CONFERENCE ON POST-KEYNESIAN ECONOMICS.

THEORY AND POLICY

MAY 13-14, 2001

C-103 HESBURGH CENTER, UNIVERSITY OF NOTRE DAME, INDIANA, U.S.A.

THE DEPARTMENT OF ECONOMICS, UNIVERSITY OF NOTRE DAME

THE CENTER FOR MACROECONOMIC AND DEVELOPMENT POLICY, KALAMAZOO COLLEGE
HELEN KELLOGG INSTITUTE FOR INTERNATIONAL STUDIES, UNIVERSITY OF NOTRE DAME

A FORGOTTEN RUBLE REFORM SET UP BY J.M. KEYNES

1
LESSONS FROM ARCHIVES

by Jean-François Ponsot

Ph.D. Candidate and Research Instructor

CENTER FOR THE STUDY OF MONEY AND FINANCE, CENTER FOR THE TECHNICAL ANALYSIS OF ECONOMICS
(CEMF-LATEC), UNIVERSITÉ DE BOURGOGNE, DIJON, FRANCE.
jfponsot@u-bourgogne.fr

Abstract
A short-lived “Emission Caisse” experiment was conducted in Northern "White" Russia as part of Allied
intervention in the Russian civil war. What makes it even more interesting is that the details of the scheme were
worked out by John Maynard Keynes. Examination of British and French records of the time shows how the
British managed to impose their scheme in place of the French plan for an Interallied Bank. The episode is an
illustration of Keynes's pragmatism and more importantly of the advantages and limits of currency boards as
instruments of monetary reform. Stringent issuing rules made the ruble a convertible and stable currency but
imposed serious financial constraints on the "White" Russian war effort.

1 This paper is a revised version of an article that will be published in History of Political Economy 34.1, spring
2002.

1
I. INTRODUCTION

Monetary reforms in the 1990s have seen a resurgence of the old currency board
mechanism first used in Britain's colonies. This unusual monetary arrangement makes the
national currency fully convertible. It operates on two principles: the national currency is
pegged to a key currency at a fixed par value; that par value is guaranteed by the exclusive
commitment of the monetary authority to passively back any issue by reserve assets
denominated in the reference currency. As a result of the devaluation of the ruble on 17
August 1998 there have been increasing calls for this type of monetary scheme to be
introduced in Russia. Yet it so happens that a monetary experiment inspired by currency
board principles was conducted at Archangel during the Russian Civil War. This "Emission
Caisse" experiment begun by the Allies in 1918 in anti-Bolshevik North Russia features little
in economic publications. Only a brief paper by D. Spring-Rice (1919) published at the time
in the Economic Journal and a recent study by S.H. Hanke and K. Schuler (1991) give an
overview of the arrangement.2 These documents indicate in particular that the mechanism
was designed by J.M. Keynes, then a senior official at the British Treasury. However, the
experiment is not mentioned in any of the thirty volumes of the Collected Writings (1971-
1989) nor in Keynes's "unwritten" works brought to light by O'Donnell (1992).

Personal searches of the British and French public records3 have produced official
correspondence and internal memoranda providing important clarifications on the question.
In particular, they contain various versions of a memorandum in which Keynes sets out the
scheme he had worked out. Section II sets out the background to the Allied intervention
alongside the "White" Russians and describes French and British plans to restore monetary
order. Section III outlines the monetary arrangement thought up by Keynes: it shows that
Keynes was inspired by monetary orthodoxy but willing to loosen the stringent issuing rules
that traditionally governed currency boards. Section IV reviews the brief existence of the
National Emission Caisse relating the difficulties in setting it up and describing how it
worked. Section V evaluates the experiment; it shows how adhesion to the arrangement's
strict rules helped create a stable and convertible currency; but it also emphasizes that
these rules introduced a financial constraint by severely restricting any resort to borrowing.
This explains North Russia's difficulties in financing its war effort. Finally concluding
remarks are drawn in Section VI.

II. THE BACKGROUND TO INTERVENTION. THE PROJECTS FOR MONETARY

REFORM

The Russian Civil War broke out shortly after the October Revolution. The "White"
armies formed the hard core of resistance to the new Bolshevik regime. They were active on
several fronts including North Russia. Allied military intervention in support of the "White"

2 S.H. Hanke and K. Schuler's work is intended primarily to give historical substance to their support of currency
boards. The work is referred to by A. Walters and S.H. Hanke (1992) and cited by A.J. Schwartz (1993).
3 I have used HM Treasury and Foreign Office records which are held at the PRO (Public Record Office) in Kew,
near London. In France, I have used archives kept at the CAEF (Centre des Archives Economiques et Financières)
of the French Ministère de l'Economie et des Finances. In order to lighten the text, the archives documents
mentioned in this paper will be simply indexed PRO or CAEF. For more detailed references, please contact
jfponsot@voila.fr.

2
Russians was based on various motives that were not entirely free from ambiguity.4 When
the Murmansk Soviet, the main political body in North Russia, decided to break with the
central government on 30 June 1918, the split was largely supported by the Allies. The
Bolsheviks were driven from the region and the various "White" troops then set up the
supreme North Russian government at Archangel under the populist leader Nicolaï
Chaikovski.5

• Monetary chaos: inflation, inconvertibility of the ruble and parallel currencies

The Allied landings in North Russia took place in a particularly difficult monetary
context subsequent to the upheavals of 1914-1918, namely the break-up of the tsarist
empire, the Great War and the 1917 Revolutions. Like the Allies, in 1914 Russia had
resorted to the full array of standard financial practices to pay for the war effort. Paper
money was printed hand over fist as the ceilings for the issue of bank notes and for
discounting Treasury bills by the State Bank were constantly raised to meet the necessities
of wartime. The ruble was declared non-convertible. But above all there was massive resort
to borrowing with loans accounting for some 70% of sources of finance.6 The reorganization
of the Imperial Bank (1894) and introduction of the gold-ruble (1897) by the tsarist regime
together with reforms aimed at sorting out public debt had helped make the Russian
currency stable and convertible. But the war undid all this and by early 1917 the ruble
commanded a mere quarter of its pre-war value.7

The revolutions of 1917 caused greater instability and hastened the ruble's
depreciation. Barter became widespread. The Bolsheviks made radical reforms. The banking
sector was nationalized8 like much of the economy. State debt was totally and unilaterally
cancelled, except for Treasury bills held by the public. Bolshevik doctrine also held that
money would be quite simply eliminated. But faced with the worsening financial climate,
central government acted pragmatically. Monetary stability became a prime objective but the
prevailing context made it difficult to achieve: "He [Lenin] was aware inflation had to be

