10
Economy Politics, and Diplomacy in Crisis

The Grain Crisis and the Search for Foreign Investment

At the time of the Fifteenth Party Congress, the two largest problems facing Soviet foreign relations and economic development—the agrarian problem and the trade deficit—seemed resolved in spite of the war scare and the break in relations with Britain. The grain harvested in the USSR in 1926/27 set a postrevolution record, and grain exports helped to push the country's trade surplus to near-record levels. The USSR received relatively substantial medium-term loans guaranteed by the German (1926) and the Austrian (1927) governments, and some American banks—Chase National and Equitable Trust—began to expand their short-term financing of purchases. Foreign loans for the year 1926/27 reached a level that had not been attained since the October Revolution, and one that would not be repeated until the years 1941-19452.^[1] Short-term credits were negotiated to cover trade deficits, and loans were dedicated to a new and, at the time, distinctively Soviet style of technology transfer, described as "the direct purchase of technical assistance including foreign designs and foreign built factories, the direct hiring of foreign engineers and technicians, and the import of modern equipment both for production and for use and as a prototype to be copied for domestic production."^[2] For the year 1926/27, machine and engineering imports reached 58 percent of the 1913 level in real terms. When combined with increased domestic machine production, the installation of new capital equipment exceeded the 1913 level by 15 percent. To both party leaders and nonparty economic planners it seemed as if the industrialization drive, first announced in late 1925, could now be undertaken and carried out without serious difficulty.

In August 1927, in the midst of the war scare crisis and the campaign

against the United Opposition, the Politburo made the crucial decision implementing the industrialization drive. It approved new construction projects in major industries and allocated increased funds to industrial construction from the state budget. Thereby it sided with Vesenkha, which insisted that overtaking the economies of Europe necessitated increased industrial investment, and against those nonparty economic experts who argued that further drafts from the budget would endanger the country's economic equilibrium. As a result of this decision, capital investment in Vesenkha-planned industry increased by 50 percent during the economic years 1927/28 and 1928/29. By mid-1929 it had reached a level 70 percent higher than total capital investment in 1913. In the two years 1927/28 and 1928/29, the state budget grew by 60 percent, and 50 percent of this was allocated to industry and collective agriculture. This "triumph of rapid industrialization," as it has been called, was accompanied by a "socialist offensive," an effort to extinguish private enterprise, both rural and urban, by directing investment into the socialist sector of the economy.^[3]

Optimism also pervaded the NKID Collegium. In late October 1927 it concluded that the worst of the tensions of the war scare crisis had dissipated. Chicherin sought and received—apparently at a joint meeting of the Politburo, Sovnarkom, and the Central Committee—a reendorsement of the policy of increased economic exchange and improved political relations with Europe and America. He predicted that relations could be improved, not only with France but with the United States and Britain as well. Investors in London and New York were showing interest in the USSR, he stated, and the governments of both countries were warming toward Moscow. If promoted, this interest "should not be without effect on the position of capitalist circles in other countries on the so-called Russian question," meaning that if Wall Street and the City could be won over to investing in Soviet Russia, the attitude of the government and business elites of the rest of the capitalist world would be transformed. There was a crucial proviso, however. New foreign investment would be forthcoming, Chicherin stated categorically, only if the foreign trade monopoly were relaxed or ended.^[4]

At the same time, the policy of participation in the organizations and agreements of multilateral international cooperation was implemented as Litvinov went to Geneva in late November, where, as leader of the Soviet delegation to the Fourth Session of the Preparatory Commission on Disarmament, he proposed "immediate, complete, and general disarmament."^[5] With him he took "the general line" of foreign policy that Stalin had articulated in a speech to a joint plenum of the Central Committee and the Central Control Commission on 23 October^[6] : The USSR was the one

power which for the sake of all humanity worked to preserve world peace against the preparations for war and the provocations of the imperialists, and it was the only honest advocate of disarmament, the one country truly interested in lifting the burden of arms from the backs of the exploited workers of Europe and the oppressed peoples of Asia. Late 1927 was the time when much of what would be sloganized for both domestic and foreign consumption over the next sixty years as "the struggle for peace" or as "the struggle for peace and disarmament" was formalized. Not coincidentally, "peaceful coexistence" was dogmatized at this time, with the term officially installed in party usage, ending what had been the practice since 1920 of using the terms "peaceful coexistence" and "peaceful cohabitation" interchangeably.^[7]

