I wish to express my indebtedness for helpful suggestions and criticisms of several drafts of this article to Joseph Atiah, Michael Confino, Nachum T. Gross, Evsey D. Domar, Milton Friedman, Arcadius Kahan,. Simon Kuznets, Gur Ofer, Henry Rosovsky, Peter Temin, and an anonymous referee. I have also benefited from the editor's invaluable suggestions for improvement. Comments made at the faculty seminar of the Department of Economics at the Hebrew University were of great help. None of those mentioned is, of course, responsible for any errors which may still remain.

The research described in this paper was partially supported by a grant of the Kaplan School of Economics and Social Sciences at the Hebrew University.

¹ Goldsmith, R. W., “The Economic Growth of Tsarist Russia 1860–1913,” Economic Development and Cultural Change, IX (April, 1961), 441–75.CrossRefGoogle Scholar This article is one of the main sources of quantitative information of Russian economic performance in this period.

² Although silver and gold coins were nominally in circulation throughout the entire second half of the nineteenth century, they all but disappeared as means of payment after 1850. Paper money made up the entire currency stock until the early 1890's. Significant amounts of gold coin came into circulation only when Russia established the gold standard, in 1897.

³ Crisp, O., “Russian Financial Policies and the Gold Standard at the End of the 19th Century,” Economic History Review (Second series), VI (1953), 159.Google Scholar

⁴ Since α is assumed to be a positive function of real per capita income, it can be a shown that is equal to the rate of change of per capita income multiplied by the income elasticity of demand for money. This applies similarly to which is assumed to depend on t—a time measure which serves as a proxy for change involved in the transformation of a pre-industrial rural economy into a market economy. For our purposes it is, however, preferable to refer explicitly to α; and α in the text.

⁵ Empirical studies of demand for money, the purpose of which is to establish the parameters of the structural demand equation—that is, the interest and income elasticities of demand for real money balances—do, inevitably, specify the price level as an explicit variable.

⁶ The price of foreign exchange rose at an average annual rate of 0.6 percent over the 1865–1895 interval. For data and discussion see Yaeger, Leland B., “Fluctuating Exchange Rates in the 19th Century: The Experiences of Austria and Russia,” in Mundell, R. and Swoboda, A., eds., Monetary Problems of the International Economy (Chicago: University of Chicago Press, 1969), pp. 81–85.Google Scholar

⁷ For a detailed description of the technique of estimation and the supporting assumptions used, see Appendix, “Feasible Changes in the Traded Share of National Product 1880–1900,” (mimeographed; to be obtained by request from the. author).

⁸ In his definitive study on the history of interest rates, S. Homer describes the state of empirical knowledge as follows: “We have no true history of Russian interest rates until 1917. Imperial Russia was striving to imitate the finance of Western Europe… The interest rates quoted below reflect this effort at imitation based largely on foreign capital.” See Homer, S., A History of Interest Rates (New Brunswick: Rutgers University Press, 1963), p. 542.Google Scholar

⁹ Ibid., p. 543.

¹⁰ Ibid., pp. 196–97, 222–23, 260–61, 409–26, and 461.

¹¹ Falkus's national income estimates imply an annual average increase in prices of 2 percent between 1900 and 1913. See Falkus, M. E., “Russia's National Income, 1913, A Revaluation,” Economica, XXXV (Feb. 1968), 58.Google Scholar Goldsmith's discussion of production indices implies that prices between 1865 and 1885 were falling at 0.4 percent annually, and that between 1885 and 1913 they were rising at one percent annually (Goldsmith, pp. 467–8 and fn. 53). When put together, Goldsmith's and Falkus's figures imply that the price level was very probably stable in the 1880–1900 interval. The implied rate of decline in the previous two decades was evidently of secondary order of magnitude. The same impressions on the pattern of the price level are conveyed by Yaeger (pp. 79–80).

¹² The absence of a Russian counterpart to the English and Scottish country bank movement may cast doubt on the claim that money was scarce over a long period. One can argue that profit considerations would have induced private enterprise to alleviate the shortage of liquidity, if it really, existed, by the creation of appropriate financial institutions. Note, however, that it was the issue of their own promissory notes that was at one and the same time the most lucrative business and the instrument by means of which the country banks contributed to the flexibility of the money supply in England and Scotland. See Deane, P., The First Industrial Revolution (Cambridge: Cambridge University Press, 1965), pp. 168–72.Google Scholar But since private note issues were foreclosed by government monopoly of currency emission, and the use of demand deposits for effecting payments usually happens at a much later stage of economic development, the absence of a rush of bank establishments in Russia is understandable. It seems that the existence of a banking institution of (eighteenth-century) Bank of England caliber and, of course, a non autocratic and relatively decentralized form of government, were very probably among the most important preconditions for the development of a “country banking movement” in England and Scotland. The slow growth of Russian private banking in the 1860–1890 interval is therefore consistent with the claim that money was scarce.