4 Initially in 1917 the Allies' objective was to maintain an eastern front against Germany in Russia. As long as
Russia was engaged in the fight against Germany, the Allies counted on the Bolshevik government. But when
Lenin officially withdrew from the conflict on 3 March 1918 by signing the Brest-Litovsk Treaty, the Allies decided
to intervene directly on the ground. The first Royal Marines landed a few days later at Murmansk (6-11 March) and
then at Archangel in northwestern Russia. The troops were soon ordered to support the ruling local "White"
Russians. The Allies hoped that after beating the Bolsheviks, the "White" Russians would resume the war against
Germany. When it became clear though that Germany would be defeated, the anti-German crusade turned into an
anti-Bolshevik one. The Allies invoked the financial losses caused by cancellation of the tsarist regime's debts and
the nationalization of businesses and foreign assets; but above all they invoked the threat of the Soviet regime
spreading to Europe in the aftermath of four hard years of warfare. The motives for Allied intervention in Russia
then became primarily political. It should be remembered that the Allied occupation was based also on colonial
motives (Munholland 1981), through a subtle division of territory into "zones of influence", mainly between the
British and the French.
5 For a detailed account of Allied intervention in North Russia see the Report on the Work of the British Mission to
North Russia from June 1918 to 31 March 1919 (T1/12349[29831]), as well as Ironside (1953) and Mawdsley
(1987).
6 This consisted in both internal borrowing (four-year Treasury bonds at 4% and six-month Treasury bills) and
foreign loans (between the State Bank and the Banque de France or the Bank of England, and direct loans from
the Allied governments to the Russian government for purchasing arms) (Waller 1979, 1489-1492).
7 "When the war broke out in 1914 it was on a stable basis (judged by the standards then existing), a note issue of
1.663 million roubles being backed by a gold reserve of 1.603 million roubles, the State debt being at that time
about 8.824 million roubles. […] At the beginning of 1917, not only had the State debt, quite naturally, increased
to 33.580 million roubles, but the note circulation had risen to 9.103 million roubles against a gold reserve which
had fallen to 1.175 million roubles" (Spring-Rice 1919, 280).
8 See Memo IV: British Interests in Russian Banks in T1/12290[9714].

3
stopped and a stable currency established. [But] wartime communism, the constant spread
of the black market, the need to finance the civil war, the obligation to make nationalized
firms work come what may […] made any coherent policy on money and credit impossible.
[…] With no money coming in through taxes, the State budget was running a serious deficit.
[…] There was nothing for it but to print money" (Waller 1979, 1495-1496).

The massive issue of bank notes took different forms. Whether for reasons of
transport difficulties or out of a desire to assert their independence, local branches of the
State Bank took to issuing money often without the consent of the central authority. The
Civil War meant the various "White" Russian authorities created their own currencies. Also
in circulation was the often crude counterfeit money the population put great trust in as
well as the different substitute monetary instruments issued by firms in the form of notes,
bills or tokens. Thus, when the provisional government of North Russia was set up in
Archangel in early summer 1918, a host of different currencies were already circulating.
There were notes with the tsar's head, the famous "beer label" notes issued by the Kerensky
government, Bukovin notes, different coupons or Treasury notes issued by the Bolsheviks or
previous governments, as well as local notes known as "Morjovki" (as they featured a walrus
head) issued by the Bolsheviks before they were forced out of North Russia.9

The climate of monetary and financial instability made Allied military intervention a
more complex affair. The British War Office sent out D. Spring-Rice as financial advisor to
the Allied Forces to evaluate the situation. In a memorandum of 3 July 1918 he described
the financial constraints of intervention to his government. On 9 July the military
authorities in Murmansk and Archangel pressed the British government to issue new bank
notes having currency in North Russia promptly (Spring-Rice 1919, 282). Having finally
sided against the Bolshevik regime, the Allies no longer needed to placate to Moscow and
were free to seek a solution to the financial and monetary chaos. France and Great Britain
drafted separate monetary reforms for North Russia.

• Interallied Bank versus Emission Caisse

The French project for monetary reform was developed in a number of stages.
Initially the plan followed the guidelines of the draft interallied agreement proposed to the
Allies by M. Noulens, then France's diplomatic representative in North Russia. The project
provided for a two-tier operation. The first stage was relative to a proposed interallied
guarantee for an internal loan of rubles 15 millions to be raised by the government of
Archangel and secured by a lien on a stock of sawn timber evaluated at 20 million rubles.
The second stage involved authorizing the State Bank to issue bank notes denominated in
rubles for 200 million rubles. These bank notes would also be "backed" by the Allies who
undertook to redeem the notes up to a value of 20 million dollars in line with the exchange
rate at the time the scheme was devised (10 rubles = 1 dollar). In exchange for their
"backing" the Allies would obtain concessions on Russian forests intended as security for an
estimated 25 million dollars. The project was soon abandoned because of the risk it involved
for the Allies: the political situation was unstable and the West had little faith in the local
government.

The Russian Financial Affairs Commission in Paris, chaired by M. Sergent, reshaped

Noulens's proposals as a plan to set up an Interallied Bank issuing an interallied ruble at
the gold par value of the old ruble with the other currencies of the countries participating in
the creation of the bank. Emphasis was on the interallied character of the new body and the

9 See Memo 20: Varieties of Currency in T1/12290[9714].

4
strict control over Russian monetary initiatives: "The new currency must be unconditionally
backed by the Allies, issued by them, under their direct control, denominated in rubles with
a fixed exchange rate in sterling, francs, dollars or yen, in consideration primarily for
Treasury bills of the Allied States, these being covered, as necessary, by agreements or
conventions with the future Russian government, both as acknowledgement of past debts
and as new loans granted to Russia" (CAEF).

The initiative in issuing paper money would be entirely in the hands of the Allies and
the amounts would be proportional to their decisions to provide Treasury bills to the
Interallied Bank. Instruments of payment in North Russia would be put into circulation on a
pro rata basis with these "advances" (CAEF) granted by the Allies after negotiation with the
local government. The plan evoked the possibility of talks as part of the Peace Conference.
The Russian government would be authorized to issue State bonds, in the form of Treasury
bills, but within a limited framework and defined jointly with the Allies.10 The arrangement
thought up by the French consisted therefore in creating a new currency for North Russia
whose value and stability could be guaranteed exclusively through advances granted by the
Allies. The goal was to establish a sound basis on which to "grant loans to these local
governments to lead them from instability to order and sustainability" (CAEF). The scheme
fitted into a broader framework than that of a simple monetary reform in that it sought to
promote Allied investment, particularly French investment, in the northern region. The
construction of railways from Murmansk was envisaged and a consortium of French
businessmen was set up, with the help of the Crédit Lyonnais in particular, to buy land and
carry out construction. The Interallied Bank presented the further advantage that its
activities could be extended to the other zones supported by the Allies.

The French project was not adopted. The British came up with an alternative scheme
and decided unilaterally to apply it, invoking the urgency of the situation11 and the need of
an institution under Russian auspices.12 The reform was aimed primarily at solving the
financial difficulties facing the Allied contingents on the ground. The issue of currency was
intended primarily to meet the Allied needs for cash to pay the troops and to pay for local
goods and services. The British intended to adopt the opposite approach to German
occupying forces in Ukraine who had resorted to plundering resources, forced labor, and the
uncontrolled issue of paper money. They agreed then to assume their commitments in North
Russia in order to maintain the trust of the local political authorities. The specific concerns
of the provisional government were secondary. J.M. Keynes was then assigned in August to
draw up the details of a monetary reform project for creating a new currency in North
Russia.

III. AN OUTLINE OF THE MECHANISM DESIGNED BY KEYNES

• The origins of the project: the currency board model

The arrangement proposed by Keynes was inspired by the stringent rules governing
currency boards. This type of monetary regime was developed in the British colonies and in

10 "Local Treasury bills can be used only in exchange for advances granted by the Allies, after discussion,
examination and limitation of the terms and sums allocated" (B31981[Sergent, 6]).
11 cf. the answer by Robert Chalmers to the French memorandum (T12/40[33704]). See also Memo 21: Working
the Currency Scheme in T1/12290[9714], T1/12203[37543] and T1/12261[40676].
12 "French plan is for an Allied bank to issue notes. This proposal is not welcome to Russians, who think notes
should be issued by a Russian institution such as Conversion Office" (Telegram in T1/12261[39739]).