In that same speech to the Central Committee, Stalin again articulated the autarkical strategy of economic development he had defended since 1925. Foreign concessions, he argued, subjected the Soviet proletariat to conditions of tsardom and slavery; the USSR could and would "re-equip our industry on the basis of internal accumulations." Such statements were rhetorically consistent with "socialism in one country." And they could hardly be abandoned at a time when Trotsky stood for more foreign concessions and expanded foreign trade, and when the platform of the United Opposition criticized the present and projected tempo of industrialization as inadequate, called for an abridgement of the government monopoly on foreign trade, and urged the payment of tsarist debts so as to encourage foreign loans. Such statements did, however, put the party's officially announced strategy of economic development (autarky) in direct contradiction to the government's de facto foreign relations (a search for loans from New York and London).

This discrepancy between rhetoric and policy continued even after the leadership of the United Opposition was on its way into exile. In a secret memorandum to the Politburo written in late December, Stalin revealed an economic foreign policy that drew heavily on the Opposition's strategy of development. He declared that the reconstruction of the economy, "the socialist construction of our state," and the "realization of the economic dictatorship of the proletariat" were "impossible without the help of foreign capital." "We are suffering from a chronic lack of money and a lack of intelligent economic forces so that we are unable to carry out our program with our own resources alone." After what he characterized as "long talks with Comrade Chicherin," Stalin urged a relaxation of the foreign trade monopoly, a proposal he claimed to have favored for months. The monopoly was a relic of War Communism, he stated, and, praising Lenin's concept of tactical retreat, he declared that "the period of War Communism is over."

If the trade monopoly were relaxed, "the prospects for coming to an agreement with the English and the Americans, that is, of obtaining the needed means for reconstruction, become much more favorable." And when London and New York were won over, Stalin stated in support of Chicherin's argument, the policy of the entire capitalist world would surely be transformed.^[8]

The Stalin-Chicherin proposals were accepted in principle by the Politburo, and the relaxation of the foreign trade monopoly was discussed on repeated occasions in late 1927 and early 1928. These discussions were kept secret, and in public the majority leadership affirmed the importance of the foreign trade monopoly and denounced reports of pending modifications in it. In December 1927, while Stalin was urging the Politburo to relax the monopoly, and when the matter was near the top of the national policy agenda, Anastas Mikoian, people's commissar of foreign and internal trade (1925-30), told the Fifteenth Party Congress that the monopoly was "the impregnable condition of the building of socialism in a capitalist environment." The following February, while Litvinov instructed Soviet diplomats to suggest in foreign capitals that the monopoly was about to be relaxed, the ECCI announced through the Communist press abroad that modification of the trade monopoly was out of the question.^[9]

By this time, however, a state of emergency gripped the country, the result of a crisis in economic development, foreign relations, and high politics. In October-December 1927, as the Opposition was defeated and as Trotsky and Rakovskii were sent into exile, the condition of the economy, which had been stable and growing since 1926, became critical. And in the months that followed, the Politburo initiated "extraordinary economic measures." A highly publicized show trial was conducted, presided over by Andrei Vishinskii. The Stalin-Bukharin coalition, which had governed the party for three years, disintegrated and the collective leadership of the CPSU split into "moderate" and proto-Stalinist groups. "Peaceful coexistence," international cooperation, and efforts at making agreements with the capitalist powers all failed to bring about significant new foreign investment. Economic policy took a leap forward into coerced collectivization and rapid industrialization.

What initially sent the economy and the politics of the USSR into crisis was a sharp decline in extra-rural grain marketings beginning in October 1927.^[10] War rumors and fear of another famine discouraged the peasantry from selling grain and caused a rush of panic buying at consumer cooperative stores. By November-December, peasant grain sales to official collection agencies had dropped to one-half of what they had been for the same period the previous year. Peasants concealed grain in huge pits; speculation

increased; government stocks became depleted; and the food supply to the towns, the industrial centers, and the Red Army was threatened.