¹³ Witte's secret memorandum submitted to the emperor in 1899 gives a lucid summary of the aims and means of his economic policies. The excerpts speak for themselves: “The measures taken by the government for the promotion of national trade and industry have at present a far deeper and broader significance than they had at any time before… The creation of our own national industry, that is the profound task… In Russia there is yet too little industry, capital and spirit of enterprise… What then must we do? We cannot wait for the national accumulation of capital in a country in which the majority of the population is experiencing hard times… The influx of foreign capital is, in the considered opinion of the minister of finance, the sole means by which our industry can speedily furnish our country with abundant and cheap goods… Why not let foreign capital help us to obtain still more cheaply that productive force of which alone we are destitute?” See Laue, T. H. Von, “A Secret Memorandum of Sergei Witte on the Industrialization of Imperial Russia,” Journal of Modern History, XXVI (1954), 64–71.Google Scholar

¹⁴ By way of illustration, an average annual deficit of about forty million rubles was strongly regretted by Bunge. He therefore felt that, even at heavy political cost, a number of new indirect taxes must be introduced. The size of this deficit was of an order of magnitude of two thirds of one percent of national income! The data for the size of the deficit are from O. Crisp, “Russian Financial Policies,” p. 160, n. 2. A direct estimate of national income is, of course, not available. But on the basis of the Prokopovic estimate for 1900, and the estimate for the growth of national income presented above, a guess that national income was running at about 6.0–6.5 billion in the early 1880's is plausible (See Table II in Appendix). The deficit/national income ratio mentioned above has been calculated accordingly. Lyashchenko and Miss Crisp also give a sympathetic account of the balanced budget policy. See O. Crisp, “Russian Financial Policies…,” pp. 183 and 185, and Lyashchenko, P. L., History of the National Economy of Russia (New York: Macmillan, 1949), p. 140.Google Scholar

¹⁵ The obverse image of this surplus was the outright decline of the stock of money, which is noted above. The impact of fiscal policy on monetary developments was dominant, since Russian banking in these days was still in its infancy. The Russian banking system could therefore not count much as an independent source of influence on the stock of money and on monetary developments.

¹⁶ See O. Crisp, “Russian Financial Policies,” p. 166.

¹⁷ Ibid., p. 168.

¹⁸ The foreign investment data are from Lyashchenko, History, p. 718. This is consistent with several pieces of information from other sources, and can be summarized as follows:

¹⁹ The choice of years for the “balance of payments indicators” was effected by the availability of national income estimates.

²⁰ This is because annual data were available only for exports and imports. The information on the relatively large item, “interest and dividends paid abroad,” was available only in the form of a 16-year total for 1898–1913. To derive the current account estimate for one year, it was necessary to calculate the sixteen years’ mean of these two items, and add this figure to the export and import data for 1900 and 1913. Since interest and dividends very probably rose within the period, this technique of estimation inflated the payments debit on current account in 1900 and reduced the estimate for 1913.

²¹ The statement on the relative size of the current account deficit relies on a rough backward calculation of Russia's national income in the 1890's. (See Table II in Appendix.)

²² Since the tightening of the fiscal screws in the 1880's was also a reaction to the inflationary finance of the Balkan War, one may argue that the war years should be included when monetary developments in the 1880's are studied. Yet, even when the rapid monetary expansion that started in 1876 is taken into consideration, the strong deflationary impact of monetary policy is still very much in evidence. Between 1875 and 1890 the stocks of money and of currency grew at annual average rates of less than 0.5 percent, and 1 percent, respectively. Thus, even the most favorable interpretation of the Bunge-Vishnegradsky policies could not but identify them as deflationary.

²³ The famine caused a deficit in the ordinary budget, due to arrears in tax collections and remissions. The railroad construction program, carried on the books of the extraordinary budget, was partly financed by government operations in the internal capital market. Thus, Witte gained not only on the swings—the railway network was a major contribution to the infrastructure of the economy—but also on the roundabouts, by allowing the sorely needed monetary expansion.