5
South America.13 The British Empire numbered more than 70 of them. Newly created boards
were responsible for passively issuing local money that was backed by foreign currency
reserves — generally sterling — and marginally by gold and silver reserves. The level of cover
often exceeded 100% or even 110%. These were "pure" currency boards. Nonetheless some
colonial monetary arrangements originally set up as currency boards did not strictly obey
the rule of total convertibility guaranteed by foreign reserves. Initially currency boards were
an answer to the trouble caused by having heterogeneous and non-convertible currencies in
circulation and were a way round the constraints and costs engendered by the possible use
of sterling in far-flung lands: costs relating to transport and the danger of destruction or
loss. The colony benefited from the arrangement in having a "sound" means of payment in
circulation (which being guaranteed by foreign reserves reduced the risk of crises of
confidence and runs on banks). It also earned interest on the reserves deposited by the
Board with the Bank of England. More generally, the establishment of these monetary
arrangements can be interpreted as a major factor in integrating the territories with Great
Britain.

The colonial monetary organization based on currency boards was introduced a few
years after Peel's Act (1844) reforming the Bank of England (O'Brien 1997) in line with the
monetary precepts of the Currency School, to the detriment of those of the Banking School
and Free Banking School. It would be interesting to know to what extent the initiators of the
colonial currency boards were influenced by the controversies raging in monetary theory in
the 19th century. This would involve a more theoretical justification of the establishment of
currency boards. Ricardo's influence is decisive here. His ideas on the money supply being
unconditionally related to reserves were to inspire the Currency School14 and the principle
was adopted and extended through the 1844 reform. The Peel Act stipulated that any new
issue of notes by the Bank of England's Issue Department had to be matched by an
equivalent increase in the gold reserves. The currency boards seem to have operated on this
major principle of total cover of the money issued. Nonetheless, they cannot be seen as a
simple extension of the philosophy of the Bank of England's Issue Department as A.J.
Schwartz pointed out15, or more generally as a straightforward application of the Currency
School's recommendations. Indeed in a currency board the reserves are made up essentially
of assets in the reference currency and only marginally of bullion. Moreover, the principle of
cover applied only to what is now termed the monetary base and not to the money supply,
as Currency School rationale requires. Only the issue of currency by the board is regulated;
the issue of bank credit money was not controlled.

While the currency board's ambiguous origins lie in the theoretical developments of
the Currency School, the rationale behind the system depends on the implicit acceptance of
the principles underlying the theory, in particular the "specie-flow mechanism" initiated by
David Hume a century earlier. Under this mechanism, any change in the quantity of money
issued passively is supposed to be determined ultimately by an equivalent variation in the
foreign reserves, i.e. to correspond to an inflow or outflow of sterling (and/or bullion) to or
from the colony.

Keynes was fully conversant with these colonial arrangements when he came up with
the scheme for North Russia in the summer of 1918. First, he had been a senior Treasury

13 See Schwartz (1993) for a recent overview.

14 Even if the framework for issuing money he described proved less rigid than that of his followers.
15 "The marginal 100-percent reserve feature of the Issue Department and the average 100-percent reserve
feature of the Currency Board seem related, but I see no evidence that the architects of the initial Boards had a
blueprint of the Issue Department in mind" Schwartz (1993, 158).

6
official since 1915 responsible for international financial relations.16 Then, his first essay,
Indian Currency and Finance, published five years earlier argued against the official plan to
adopt the gold standard. Finally, in the same year the Economic Journal published his
summary review of two official documents on monetary problems in the colonies. The first
document "contain[ed] a good deal of interesting information relating to currency practice in
semi-barbarous countries under civilized administration" (Keynes 1913, 147). Keynes
preferred to dwell on the recommendations of the Departmental Committee of Inquiry for the
establishment of a vast currency board in West Africa covering Gambia, Sierra Leone,
Nigeria and the Gold Coast (now Ghana). Although he did not mention it explicitly, Keynes
drew on this experience for his monetary reform project for North Russia.

• The operating principles

Among the documents in the public records relating to the currency reform of
Archangel is Keynes's unpublished "Memorandum on Financial Arrangements in Northern
Russia" (PRO). There are three versions of the paper. Each of them contains six or seven
pages with several differences. The first version dated 22 August 1918 was the copy
submitted to Sir R. Chalmers and to the Bank of England for approval. The second version
is a manually modified version taking into account the Bank of England Exchange
Committee comments. The third version is the definitive typescript copy. The paper received
by the French authorities on 26 September 1918 is slightly different.

Keynes justified his project by the necessity to put monetary circulation in North
Russia back on a sound footing: the instruments in circulation had no legitimate basis and
were (virtually) worthless, which hindered Allied action and would complicate the situation
when normal trading relations were restored. "At present they are kept in circulation merely
by sentiment and custom. [...] The exchange value of the existing roubles is quite out of
proportion to their purchasing value and could indeed only persist in the present highly
artificial conditions. The purchasing value has fallen from one twentieth to one sixtieth of
the former value; but the exchange value has only fallen to a figure from one third to one
fifth of the par value".

The arrangement set out in the memorandum was based on observance of the
principle of backing for the money in circulation, which could only be done by strict rules on
issuing money. Keynes specified that the system should be described as "[...] an independent
Office of Conversion analogous to those which have been successful in South America in
raising the currencies of those countries from their previous depreciated condition". He did
not mention the similarity with the monetary arrangements in the British colonies but
rather with South American conversion boards.17 It should be remembered that Keynes
knew that his scheme had to be approved by the Americans and the French and so he
preferred to make no mention of a system linking closely Great Britain and territories within
its sphere of influence.

The new currency in circulation had to represent nominally an authority recognized

by the Allies. This is why it was to cover "the whole of our sphere of influence in Northern
Russia, but not in Siberia". This restriction to a territory primarily under British influence

16 Keynes's move to the A Division of the Treasury gave him the opportunity to be active as a practitioner of
economics and official representative of Great Britain. In addition to the control of loans to and from the Allies,
which gave him the idea of the National Emission Caisse of North Russia, he was involved in currency operations
(particularly exchange rate speculation) and took part in important international negotiations.
17 The most important of these conversion boards was undoubtedly the Caja de conversion set up in Argentina in
1900 and described by A.G. Ford (1962).

7
did not go down well with the French who wanted to support the Siberian authorities.18
Keynes thought his plan had the advantage of not committing the Allies unduly while
guaranteeing the value of the new currency on a sound basis: circulation would be based
not on a formal guarantee by the Allies but essentially on the formation of a sterling reserve
"held at the Bank of England and [which] would be the inalienable property of the Russian
Office of Conversion" and not the property of the local government. He thus dismissed the
argument that the project would grant too many facilities to the government. Keynes added
that the integrity of the issue office would anyway be ensured by the presence of British
financial advisors on its board.19

The main role of the Caisse would simply be to ensure the automatic and unlimited
conversion of new bank notes into sterling and vice-versa, at a fixed exchange rate of 40 new
rubles for one pound sterling. All new ruble issues were to be dependent on the presentation
of pounds sterling [clause 8-c-(i)]. Reciprocally, the presentation of new rubles to the Caisse
allowed pounds to be obtained in exchange in the form of checks on London banks. In the
French version, Keynes added to the 8-c-(i) clause that the issue could be realized also
against French francs or US dollars exchanged at current rates against the pound and kept
at the Banque de France and at the United States Federal Reserve Bank. But these
particulars seem to be intent on securing the Allies adhesion.20 So whereas in the definitive
British version he presents the arrangement as a "sterling exchange standard regulated by
an Office of Conversion" (PRO), in the versions aimed at the Allies Keynes broadens it to a
multiple exchange standard — "étalon de change" (CAEF). Another item gives evidence of the
British preference for a sterling standard only: a reference to gold included in the
preliminary version of the memorandum was dismissed after it had been set-aside by the
Bank of England and does not appear in the final version.21.

