File No. 861.00/2543

The Russian Ambassador (Bakhmeteff) to the Assistant Secretary of State (Phillips)

My Dear Mr. Phillips: Enclosed two copies of the memorandum on questions of currency to be used in connection with the proposed assistance to Russia. I will appreciate if you will forward one of these copies to the Secretary of Treasury.

Believe me [etc.]

B. Bakhmeteff

Memorandum on Currency in Russia

One of the most important problems, which presents itself in connection with the recent decisions of the United States to render active assistance to Russia, is that of currency to be used. It is, first of all, the question of the kind of money with which the American-Allied troops will make payments in Russia. Further, and far more important, is the question of currency to be [Page 60] employed in connection with the manifold transactions arising from the proposed economic assistance to Russia. Thus, the problem of deciding upon the proper exchange media is a vital practical necessity.

In determining the line of action, following considerations must be taken into account:

No procedure should be adopted which would eventually cause embarrassment to the future national government of Russia in the coming task of consolidating and stabilizing the monetary system of the country.
All possibilities of benefiting the Germans should be avoided, especially bearing in mind Germany’s extensive operations with the Russian ruble.

The three following ways of procedure present themselves:

Using present Russian currency;
Foreign currency (United States dollars or Japanese yens);
Issuing special bank notes (certificates).

Using present Russian currency.—Simple as it appears, this method must be emphatically rejected. The unrestricted issuance of paper money during the last year has rendered the ruble entirely unstable and deprived of any character of standard value to be used in orderly exchange. Due to the lack of confidence as to the purchasing power of the present paper money, the Allied troops would be confronted with the greatest difficulty when endeavoring to procure commodities by means of notes, considered by the population as practically valueless. Violent speculation would necessarily arise and besides it is inconceivable for the Allies to use a medium of exchange, the very source of which in fact lies in the sphere of German control. The Allies could not contribute to strengthen and consolidate rubles now in the possession of the enemy and could not indulge in offering the Germans further opportunities.
Foreign currency,—To introduce any foreign currency would be embarrassing at present on account of the illiteracy of the population and its unfamiliarity with foreign specie and denominations. In the future, such course would be bound to cause difficulties to the Government of Russia. Besides consolidating the value of the old paper ruble relatively to a new national unit, the future government in this case would have to extract from circulation certain foreign specie, which, at that time, might become a familiar instrument of purchase and exchange and the value of which besides is totally independent and is beyond authority on the part of any institutions in Russia. Further, under present chaotic conditions, foreign specie of general value introduced into the country may be diverted into German channels.
Issuing special certificates.—Under such circumstances it appears that special certificates should be issued to be used in connection with Allied action in Russia. If issued in ruble values and in proper denominations, such certificates would have the advantage of being entirely familiar to the population. Their relative value and purchasing power can easily be rendered stable. Further, most simple measures would practically exclude any possibilities of benefiting German activities.

General Considerations

Certain considerations of general character are appropriate, which would render clear the nature and the purpose of the proposed financial enterprise.

It is to be conceived in the first place that no financial problems of general character may be set as the aim of the proposed action. Questions such as that of devaluation of the present paper currency, its extraction from circulation [Page 61] and other problems of stabilization of existing ruble currency can be legally solved only by a future national government of Russia, whose authority is well established and recognized and which is entirely in control both of the means of issuing currency as of its circulation and foreign exchange.

The purpose of introducing a new exchange medium is entirely practical, the aim being to establish a standard of exchange with a stable purchasing power which would enable economic assistance on the part of the Allies and render possible the resumption of normal economic activities.

In the eyes of the population the value of the new currency will be connected with the possibility of purchasing goods imported by the Allies, it being this real purchasing power which psychologically will attribute validity to the new notes.

In connection with this the amount of new notes to be issued is to be determined exclusively with regard to the practical needs of economic activities, developing in connection with Allied economic assistance and corresponding to the actual demand of exchange media.

In defining the general outline of the proposed financial institution and in considering the nature of the measures contemplated, it is supposed that the economic assistance brought into Russia by the United States and the Allies will be directed by a certain governing body, which will regulate and coordinate the activities of different institutions and insure unity in policy and action. The proposed financial institution will consequently act under the auspices and direction of this main economic commission and actually constitute its financial department concentrating and effecting all financial transactions connected with the Allied enterprise.

It is further understood that, free from selfish aim and acting on strictly business lines, the economic commission will endeavor to extend assistance to the population by giving it an opportunity of purchasing goods on a fair cost basis and besides, through extending proper credits and other appropriate measures, will contribute to the restitution of production in Russia. In these activities, the intermediary of such institutions as cooperative societies, Zemstvos, and municipalities will be largely sought, avoiding possibly avenues where profiteering and speculation might be expected.

For these purposes, as well as for payments by the Allied troops in Russia, proper stable exchange media have to be provided and a mechanism, whereby this media could be properly utilized by the population, instituted and brought into operation. While in the future it may be expected that the importation of goods will be, to a certain extent, balanced by eventual exports, it should be nevertheless realized that in the initial phase import operations will necessarily dominate. This will necessitate extension of credits to purchasing bodies in Russia as well as to importing corporations, acting under the supervision of the economic commission, in dollars and other foreign currency.

The proposed financial institution should be, therefore, established with a capacity of issuing exchange media for use in Siberia and parts of Russia, covered by organized Allied assistance, as well as should be authorized to extend necessary credits for supply operations of all kinds.

