up to now capital investments in industry have in most cases been financed from non-repayable budget funds..
Credit is a much more advantageous way of financing than non-repayable budget funds".
(V. Vorobyev: "Credit and Industrial Development", in: "Ekonomicheskaya gazeta" (Economic Gazette), No. 46, 1965, in: "The Soviet Economic Reform: Main Features and Aims"; Moscow; 1967; p. 90).
"Not so long ago, in practice as well as in the economics literature, the movement of circulating assets was considered as the only sphere of credit relations in the state sector of the economy...
In the present state of development... the application of the credit form, the repayment of borrowed means at the expense of amortisation and profits, and the payment of interest for them, secure the necessary material responsibility and interest of the enterprises in the effectiveness of capital investments".
(V. Batyrev: "The Economic Reform and the Increasing Role of Credit", in: "Kommunist" (Communist), No. 2, 1966, in: M..E. Sharpe (Ed.): op. cit., Volume 2; p. 245, 246).
"Long-term credit is playing a more active part.. in financing fixed assets in industry.. The credit period for fixed assets has been raised to six years and it is granted much more widely, so that it is now given not only for measures connected with the application of new technology and the mechanisation of production but also to a large extent for the reconstruction and expansion of production at existing enterprises.. Moreover, bank credits may also be used for investment in the building of new enterprises provided they are recouped in not more than five years after commissioning".
(K.N. Plotnikov: "Soviet Finance and Credit", in: "The Soviet Planned Economy"; Moscow; 1974; p. 23).
"Credit relations must be more broadly developed in the sphere of construction, in particular through the extension of long-term credits to customers".
(A.N. Kosygin: "Guidelines for the Development of the National Economy of the USSR for 1976-1980", 25th. Congress CPSU; Moscow; 1976; p. 43).
The increase in the role of bank credit in the Soviet economy brought about by the "economic reform" naturally also enhanced the role of the
"
As the role of the credit system rises the significance of the interest paid on loans will also grow".(V. Garbuzov: ibid.; p.55).
In the propaganda campaign preceding and associated with the "economic reform", strong demands were put forward that the rate of interest should no longer by purely nominal, but should be set
"sufficienctly high" to enable it to function effectively as an economic lever in the hands of the state:"The rate of interest on the credit should be set sufficiently high".
(V. Belkin & I. Bergman: "The Independence of the Enterprise and Economic Stimuli", in: M.E. Sharpe (Ed.): op. cit., Volume 1; p. 230).
"Payment of interest for use of cash loans is an important aspect of credit relations....
The bank exacts 2% per year for most loans. This is a very low rate, and therefore the enterprise cannot become sufficiently interested in employing borrowed means thriftily or in using their own accumulations instead of borrowing...
The experience of a number of socialist countries shows the effectiveness... of a higher interest rate".
(V. Batyrev: ibid.; p. 248, 249).
In 1967, therefore,
the standard rate of interest was raised to 4-4.25% for short-term loans of up to 5 years, and 4.5-6% for long-term loans of 5-15 years. (A.H. Hermann: "East-West Finance", in: "The Banker", Volume 121, No. 546; August 1971; p. 878).Soviet economists were enthusiastic about this measure:
"Interest for credit, as an economic method, is set at a level which ensures the use of the planned credit resources with optimal efficiency".
(P.G. Bunich: "Methods of Planning and Stimulation", in: "Soviet Economic Reform: Progress and Problems"; Moscow; 1972; p. 223)
"Bank credit is becoming a powerful economic lever".
(K.N. Plotnikov: "Soviet Finance and Credit", in: "The Soviet Planned Economy"; Moscow; 1974; p. 223).
Although some demanded that the rate of interest be increased
still further:"An economically (and mathematically) substantiated increase in interest rates will have substantial influence on the better use of such important instruments as credit, capital charges and profit for the management of the economy".
(I. Shor: "Some Problems in Building Models of Interest", in: "Dengi i kredit" (Money and Credit), No. 3, 1972, in: "Problems of Economics", Volume 15, No. 7; November 1972; p. 72).
The profit of an enterprise is calculated after all interest charges have been met;
"Interest on all types of loans is paid from the profit of enterprises prior to establishing its calculated magnitude".
(P.G. Bunich: ibid.; p. 52).
So that, in the case of an enterprise which is in the process of repaying a bank credit granted for the acquisition of production assets in a lump sum,
the rate of interest becomes the lower limit of profitability for the enterprise:"The level of interest becomes the lower limit of permissible profitability, and only capital investments that exceed this limit will be considered profitable".
(P. Bunich: "Economic Stimuli to Increase the Effectiveness of Capital Investments and the Output-to-Capital Ratio", in: "Voprosy ekonomiki" (Problems of Economics), No. 12, 1965, in: M.E. Sharpe (Ed.): op. cit., Volume 2; p. 184).