• The conversion of old rubles and the 33.3% clause: departures from strict
currency board rules

The project provided for two additional arrangements for the issue of new rubles in
ways designed to relax the rigid framework traditionally imposed by the automatic
mechanism of a pure currency board.

18 cf. criticism of Keynes's plan sent officially by France to Great Britain in the form of a reworked version of
Sergent's memorandum (B31981[Sergent]). The French thought Keynes's project showed the British were looking
to go it alone. Keynes replied that his project was not very different from that imagined by France, but without its
disadvantages. He remarked that the French plan could not be set up without negotiations: "That would certainly
lead to political complications and extensive discussions and delays". However, the Allied financial intervention
had to be rapid as the direct channels of communication with Archangel across the White Sea would shortly be cut
off by ice until May of the following year. Keynes sought to reassure the French authorities: "I hope that your
government will see no objection to our going forward immediately with a plan which to my mind would not
prevent pursuit of M. Sergent's wider plan if something of the sort were required next summer", cf. cover letter to
Keynes's memorandum sent to the French government in B31981.
19 This question was fundamental for the British authorities: "What seems to be needed is a man who will work at
Russia financial problems entirely from the British point of view. He should therefore be an Englishman and have
suitable opportunities of keeping in touch with England" (Memo II: British Financial Representation in Russia in
T1/12290[9714]).
20 "[The US government ] propose as a condition that proceeds of any new rouble notes purchased from Office of
Conversion by the United States for their needs should be held at the Federal Reserve Bank in New York"
(Telegram to Mr. Barclay, Washington in T1/12203[36543]). See also T1/12261[41536].
21 The final 8-c-(i) clause specifies a note issue "in exchange for sterling in London at a fixed rate of exchange",
instead of "in exchange for sterling in London (or for gold) at a fixed rate of exchange" in the first version.

8
 The first related to the requirement to withdraw the different instruments of payment
from circulation [clause 8-c-(ii)]. Keynes entrusted the task of substituting the new currency
for old rubles to the Caisse. The Caisse would ensure conversion at an arbitrarily fixed rate
of exchange "lowered from time to time". The plan proposed the rate should be set at four
new rubles to five old ones for the first month. "If things went well this lowering should be
effected rapidly until a rate of 1 new ruble for 2 old rubles had been reached. After this
further reductions would be dependent on the amount of old roubles offering". This
undertaking meant that part of the new currency issued would be covered by "unbacked"
assets, as the French government pointed out. But Keynes considered that some of these old
rubles could be bought by the Allies who might use them in transactions with the other
Russian regions.22 However, it was still necessary to have a provisionally overvalued
exchange rate for old rubles in order to incite those holding them to convert to new rubles
and systematically use the new currency as the conversion rate came down. Keynes wanted
to overcome any suspicion of the new notes, which were denominated in rubles, but printed
in England. Assuming this first constraint could be removed, the transition phase would
present other difficulties. Remuneration in new rubles would require a reduction in nominal
wages making the monetary illusion difficult for wage earners to accept: "Wages in terms of
the old rouble are based on the purchasing power of this unit and might, therefore, be
unduly high if continued at the same rate in terms of the new rouble. In the long run it will
hardly be possible to pay the workman at an equally high rate in terms of the new rouble. At
first, however, it might be prudent to do so. Until the increased purchasing power of the new
rouble has been realized by experience, it might cause serious discontent to cut down the
money rates of wages. The loss thus involved could, however, be partially recouped by
reckoning the value of the rouble at 3d. instead of 6d. when fixing the selling price of
imported foodstuffs and other necessaries of life".

The project provided for a second issue arrangement affecting the principle of total
backing by foreign assets [clause 8-c-(iii)]. Keynes authorized an issue of notes "in exchange
for the Treasury bills of the local government provided no more notes are so issued whenever
the amount so issued exceeds one-third of the total amount in circulation". The concession
to the local was limited to one third of the money in circulation. The ambiguous formulation
of the 8-c-(iii) clause must not be understood as if the total amount of the notes in
circulation is 100, one third of these 100 — i.e. 33.3 — may be set in the form of Treasury
bills. It must be understood as follows: when the total amount of the new ruble notes in
circulation backed by foreign exchange reserves is 100, a new issue limited to 33.3 can be
done in exchange for Treasury bills of the government. The memorandum does not specify
the terms for issuing these Treasury bills: the initiative of local government "promises to
pay" (Spring-Rice 1919, 284) seems to be left to the local government's own judgement. In
fact, they were issued in the form of 5 years bonds bearing a 5% interest. It is difficult to
ascertain whether subscription was extended to the whole economy and possibly to banks.
Several banks operating mainly on the basis of foreign capital were based in Archangel
before the Caisse was set up.23 But the records do not show whether these establishments

22 Keynes did qualify this point in a conference with French representatives. According to an internal memo of the
French Ministry of Finance dated 15 November 1918: "Mr. Keynes specified it would not be a question of openly
accepting current rubles but of buying under the control of the British commissioner such quantities as might be
needed" (Note 10.301 in B31981).
23 Moscow Popular Bank, Russian Bank for Foreign Trade, Bank of Moscow, Petrograd International Trading
Bank, New Union Bank, Siberian Trade Bank, Russo-Asian Bank, Archangel Mutual Credit Society. It was also
planned to open the Northern Commercial Bank for Industry and others with capital held mainly by traders (Note
of Noulens, dated 2 September in B31981).

9
were still in business when the Caisse was opened and if so what their relations with the
local government and the Caisse were.24

The Bank of England was thoroughly opposed to these two additional issue
arrangements25, but Keynes eventually disregarded the Committee of Exchange
recommendations in the last version of the memorandum. In the project, the substitution of
the new money for the old and the 33.3% clause opening up the way to financing of
government deficit by the Caisse were two separate forms of issue that were not covered by
any increase in foreign exchange reserves. Keynes separated the two operations. In practice
they were much more restrictive as the 33.3% clause included both categories of issue.
Indeed the fundamental principles of the currency reform approved by the Financial and
Economic Council attached to the government defined the issue not covered by foreign
reserves as follows: "The above supplementary issues are for loans to the North Russian
Government for their needs against their obligations and also for the purchase of State
Notes now in circulation [...]. Under no circumstances may the issue of Bank Notes,
unguaranteed by Foreign Currency exceed one third of the whole sum in circulation under a
guarantee of a foreign Currency Deposit".26. It meant the ceiling of reserves held by the
Caisse would be set in the form of local government securities (and of old rubles notes) at
25% of its total issue. In other words, it meant the establishment of a minimum backing
rate of 75% in pounds sterling.

Walters and Hanke (1992) inquire into Keynes's motives for breaking the orthodox
rules about issues being completely backed by foreign assets. Keynes's position on the
question is indeed hard to fathom. In his earlier writings Keynes showed that he was not in
favor of the excessive rigidity imposed by complete cover. His work on the Indian monetary
mechanism published in 1913 shows this. Moreover in his commentary of the same year in
the Economic Journal about the West African Currency Board, he shows just how ambiguous
it was to make a statutory tie between the money supply and the proportion of reserves held
by the issuing body, especially when there was not 100% backing: "Most economists would
probably agree that a system of legal reserve amounting to a fixed proportion of the
circulation is nearly always vicious, because, as soon as the reserve has sunk to the
prescribed ratio, the redemption of any further note involves a breach of the law. When the
fixed proportion is so high as three-fourths this objection has special force, because the
reserve actually held is not likely to exceed the legal reserve by any very great amount"
(Keynes 1913, 147). This implies some rejection of the principle of strict proportionality
between the issue and the reserves. Yet the mechanism he thought up for Russia was based
on just this principle of regulation of the money supply. The issue level covered by assets
expressed in the anchor currency was set at 75% as in the West African Currency Board.
Fundamentally, the principles of external cover and of automatic issuing rules were pushed
to the forefront. The currency board rationale was to be adhered to even if the reform is not
strictly within the extreme framework of a "pure" currency board.