It is not clear that Witte fully understood the monetary implications of his public works program. Yet, even if he had been aware of the expansionary monetary effects of the operation by which he financed the railroad program, he was certainly reluctant to admit it. Sound finance, and hence a balanced budget, was an article of faith not only in international financial circles, but also at home. His conservative critics sought to discredit his policies by maintaining that he was running a deficit, which he denied. Thus the distinction between the ordinary and the extraordinary budgets was presumably not as innocent as it may appear at first sight.

²⁴ The hypothesis that a deflation-bred sluggish mood retards growth assumes a specific attribute of entrepreneurial behaviour. Initiative and entreprenuerial activities are presumed to be significantly affected by the prevailing attitudes—they thrive in a buoyant atmosphere and decline in a noncongenial climate. This behavioral assumption is, of course, not novel; it is an integral element of conventional trade cycle theory, and figures as an element in one of the building blocks of this theory—the investment function. If we go beyond the accepted notions on this subject, it is only in the suggestion that these attributes of entrepreneural behavior apply not only to ups and downs in the mood of the business community in response to the alternating stages of the trade cycle, but to longer run developments too.

²⁵ Duties at rates of 310 percent for locomotives and pig iron, and 430 percent for cotton yarn and cotton manufactures indicate the degree of discrimination and the far-reaching restructuring of relative prices due to the tariff. (The data are according to Lyashchenko, History, p. 558.)

The figures also show that the bias in favor of heavy and producer industries, which has gained prominence as the specific characteristic of the Soviet industrialization drive, was already an integral element of the industrialization policy initiated by Vishnegradsky, and carried out by Witte. Vishnegradsky, Witte, and later Lenin, were inspired by English and German models of industrial development. The early industrializers and later the Bolsheviks deduced from their experience, which proved to have been a formula for growth, that each and every developing economy must follow exactly the steps of the pioneers of industrialization. The non sequitur of this reasoning is obvious.

²⁶ In his secret memorandum to the Emperor, Witte put this bluntly, as follows: “Even the most beneficial measures of the government, in the realm of economic policy, seem to impose hardship on the population … years, even decades, must pass before the sacrifices can bear fruit.” See Von Laue, “A Secret Memorandum,” p. 65.

²⁷ Gerschenkron, A., “Agrarian Policies and the Industrialization of Russia 1861–1917,” in Habakuk, H. J. and Postan, M. (eds.), The Cambridge Economic History of Europe, (Cambridge: Cambridge University Press, 1965), Vol. IV, pp. 783–84.Google Scholar

²⁸ It is well known that capital flows are not discouraged by the level of the exchange rate; what hampers them is its instability. The Russian exchange rate was not particularly unstable. Its average range of variation in one year, between 1879 and 1891, was 12.48 percent. This average is, however, strongly affected by two extraordinary years, 1888 and 1891, in which the rate varied by 31 and 24 percent, respectively. (Yaeger, “Fluctuating Exchange Ratio …,” pp. 81–85.) These extreme fluctuations were not related to economic variables per se; they were due to politics, and famine. A less expansionary foreign policy would probably have done much more for exchange rate stability than any economic measure. We may note that Witte and his predecessors were, on this issue, on the side of the angels. They realized, and said so, that economic development and an expansionist foreign policy are incompatible.

²⁹ Redemption payments were estimated at 6.4 percent of tax collections (Gerschenkron, “Agrarian Policies,” p. 780 and n. 3). Tax collections were about 13 percent of national income in the mid 1880's. See Kahan, A., “Government Policies and the Industrialisation of Russia,” Journal of Economic History, XXVII (December 1967), 463.Google Scholar

³⁰ The tightening of credit conditions in world capital markets, on the one hand, and his reluctance to increase the government deficit, on the other, were the immediate reasons for Witte's attitude in the crucial years at the turn of the century. For a review of what might be called “Russia's first industrialization debate,” see Laue, Theodore H. Von, “The High Cost and Gamble of the Witte System: A Chapter in the Industrialization of Russia,” Journal of Economic History, XIII (Fall, 1953), 425–44.CrossRefGoogle Scholar Von Laue is, on the whole, in sympathy with the reasoning of Witte's critics, and particularly with their claim that Witte attempted to industrialize at a too rapid pace. He cites approvingly several of their recalculations of the volume of industrial production, and of fiscal data, the relevance of which to the issue is not quite clear. Yet, unless Von Laue accepts the presumption of the State Council, the State Comptroller, and several other of Witte's conservative critics that a budget deficit comes close to sin, the point of his strictures on the latter's management of government finances evades me.

³¹ Keyes, J. M., A Treatise on Money (London: Macmillan, 1930), Vol. II, pp. 161–62.Google Scholar