The final Soviet monetary reform began on January 22, 1991. It was named the Pavlov Reform after its architect, Minister of Finance Valentin Pavlov, who also became the last prime minister of the Soviet Union. The confiscatory monetary reform was arranged to withdraw excessive money from circulation and to solve, at least in part, the problem of commodity shortages. The official reason was the removal of counterfeit rubles allegedly being brought into the Soviet Union from abroad.
The Soviet monetary mechanism functioned in the conditions of an industrial decline. At that time, non-cash rubles, actual domestic rubles, actual foreign currency rubles, transferable rubles of the Council for Mutual Economic Assistance (CMEA), certified rubles from Vnesheconombank, and Merchant Marine Ministry bonds were in circulation.
One precondition for the monetary reform was that by the middle of 1990 Soviet leaders had decided to shift over to the private ownership of the means of production and began dismantling the foundations of socialism. There were several economic programs proposed to USSR President Mikhail Gorbachev for the transition to a free market economy. The most famous of these proposals is the 500 Days Program, conceived under the direction of the young economist Grigory Yavlinsky.
The Soviet government also drafted its own program. Recognizing the need for transition to market relations, the government advocated having a protracted transitional period and leaving a sizeable public sector in the control of federal administrative agencies. Gorbachev opted for the government program, which was launched in January 1991.
On January 22, 1991, Gorbachev signed a decree eliminating all 50-rouble and 100-rouble banknotes issued since 1961 and restricting bank withdrawals from private accounts. The Vremya (Time) television news program, which was broadcast daily at 9.00 p.m., reported on the signing of the document at a time when virtually all financial institutions and stores were closed.
Under the presidential decree, the Soviet financial system stopped accepting banknotes issued since 1961 and started exchanging them for other currency denominations, as well as 50-rouble and 100-rouble banknotes issued in early 1991. Beginning on January 23, 1991, the government restricted monthly bank deposit withdrawals to 500 rubles.
The government said this measure would freeze unearned incomes, the assets of speculators, corrupt officials, illegal businesses, and counterfeit money, and this would result in a condensed money supply and a halt on inflation.
The confiscatory monetary reform was conceived by Soviet Minister of Finance Valentin Pavlov. In the summer of 1990, Pavlov sent a secret note to Gorbachev and Nikolai Ryzhkov, chairman of the USSR Council of Ministers, arguing in favor of exchanging 50-rouble and 100-rouble banknotes due to be issued in 1991. He wrote that a significant amount of large-denomination Soviet banknotes had been accumulated abroad and by illegal businesses.
On January 14, 1991, shortly before the reform was initiated, Pavlov was appointed chairman of the USSR Council of Ministers. This formalized the national leadership’s determination to overhaul the country’s financial and political system.
Under the terms of the reform, citizens could exchange old 50-rouble and 100-rouble banknotes for new ones for only another three days, that is, on January 23-25. After that, all exchanges could only be authorized by special commissions. Each person was allowed to exchange up to 1,000 rubles, while special commissions had the right to allow the exchange of larger sums until the end of March 1991. Individual withdrawals from the state-owned Sberbank (Savings Bank) could not exceed 500 rubles in new banknotes. Moreover, the procedure for unlimited non-cash payments for goods and services was established.
New 50-rouble and 100-rouble banknotes were issued in 1991. Later, one-ruble, three-ruble, five-ruble, ten-ruble, 200-rouble, 500-rouble and 1,000-rouble banknotes were issued.
Old one-ruble, three-ruble, five-ruble, ten-ruble and 25-rouble banknotes issued in 1961 and all Soviet coins remained in circulation equal with the new money issued in 1991. No new 25-rouble banknotes were issued.
The State Bank of the USSR also issued new coins, including ten-kopeck coins (iron), 50-kopeck coins (nickel alloy), one-ruble coins (nickel alloy), as well as five-ruble, ten-ruble and 50-rouble coins (bimetal).
Due to the narrow time frame for exchanging money, long lines of people immediately formed at savings banks. It was also possible to exchange money in workplaces and at post offices. The reform dealt a crippling blow to thousands of people keeping money under their mattresses or saving their money with Sberbank. Savings that had been amassed over decades, as much as 15,000-30,000 rubles, vanished overnight.
Two weeks before this happened, on January 10, 1991, Pavlov denied the rumors of an impending reform.
After the exchange of large-denomination banknotes, Pavlov conducted a media campaign accusing Western banks of coordinating their efforts in order to cause disorder in the circulation of money in the Soviet Union.
The reform made it possible to implement only part of the government’s plans. The confiscatory procedure withdrew 14 billion rubles of cash from circulation. This made up for 10.5% of the entire money supply, or just below 17.1% of the planned target of 81.5 billion rubles.
On April 2, 1991, food, transport and utilities prices rose by 100-300%.
In December 1991, Kommesant analysts reviewed the results from 1991 and reported that Pavlov’s reform had contributed to skyrocketing prices that had shot up 7.8 times. Various force majeure circumstances, including the exchange of banknotes as well as official statements about upcoming upheavals in the circulation of money, rather than market factors, were major contributors to price hikes.
The standard of living in the country plummeted. By the end of 1991, the economy of the USSR was in a disastrous state. Production continued to slump. The average national income dwindled by 20% compared with 1990. The state budget deficit, namely, the excess of expenditures over revenues, reached an estimated 20-30% of the GDP. The nationwide growth of the money supply was fraught with the loss of control over the financial system and hyperinflation exceeding 50% each month, which had the potential to paralyze the entire economy.
The main consequence of the reform was the people’s loss of confidence in the government’s actions. Many politicians and historians think that the 1991 Soviet political and financial reforms completely undermined the people’s trust in the Kremlin and seriously influenced subsequent developments, including the August Coup of 1991 and the Belavezha Accords of December 1991 on dissolving the USSR.
This material was prepared on the basis of open sources.