24 However that may be, the financial context at the time was not favorable to a strong banking activity: "There is
nothing to indicate that [the banks] could attract any fresh deposits or valuable business. The old banks were
completely discredited in public eyes. Experience is that such a shock to reputations is forgotten slowly and that
the liability to runs would be abnormally great for some time" (Memo IV: British Interests in Russian Banks in
T1/12290[9714]).
25 "From a purely banking point of view, the Committee hesitate to recommend the scheme and would at any rate
have preferred to have eliminated 8-c-(ii) and (iii), confining the application of the note issues to the financing of
military expenditure and the payment of produce for export to UK" (T1/12261 [33796]).
26 Our italics. Point 7 of the Fundamental Principles of the Currency Reform in the Northern Region
(T1/12261[50174(49788)]).

10
 The ambivalence of Keynes's project appeared in the difficulties in running the
Emission Caisse.

IV. THE OPERATION OF THE NATIONAL EMISSION CAISSE (NOVEMBER 1918-

APRIL 1920)

It took three months for the issuing institute to become operative. The president of
the supreme government of the northern region officialized the formation of the National
Emission Caisse of North Russia by a decree of 11 November 1918 (Viestnik no. 31) and the
Caisse opened finally for business the 20 November. Sir E.M. Harvey, director of a leading
British bank, was appointed jointly by the British and North Russian government as
president of the institution's financial council with a six-month mandate. He was seconded
by a committee of four advisors, also chosen by the two governments. Subsequent to
France's — forced — acceptance of the British plan, a position as advisor was reserved for a
French representative, but Noulens declined the post.

• Priming the mechanism

For the first issue to be ordered, pounds sterling had to be presented to the Caisse.
The British government was behind the formation of the reserve fund that fueled the initial
issue, in accordance with Keynes's proposal. The decree of 11 November provided for "[…]
entering into a special agreement with the British government by one point of which it
should undertake to acquire, over the first four months of enforcement of the new monetary
system, credit notes of the northern region at the rate of 40 roubles for one pound sterling,
for a sum of at least 25 million roubles per month". The account of the Emission Caisse with
the Bank of England was thus credited with £625,000 per month for the first four months at
the initiative of the British government. In exchange, the British government obtained notes
denominated in new rubles at the Caisse's head office in Archangel. The first issue of notes
came about concretely through payment of British troops in new rubles and more generally
through the payment of transactions made locally by the British Mission. As the first four
issues totaled 100 million new rubles, the Caisse was authorized to issue for the government
an extra amount up to 33.33 million rubles against government bonds. But the successful
start was compromised by technical incidents and blunders in printing the notes and by
delays in their dispatch from England27, and it was not until the 16 December that the
Caisse was able to provide new rubles to the Government and then only for a small
amount.28

The monetary arrangement allowed for net income to the Caisse. The reserves held at
the Bank of England, assimilated to sterling balances, earned 4.5% and the government
bonds 4 to 5%. Moreover, as the Emission Caisse did not deal in deposit operations, no
interest payments were made. The articles provided for these net products to be distributed
between the Caisse and the government until the Caisse accumulated an additional reserve

27 For more details on the first difficulties, see T1/12440[3142] [42022]. Printing of the notes of 1 to 500 ruble
denominations was entrusted to the British Company Waterlow — not a name to encourage French support for the
project. Keynes had recommended printing notes similar to the rubles already in circulation: "These notes are by
no means facsimiles of the existing issues but their general appearance is similar and they will bear a familiar
aspect to the local population" (T1/12261[35246, 1]). The printing process meant using plates from the old tsarist
presses but, in their haste, the printers forgot to remove the imperial monogram and arms. It took much time to
manually blot out the insignia liable to cause offence to the anti-monarchist fraction of the "White" Russians
(Hanke and Schuler 1991).
28 Two million new rubles according to Lindley (T1/12349[29831]).

11
equivalent to 10% of its issue. Beyond that point, profits were handed over entirely to the
government.29 Because of the very high expenses, the first year's operation did not give rise
to any seigniorage revenues.30

• Convertibility of the new ruble with the dollar and the French franc

Convertibility of the new currency became a crucial question when the first
difficulties arose relating to the presence of non-British contingents on the ground. In the
winter 1918-1919 came the problem of paying the wages of Allied officers and men in local
currency. In order to avoid any pointless exchange transactions it had been agreed in
October to apply Keynes's recommendations about opening accounts for the Caisse in
Paris31 and New York. This mechanism meant that any demand for new rubles by France or
by the United States would not require prior conversion from francs or dollars into pounds
sterling and the foreign exchange operation would be directly between France or the United
States and the Emission Caisse. In practice nothing of the sort happened. As already
mentioned earlier, the mechanism was only a formal proposition to win the adhesion of the
Allies. In actual fact, the British authorities were not favorable to the reference to the dollar
and to the French franc. So supplies of liquidities in new rubles still required London's
intervention. On the ground the Treasury of the French Embassy had difficulties in
providing new rubles for its troops. To facilitate operations, the British Treasury, which did
not face these problems, agreed to advance funds. But the transfer to France of part of the
wages of French soldiers was charged at the rate of exchange of the new ruble against the
franc.32 It appeared that this exchange rate, revised monthly, did not correspond to the
crossed parity deduced from the exchange rate applied for reimbursement operations in
pounds sterling by France of the new ruble advances granted by Great Britain.

• Stamping and conversion of old rubles

When the Caisse was opened, the conversion rate for purchasing old rubles in
circulation was 48 old rubles for 40 new ones. This was close to the rate Keynes prescribed
of 50 old to 40 new rubles, which in turn would be equivalent to one pound sterling. The
new notes were not an immediate success with the public. As Keynes feared not everyone
approved of these "English" rubles.33 The "premium of the new rouble over the old"34 had a
limited effect especially as the conversion rate was maintained at its initial level for five
months, contrary to the recommendations in the project. Spring-Rice considered the
reluctance to alter the conversion rate resulted from the local authorities seeking to

29 Article 11 (T1/12261[50174(49788)]).
30 As the printing cost was very expensive (more than eight million rubles for the six first months of 1919) and
operating expenses came to 400,000 rubles per year, the revenue of the Caisse estimated at five million rubles for
the first year of existence was not sufficient to produce a profit (T1/12440[26425]).
31 "Mr. Keynes confirmed that we [France] would obtain, for the needs we might have in North Russia […] any
quantity of the new currency at the rate of six pence per ruble by placing the equivalent amount in francs in an
account opened in Paris with the conversion caisse and on which it could draw as necessary" (Note of the Ministry
of Finance to the Ministry for Foreign Affairs dated 15 November in B31981).
32 For February 1919 the "exchange rate for the military" applied to these transfers was 65 francs for 100 new
rubles, with a minimum commission of 0.50 kopecks.
33 "As Mr. Keynes always thought likely, it will be very hard at once to raise the selling prices of imported goods,
which are new based on exchange of 48, without making the name of England more unpopular than it is at
present among the always discontented and ungrateful Russian. And it will be equally hard to lower money wages
in roubles all at once without producing further discontent among the workmen" (Memo 23: Six Pence or Two
Schillings in T1/12290[9714]).
34 To use Keynes's expression (T1/12261[35246, 5]).