As in an orthodox capitalist country, actual rates of interest are
differentiated according to the financial position of the enterprise applying for the credit -- enterprise which are functioning "efficiently" (i.e., profitably) receiving more favourable terms than those which are not -- and varied in accordance with the general economic situation:"The experience of a number of socialist countries show the effectiveness.. of a rate (of interest -- WBB) that differs in accordance with the type of loan, the work and financial condition of the borrowing enterprise and also, if possible, the general economic situation....
The differentiation of interest rates for loans is connected with the introduction of different crediting procedures for enterprises that are operating efficiently and enterprises that are functioning badly. According to this approach... the bank should grant favourable terms to the former and take restrictive measures in relation to the latter"
(V. Batyrev: ibid.; p. 249-59).
"Efficient enterprises.. enjoy certain advantages, while credit is sometimes restricted to poorly-run enterprises as a kind of sanction against them".
(B. Zabelin: "Industrial Management: Soviet Experience"; Moscow; n.d.; p. 84).
"Poorly functioning enterprises should be placed under still tighter loan restrictions to that they will eliminate shortcomings in their work more promptly".
(M. Pessel: "Credit and its Development under Current Conditions", in: "Nauchnye doklady vysshei shkoly: Ekonomicheskie nauki" (Scientific Report of Higher Schools: Economic Science). No. 9, 1972, in: "Problems of Economics", Volume 15, No. 12; April 1973; p. 90).
"An important factor in increasing the role of bank credit in developing the Soviet economy is the differential granting of credit to well-run or badly-run enterprises and organisations... Well-run enterprises receive credit concessions".
(K.N. Plotnikov: ibid.; p. 222).
The policy of the
Construction Bank (Stroibank) is described as one of imposing"...restrictions on granting credit to existing enterprises that are either operating at a planned loss or are relatively unprofitable".
(V.N. Kulikov: "Some Problems of Long-term Crediting of Centralised Capital investments",in: "Finansy SSSR" (USSR Finances), No. 5, 1974, in: "Problems of Economics", Volume 17, No. 10; February 1975; p. 61).
In particular, enterprises which do not repay bank loans on time are subject to
a "punitive" rate of interest and to other penalties:"If an enterprise does not repay the amount of credit planned for a given period, the unpaid sum is shifted to a later period with a higher interest rate".
(P. Bunich: ibid.; p. 184).
"If an enterprise does not repay a loan on time, it should not only be subjected to the payment of a higher interest rate; other measures would also be taken.. In some cases it may be necessary to confine the crediting within definite limits, in others -- to establish a stricter procedure for credit assistance...
A particular high ('punitive') rate of interest should be fixed for overdue loans".
(V. Batyrev: ibid.; p. 243, 249).
As in an orthodox capitalist country, bank credit is normally advanced to an enterprise only
against security:"Credit must be secured. Enterprises and economic organisations obtain credit on the security of stocks of goods and materials or their production expenditures (raw and other materials, finished goods, etc.). Only in special cases.. are loans issued by the State Bank without such security".
(K.N. Plotnikov: ibid.; p. 221)
All credit in contemporary Soviet society is advanced by
banks which are state institutions. The USSR State Bank (Gosbank SSSR) specialises in the granting of short-term loans, while the Construction Bank (Stroibank) specialises in long-term loans for construction purposes.Although state institutions, the economic policy of the Soviet banks does not differ in principle from that of banks in orthodox capitalist countries -- as the Chairman of the USSR State Bank makes clear:
"When crediting enterprises and organisations it is essential to have them improve capital efficiency, cut production costs, raise the profitability of production and eliminate operations at a loss".
(M. Sveshnikov: "USSR State Bank after 50 Years", in: "The Banker", Volume 121, No. 550; December 1971; p. 1,479).
As in most orthodox capitalist countries, the Soviet banks are left relatively free to regulate the amount and conditions of credit they extend:
"It is not expedient, in the new conditions, to attempt strict regulation of credit assistance given by the bank....
It is precisely along these lines that we can overcome those tendencies towards bureaucratization and excessive regulation of credit which hinder the further development of credit and impede a flexible maneuvering with resources".
(V. Batyrev: ibid.; p. 243, 244).
The exception to this principle -- as in orthodox capitalist countries -- lies in the fact that the standard rate of interest (on which the actual rates of interests charged depend
) is fixed at a high government level, in order that this maybe utilised -- as in orthodox capitalist countries -- as an "economic lever" to influence the economy:"The establishment of an interest rate on capital, and primarily on the circulating assets granted to the enterprises, will prove to be the best, and probably the only, form of economic influence".
(V. Trapeznikov: "For Flexible Economic Management of Enterprises", in: "Pravda" (Truth), August 17th., 1964, in: M.E. Sharpe (Ed.): op. cit., Volume 1; p. 199).
"Credit is used as an instrument for influencing the economy"
(M. Pessel: ibid.; p. 89).
Contemporary Soviet economists claim that interest in the Soviet economy is "qualitatively different" from interest in an orthodox capitalist economy:
"Under socialism, interest differs fundamentally in terms of content and economic role from interest paid for loans in the capitalist economy".
(V. Batyrev: ibid.; p. 248).
As has been shown,
the facts do not bear out this claim.
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