Constituency of the Financial Institution

An Allied or American bank to operate in Russia should be created through special decree and international agreement, the stock of the bank to be formed mainly through subscription by the Allied Governments or the United States; the balance eventually, but not necessarily, to be subscribed by private [Page 62] interests, cooperating with the economic commission; the board to be nominated by the participating governments and supplemented eventually by representatives of private stockholders.

The bank to have two main departments: an issue department and a commercial department.

The issue department to be authorized to issue bank notes (certificates), secured by a respective part of the capital stock held in trust by the participating governments. Besides issuing bank notes directly against stock, the issue department should be allowed to issue supplementary media against government notes, bank acceptances, properly secured obligations of institutions and other commercial paper of undisputable value.

The commercial department will operate with the part of the capital stock in foreign values, assigned to such department. It will further use for operations the bank notes issued by the issue department. The commercial department will establish the necessary credit in foreign currency or in bank notes to different institutions and organizations in Russia as well as to importing concerns. It is through the commercial department that the Allied Governments could obtain necessary moneys for the current expenses of their contingents in Russia against notes or similar documents.

Nature of Bank Notes

their status in regard to interior circulation and to foreign exchange

The bank notes should be issued in rubles, adopting the regular Russian denominations. The value of the bank notes should be determined by ascertaining their equivalent with foreign currency. In adopting the exchange equivalent it appears appropriate to accept as the relative value of the ruble its former original pre-war valuation, thus establishing the value of the new ruble notes on the basis of the original standard.

The new bank notes could in no case be regarded as legal tender. To issue and enforce lawful money is the privilege and authority of a national government only. The bank notes should be considered as certificates, issued for a specific purpose and used in connection with certain economic transactions, arising from the fact of Allied assistance. The nature of the bank note will consequently be that of a certificate to be used for the purchase of goods imported through Allied channels as well as for all transactions with Allied institutions in Russia. The inscription on the face of the notes could tentatively be of following character:

The __________ Bank accepts these ruble notes for all payments to the Bank and to all institutions connected with it. The value of this note is secured by deposits in trust with Governments of __________. In exchange this note will be equivalent to __________ in the currency of __________.

Although the value of the new ruble note will be thus established in equivalence to foreign currency, this would not mean that free and unrestricted exchange to foreign values would be effected. On the contrary, the necessity of preventing use of these bank notes by German affiliations would demand excluding entirely these bank notes from free exchange in foreign markets and would oblige limiting of such operations to the institutions of the bank only. Furthermore, following the actual practice of Allied countries such exchange would be subject to regulations which would permit the purchase of foreign currency only after proper consideration of each particular case.

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relation to actual russian currency

As heretofore stated the new bank notes should be issued without prejudice to the present currency of Russia. Theoretically, the new bank notes, being issued for a certain specific purpose, are not to interfere with the circulation and use of the present currency. No regular exchange of the new bank notes with the present ruble should be established and no fixed exchange equivalent adopted. As a matter of general policy the reduction of transactions with the present actual ruble to the lowest possible minimum is suggested.

However, transactions of this kind can not be entirely avoided. In many cases peasants and other purchasers of imported commodities, often cities, Zemstvos, and Cooperatives, will possess paper rubles as an asset which they may offer as the only security in the initial phase of their transactions with Allied institutions. In such cases, rubles might be accepted as security for credits granted, regarding them strictly as collateral without specifying their actual value and leaving the final settlement to a later epoch, when the future national government would consolidate the currency and determine the relative value of the present ruble paper.

It should, however, be anticipated that the new bank notes, although not representing a legal tender of general character, will certainly be favored by the population due to their actual purchasing power and will assume, after a certain period, the character of a de facto generally recognized exchange media. It is further to be expected that such process may extend beyond the sphere of individual intercourse and that certain municipalities and Zemstvos, besides railways, banks, etc., might, on their own behalf, recognize the bank notes as tender to be accepted in transactions within their sphere of action.

In this case the new bank notes would, be eventually accepted, parallel to present currency, in payment of taxes, transportation fees, postal telegraph service, etc. However, such procedure would be adopted and decreed by the local governments and institutions themselves and certain parallel rates, announced from time to time, should be regarded more as a comparative price list in different currency.

relation to the future national government of russia

Such recognition on the part of the population of the new exchange media as tender of general character should not be considered with disfavor. To a certain extent this would facilitate the task of the future national government in the monetary reform. At the moment when the value of the inflated revolutionary ruble will have to be definitely established with regard to the new consolidated national unit, bank notes of the Allied bank, then in circulation, with their firm equivalent in foreign exchange will happily constitute a well-established standard.

It would be only necessary for the future government, through proper agreement with the Allies, to assume control of the Allied bank. Such privilege for the future Russian Government to take possession of bank with all its assets and liabilities should be properly stipulated in the constituent charter. The charter should further enable the Russian Government to determine a certain term, during which the bank notes could be recalled to be exchanged for new consolidated national currency or redeemed in foreign exchange at face value. The guaranty for such redemption would be constituted by the stock of the bank.

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This provision which would enter into effect at an epoch when the process of national consolidation of Russia has been sufficiently advanced, would serve as a link between the temporary conditions, created by Allied action, and the future financial system established and consolidated by national effort.

August 1918.