12
artificially limit the depreciation of old rubles, by solidarity with the other "White"
governments of Siberia and Ukraine.35

On 17 April 1919 the Archangel authorities ordered a new huge operation to stamp
the old notes circulating in North Russia. On 11 September 1918, the Russian authorities
had already published an order by which all "Archangel" notes had to be stamped before
October 1st and that old notes would be legal tender only when so stamped" (PRO), but the
procedure failed. The government expected this measure to allow it to ascertain exactly the
total circulation in the region and to record it in the hope that it could thereby differentiate
completely the notes circulating here from identical notes circulating in the Soviet republic
and so prevent notes stamped and perforated here from being dragged down constantly with
the different categories of rubles.36 According to them Moscow was seeking to flood the
northern territory with these notes so as to restrict the use of the new ruble and to weaken
it. To speed proceedings they put out that the unrecorded old notes would no longer be legal
tender in North Russia from June and that from that date the Caisse would no longer buy
them back. At the same time the United States came up with the idea of quoting the
stamped notes (at least in New York) at a different rate from the other rubles.37 The
American proposal was further motivation for holders of old rubles to have their notes
registered.

The launch of the stamping procedure in April coincided with the beginning of the
process started by the Caisse for successively revising the rate of conversion for old rubles
into the new currency (cf. figure 1). This devaluation of old rubles was a great incentive to
the public to convert its newly stamped old notes into new rubles. The process, aimed
ultimately at substituting the new circulation for old ones, was unpopular with the
population, who were reluctant to use the new currency, but proved most effective
nonetheless. By May there were officially 300 million old rubles in circulation, less than half
the number estimated for October 1918 before the Caisse opened.

At the same time, the Civil War was taking a turn for the worse for the anti-
Bolsheviks. The head office of the National Emission Caisse of North Russia in Archangel
was threatened.

Figure 1
Exchange rates of old and new rubles relative to the pound sterling
March September September November April Early May Mid-May June
1917 1917 1918 1918 1919 1919 1919 1919
Old* 17 35 41 45-48 56 64 72 80
New - - - 40 40 40 40 40
*Average exchange rate (the different categories of "old" rubles circulating in Archangel zone).
Sources: Spring-Rice (1919), Hanke and Schuler (1991).
• Early closure

35 "They were particularly frightened of doing anything which their anti-Bolshevik colleagues of the Koltchack and
Alexeieff (Denikin) parties might interpret as depreciating the All-Russian rouble" (Spring-Rice 1919, 285).
36 The process used for stamping was not very dissuasive. It consisted simply in a perforation with the four
initials GBCO (State Bank of Northern Government) and involved no signature or serial number. A French chargé
d'affaires reported "This operation is obtained by such rudimentary means that a pin suffices to give exactly the
same result and the Bolsheviks themselves can under the circumstances perforate as many notes as may suit
them" (B31981[Guiard]).
37 It is hard to say whether this was a concerted decision taken with Great Britain or a unilateral initiative by the
United States. Several elements incline us toward the second hypothesis: the challenge to London's financial
power and the emergence of the United States in the international financial arena at the time; the American
purpose to extend its influence in North Russia by a pervasive business strategy (Memo: American Commercial
Activity in T1/12290[9714]).

13
 By 1919 the Red Army's victory was inevitable.38 As unfavorable conditions spread,
the expansionist ardors of the two colonial powers were cooled and they were progressively
convinced to withdraw from the Russian conflict: French ground troops left North Russia in
June after abandoning Odessa and Crimea in April. British forces pulled out of Archangel on
27 September, then from Murmansk in October, although the withdrawal had been
practically decided in February (PRO). Active intervention then gave way to isolation of the
Soviet regime and indirect aid to the remaining opposition forces.

Despite protests from the North Russian government, it was decided to transfer the
head office of the Emission Caisse to London, after its new president, G.R. Young, a former
diplomat at the British Embassy, had proposed to transfer it to South Russia (PRO). The
Caisse officially closed to the public in Archangel at the end of September39. The Murmansk
branch closed on 15 October. Notes presented by the population and collected by the local
authorities were redeemed until these dates. Roughly a million rubles a day were redeemed
(in August) but this was counteracted to some extent by massive issues to the military
authorities. A major point is that the British representatives put at the disposal of the
Caisse their old rubles notes and instigated the latter to assure the redemption not in
exchange for sterling assets but for these old rubles.40 Another preoccupation of the British
authorities was to guarantee the redemption of new rubles notes held by British subjects
who had run away from Russia and fled to Danzig, Poland, Finland, Baltic regions and
Scandinavia. In Norway, the Tromso Privatbank was allowed to redeem northern rubles
notes accompanied by a certificate issued by the Caisse or by the British Consul of
Murmansk, at a rate corresponding to the official kroner's exchange of the day for sterling
checks. After the final closure, several million new rubles or so had not been exchanged.
Between forty-two and fifty-five million rubles were in the possession of the British Mission.
It was decided the notes would not be taken back to England but destroyed so the
Bolsheviks would not get hold of them.41 In compensation for the destruction of the notes
the British government obtained book-entry credit in London.

The financial council resumed its functions in London on 31 October. Its task was to
liquidate the operations of the Caisse. Priority was given to redeeming notes presented by
repatriated British troops who held a tiny proportion of the new rubles remaining in public
hands.42 Cover for some of the issue having been guaranteed by government bills that were
not readily negotiable (given the situation in North Russia) and by old rubles, it is clear that
there could be not complete redemption. French records mention spoliation of the assets
held by French officers and men. The amount was relatively small — 33,270 new rubles.

38 The total disorganization of the "White" forces and the internal quarrels of the different anti-Bolshevik factions
together with the military worth and skill of the Red Army brought the Civil War swiftly to an end (Mawdsley 1987).
Two other external factors can be advanced: the betrayal of the Russian Czechs) and the indecisive attitude of the
Allies. Intervention was based on the misunderstanding between France and Britain with each of the colonial
powers seeking to further its own interests. In addition, the unpopularity of the intervention with public opinion of
the Allied powers and the lack of enthusiasm among the expeditionary corps already exhausted by years of war
with Germany rapidly spread. See the report from C.R. Cattley (T1/12286[8342]).
39 On 4 October, according to Hanke and Schuler (1991).
40 See the correspondence between the British authorities and the Caisse in T1/12440[36783]: "Young suggests
that attempt should be made before evacuation to give population old-all-Russia rouble notes in return for present
holdings of new roubles. We approve this suggestion. [...] You can use British governments surplus of old roubles
for this purpose to our advantage".
41 The British had problems getting rid of the notes. Because they were damp they could not be burnt as planned
and they had to be dumped at sea (Hanke and Schuler 1991).
42 Notes were to be presented at the Caisse's new head office at 20 Cockspur Street, London where they were
redeemed less 1% commission by a check on Barclays Bank. For convenience and after talks with the British
Treasury, the new rubles were exchanged at sight by Barclays Bank for the Emission Caisse.

14
After protracted and fruitless negotiations with London43 the French government finally took
it upon itself to redeem the credits held by its troops.

Most of the 13.5 million still in circulation — an estimation by Walters and Hanke
(1992) —, were held by the population of North Russia. These were never redeemed. Without
conviction the Caisse's president proposed to authorize the provisional government still in
place to redeem notes until such time as the northern region fell into Bolshevik hands. The
Bolsheviks busy on other fronts did not take Archangel until 21 February 1920.

Despite the gains made from non-redemption of the notes issued, the Caisse was
bankrupt when it finally closed on 30 April 1920. Net losses were sustained in practice by
the British government. They were estimated at more than £300,000 (PRO).44 They were the
logical consequence of the excessive flexibility in the plan proposed by Keynes. The 8-c(i) and
(ii) clauses left the way open to issues with precarious backing. It is obvious that this would
have been impossible if the pure currency board model had been applied.

Should Keynes's plan be dismissed though because of its lack of rigor? This is the
position defended by Walters and Hanke (1992). Consideration of the financial difficulties
encountered by the North Russian government shows that on the contrary the arrangement
was at fault in being too inflexible.

V. FINANCING THE WAR EFFORT: "FINANCIAL SHORTAGE" IN THE NAME OF

MONETARY STABILITY

The monetary arrangements consisted in decreeing the ruble was pegged to the
pound sterling and guaranteed: it was designed to set up full convertibility of the new
currency de jure through fixed parity with the pound sterling, the credibility of the
mechanism relying on the money in circulation being backed by sterling reserves. The
advantages of the Emission Caisse related to the forced monetary stabilization that imposed
stringent conditions on issue. It depended ultimately on the "trust" that the authorities
sought to instill in the national currency. It should be recognized that the "trust" accorded
by the local population to the new currency was not immediate but as Keynes and Spring-
Rice said it was a temporary error of appreciation because of the population's "ignorance".
The fact remains that the advantages of forced convertibility and stability are indisputable.
The Caisse provided North Russia with a sound currency, allowing money to be used again
progressively in the region and setting up the right conditions for the development of foreign
trade: "The population of North Russia became the holders of 100 million roubles of good
money, and the Allies were paying their way as easily as a similar army on manoeuvres in
England. English (or French or American) merchants who wish to buy goods in North Russia
can obtain the necessary currency in Archangel by paying the sterling equivalent to the
Bank of England. Those who wish to sell goods in North Russia can, by insisting on

43 France argued that no deadline for buying back rubles had been laid down: "The French government has never
received official notice that the Caisse would cease to redeem rubles issued in North Russia". The British
government replied that the Caisse had announced its intention in the — British — press to end the exchange of
notes as from 29 February 1920 (T1/12498[10311]). A late letter of 22 January 1922 in B31981 added: "The Lords
Commissioners of His Majesty's Treasury to whom the matter has been referred, point out that these rouble notes
were issued by the Provisional Government in North Russia and were not guaranteed by His Majesty's
Government. […] There are no funds available for the encashment of further notes, the only assets held by the
Caisse being bonds of the Provisional Government of North Russia which has now ceased to exist".
44 £387,500 or 15.5 million rubles according to Walters and Hanke (1992).

15
payment in new roubles, be sure of remitting the money here through the Caisse without
fear of loss on exchange" (Spring-Rice 1919, 286-287).

The advantages afforded by the mechanism should not however conceal the
consequences of its application in economic policy. Monetary discipline left little financial
leeway to a government constrained to heavy wartime spending.

• A stifled borrowing rationale

Resistance to the Bolsheviks proved more expensive than planned and required
substantial resources. Chaikovski's government could not count on virtually non-existent
fiscal resources or on savings accumulated by traders and peasants at the beginning of the
war against Germany but which had since disappeared.45 Resort to foreign borrowing was
contrary to the founding principles of the reform project. It will be recalled that the British
rejected the French plan for an Interallied Bank as it was based on borrowing. Keynes's plan
aimed at setting aside any system based on "advances" granted to Northern Russia because
the British considered the provisional government was not able to provide adequate
guarantees or because negotiations to reach an understanding if loans were to be made
would take too long.

These restrictive arrangements were totally inconsistent with the principles and
suggestions stated at the Russian Political Conference which took place in Paris in March
1919 respecting the means of restoring financial and economic order in Russia. For
example, chapters IX and X drawn up by the Financial and Economic Section stipulated
that "For the reconstitution of Russia, the opening of foreign credits must be facilitated, to
secure vital necessities to Russia, till her production is restored to the normal. The Allies
must place capital in Russia with a view to developing her natural resources, improving
public works and re-establishing her industries" (PRO).

Moreover they were all the more inadequate to North Russia since up till this date
the development of this region under hard conditions had still be impulsed from outside:
"Before the war, the Government of Archangel — taken as a separate unit — was not self-
supporting, because it was still in a state of being developed with 'Russian capital', i.e. with
capital lent by foreigners to the Central Russian Government".46

The only recourse left by the project was for the local authorities to offer securities
for public debt to the National Emission Caisse in the limit authorized by the 33.3%
clause.47 This was, however, a restrictive framework since this "loan" was proportional to the
Caisse's issue, itself linked to the amount of the exchange reserves. It was therefore the
balance of payments that ultimately determined the level of facilities granted by the Caisse
to the government. Under these circumstances, only net demand for new rubles (in
exchange for sterling or other currencies) permitted the government to finance a new deficit.
But with the civil war, commercial outlets to regions now governed by the Bolshevik enemy
dried up; the population, employed to meet the requirements of wartime, was unable to
engage in forestry, the only source of export income; imports of basic necessities grew
constantly. The government could not therefore count on a current surplus to stoke

45 All the more so as Russian peasants' savings were concentrated in the fertile regions such as Ukraine and
Southern Russia (Martens 1918, 9-10).
46 Memo 19: Revenue of the Russian Authorities in T1/12290[9714].
47 The sole potential receipts at the time were related to the sale of an important stock of vodka bottles
accumulated since the sale of vodka had been abolished by the Czar. The revenues were estimated at 20 million
rubles (Memo 19: Revenue of the Russian Authorities in T1/12290[9714]).

16
exchange reserves and by extension to finance increased spending. In the end only foreign
demand for new rubles against currency from abroad, i.e. in this restrictive framework, from
Allied governments, allowed local government spending to be financed. As the principle of
"advances" was ruled out, in the reform implemented, this demand for rubles had no reason
to exceed the requirements in liquidities of the Allied troops involved in the intervention.
Thus, even if the 33.3% clause afforded some room for manoeuvre, the stringent rules on
regulating the monetary issue imposed on the Emission Caisse placed a severe financing
constraint on the North Russian government: any commitment to further spending required
prior spending by the Allied troops for at least three times the amount of the financial
deficit.

Keynes was aware of this financing constraint. But he saw it as the corner stone of
the monetary reform: "The salvation of the new currency must lie [...] in a very close control
and limitation of the expenditure of the local Russian authorities" (PRO). Application of a
pure currency board would have led to extreme financial constraint since, in that case, no
spending by the North Russian government could have been paid for by borrowing.

• The effects of the financial constraint

The effects of the financial constraint were soon felt. By the end of December 1918,
government debt with the Caisse already stood at 14.2 million new rubles, corresponding
more or less to the authorized ceiling, while income amounted barely to 500,000 new rubles.
Prince Kourakine, Minister for Finance, threatened to resign if the Allies did not authorize
him to issue confidence bonds48 for a sum of six million rubles.49 The purpose of the issue of
credits on the government without real consideration resulted from the urgent necessity to
meet the "general spending requirements", that is mainly wartime spending in December
1918 and January 1919. The British reluctantly consented, hoping that the operation,
which committed only the government, would not damage the integrity of the Emission
Caisse and the new ruble.

Difficulties continued in early 1919. Dockers, firemen and some workers went unpaid
— especially in Murmansk50— and wartime spending escalated. Again the local government
reported its financial difficulties in two memoranda to the British government on 15 January
and 7 February (PRO). President Chaikovski spoke out against the intolerable "shortage of
finance" induced by a "regrettable" reform and accepted to the detriment of the borrowing
project of Summer 1918 which would have allowed him to cover expenses for eighteen
months.51 He called on the Allies to authorize "[…] a loan of 300 million rubles backed by the
Allied powers, and that the amount should be included in the debt of the Russian state, the
means and terms for repayment of which are to be established by the Peace Conference".
This echoes some parts of the French reform project. In the event of refusal, the government
threatened to issue more confidence bonds (PRO).

• Breaking free from the monetary straitjacket

48 The issue of confidence bonds by the government had been common practice since 1917. It had been prohibited
by decree of 11 November 1918 setting up the National Emission Caisse. At this date, the "Trust loan" amounted
to 35 million rubles (T1/12286[8342]).
49 cf. M. Guiard's telegram of 21 December 1918 in B31981.
50 cf. F.O. Lindley's report on his trip in Murmansk in T1/12304[13990]).
51 "We were on the point of agreement on this issue, but the project was not approved, and instead of a loan, a
proposal was made for an issue of credit notes for the northern region backed […] by London pounds"
(B31981[Chaikovski]).

17
 The British government decided to relax the monetary arrangement but without
meeting Chaikovski's requirements. Indeed he was replaced a little later as head of
government by General Miller. At the end of March 1919, M. Lindley, the British chargé
d'affaires in North Russia, was authorized to provide a "subvention" of 5 million rubles a
month for the first six months of 1919 to help the government meet "national spending".52
These advances had to take effect retroactively from 1 January 1919 but the payments were
actually made in three monthly installments of 10 million rubles each for April, May and
June (PRO). They were obtained against the government's commitment not to issue any
more confidence bonds and the obligation to submit its accounts for review by the Caisse's
financial advisors. Moreover, it was demanded that one of the two British advisors should
now be involved in any new government spending decision.

The sums allocated were limited and the British government unwilling to pump
money in. But British acceptance, although limited in scope, was more than a simple
concession. Direct financial aid to the Russian government implied a break with the system
adopted so far. The stringent rules of the initial project were no longer observed and the
rationale of lending, long ruled out by the British, was finally imposed.

The assistance provided was not sufficient to balance the budget. For 1919 the
authorized resources were overestimated in a range of 60 to 200 million new rubles, while
spending (greatly underestimated) exceeded 400 million. The Archangel government went
back to the British authorities. This time it was for a loan of £5 million at 5% repayable in
23 years and guaranteed by "bonds on the forest" making 200 million new rubles
immediately available to the Caisse. The Caisse's financial committee declared it was ready
to make a new issue. But it proposed to the Foreign Office to reduce the amount of credit to
£750,000 and asked that it be devoted exclusively to operations of unification of the North
Russia monetary system: it was a matter of buying old notes, contrary to the main objectives
stated by the local government. The proposition coincided with the first stamping operations
and revision of the rate of conversion of old rubles into new currency, but above all, with the
first withdrawals of the Allied troops.

VI. CONCLUDING REMARKS

The North Russian monetary arrangement imagined by Keynes lasted less than a
year and a half and the actual operation of the National Emission Caisse at Archangel less
than eleven months. The fleeting nature of the experience does not prevent us from seeing
the advantages and limits of the mechanism. It indeed improved the financial conditions of
the allied intervention alongside the "White" forces and made it possible to circulate sound
money with a guaranteed value. But the severity of the rules of currency issue introduced a
financial constraint in the name of monetary convertibility and stability.

This inflexibility prevented the North Russian government from effectively meeting
the requirements of the struggle against the Bolsheviks. With access to loans denied, or
greatly constrained, a strictly regulated issue of money, inadequate national output to hope
to produce a current surplus in foreign trade, insignificant savings available, and negligible
financial resources, the means of action of the North Russian government were limited. The
fight against the Bolsheviks relied ultimately on Allied military intervention, directly on the
ground. With their withdrawal, resistance to Bolshevism was doomed. The relative flexibility

52 Dispatch from Noulens dated 28 March 1919, cited in a note of 8 June in B31981.

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built in by Keynes with the 33.3% clause was not enough to counter the natural rigidity of
the mechanism. It left little scope to borrowing as a source of financing wartime spending.

Today, countries under currency boards arrangements meet a similar constraint. In

the name of monetary convertibility and stability – or in the name of “credibility’, in modern
words – an integral and quasi-automatic coverage of the monetary base by means of foreign
currency reserves is required. But this “credibility” is achieved at the cost of renouncing the
chief responsibilities shouldered by a normal central bank in the sphere of central banking
and exchange rate policy, which may be very painful for growth and employment. As
Davidson underlines: “A currency board solution, therefore, is equivalent to the blood letting
prescribed by 17th century doctors to cure a fever. [It] may douse the flames of a currency
crisis but the result can be a moribund economy” (Davidson, 2000: 16).

References

HM Treasury and Foreign Office archives held at the Public Record Office (Kew, United
Kingdom)
Archives held at the Centre des Archives Economiques et Financières (Savigny-le-Temple,
France)

Other references

Davidson, P. 2000. Is a Plumber or a New Financial Architect Needed to End Global

International Liquidity Problems? World Development, June.
Ford, A.G. 1962. The Gold Standard 1880-1914: Britain and Argentina. Oxford: Clarendon
Press.
Hanke, S.H. and Schuler K. 1991. Keynes's Russian Currency Board. In Capital Markets and
Development, edited by S.H. Hanke and A. Walters. San Francisco: ICS Press.
Harrod, R.F. 1951. The Life of John Maynard Keynes. London: Macmillan.
Ironside, W.E. 1953. Archangel: 1918-1919. London: Constable.
Keynes, J.M. 1913. Review of Official Papers: Departmental Committee on Matters Affecting
Currency of the British West African Colonies and Protectorates: Report (1912), Minutes of
Evidence (1912). Economic Journal 23.89: 146-147.
Keynes, J.M. 1971-1983. The Collected Writings of John Maynard Keynes. Vols. 1-30.
London: Macmillan.
Loynes, J.B. 1962. The West African Currency Board: 1912-1962. London: WACB.
Mawdsley, E. 1987. The Russian Civil War. Boston: Unwin.
Moggridge, D.E. 1995, Maynard Keynes. An Economist’s Biography. London: Routledge.
Munholland, J.K. 1981. The French Army and Intervention in Southern Russia: 1918-1919.
Cahiers du Monde Russe et Soviétique 22.1: 43-66.

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O’Brien, D.P. 1997. Monetary Base Control and the Bank Charter Act of 1844. History of
Political Economy 29.4: 593-633.
O’Donnell, R.M. 1992. The Unwritten Books and Papers of J.M. Keynes. History of Political
Economy 24.4: 767-817.
Pipes, R. 1990. The Russian Revolution. New York: A.A. Knopf Inc.
Ponsot, J.-F. 2002. Keynes and the “National Emission Caisse” of North Russia: 1918-1920.
History of Political Economy 33.1.
Schwartz, A.J. 1993. Currency Boards: Their Past, Present and Possible Future Role.
Carnegie-Rochester Conference Series on Public Policy 39: 147-187.
Skidelsky, R. 1992, John Maynard Keynes, Vol. 1: Hopes Betrayed, 1883-1920. London:
Papermac Macmillan.
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