The European and American scholars who have examined the causes of this crisis have attributed it to a whole complex of factors including chronic low productivity, low state grain prices, a shortage of goods for purchase, and insecurities aroused by the war scare.^[11] Certainly the causes were systemic. With the decision for industrialization, the party had aimed at what Bukharin subsequently described as "maximum accumulation in socialist industry, maximum development in agriculture, and maximum consumption by the working class and the working masses in general."^[12] Choosing among these objectives seemed unnecessary at first, as it was assumed that the agricultural sector could do everything—supply raw materials for industry, provide the exports to pay for imported industrial goods, contribute the labor force for industrial expansion, and furnish the food for the growing urban industrial population. These objectives would be accomplished, it was further assumed, through the operation of the price-managed market, without additional forms of incentive or coercion. The grain crisis decisively undermined these assumptions and confronted the party leadership with difficult choices.

The decision that shaped the party's response to the crisis and the future of the USSR was taken on 6 January 1928. Following a Politburo resolution, the Central Committee directed party organizations to use "all means" to bring about "a revolution in the grain collections" in the shortest possible time. Local party leaders were made personally responsible for the success of the campaign, and they were urged to enforce Article 107 of the Russian Criminal Code providing for the punishment of speculators and the confiscation of their grain stocks.^[13] Over the next three months, 30,000 urban party cadres led by senior party officials went to the grain-growing areas to oversee the procurement campaign. Leading members of Sovnarkom and the Central Committee Secretariat toured the most crucial areas.

Stalin spent the last two weeks of January in Siberia, where he supervised the confiscation of surpluses from kulaks and the purge of local party and government apparatchiki. By the time he arrived he had decided that the crisis was the result of "sabotage" committed by kulaks, who aimed to force up prices by withholding their surpluses from the market and who encouraged smaller peasants to do the same. In Siberia he told party members of his conviction that this "kulak sabotage" posed a direct threat to the party's plans to finance accelerated industrial investment out of grain export surpluses and that the threat would continue as long as there were kulaks.^[14] If the surpluses necessary to industrialize the USSR were to be

made available to the state, and if socialism was to be constructed in Russia, he concluded, then small-scale private peasant farming would have to be replaced by an agriculture of large collective and state farms.

Implementation of these "extraordinary measures" in the countryside brought a torrent of peasant complaints flooding into local party offices. The leadership in Moscow became alarmed; Rykov clashed with Stalin upon his return; and by early February an atmosphere of imminent disaster pervaded the capital. The Politburo, Sovnarkom, and Central Committee meeting together heard Valerian Kuibyshev (chairman of the Supreme Economic Council) describe the situation in the darkest of terms:^[15] What was happening to the economy was not reconstruction, he stated, but "slow death." Only one remedy was possible—further relaxation of the trade monopoly in order to secure "generous and long-term credits" from abroad. Meeting separately on 8 February, Sovnarkom agreed, declaring that the situation was very dangerous and adopting a resolution stating that the government did not at the moment have the resources to overcome the crisis.

Rykov informed Litvinov of the results of the meeting, and the next day the NKID notified missions abroad that the economy had been "very gravely shaken by the events of the past few months," that the situation had "deteriorated sharply" during the last few days, and that it was now "exceedingly serious." "We need money and/or credits," Litvinov wrote, "but we must not forget that we need this money or credit at an extremely unfavorable moment." Because of the deepening economic crisis, opinion in Europe and America, which had seemed disposed to loan and trade agreements in October and early November, had now become reserved and restrained, Litvinov explained. Since the beginning of January, negotiations with American, German, and French companies had come to a standstill. This was the result, the NKID believed, of an effort to take advantage of the dire economic and financial situation in the USSR and to gain further concessions before concluding agreements. Litvinov instructed Soviet diplomats abroad to respond to such hesitations "in an adroit and tactful manner" and, without "any open display of haste or insistence," to "speak out vigorously in favor of agreements." Confidentially, unofficially, and noncommittally, they were to suggest that the government was on the verge of relaxing the trade monopoly. "You must exert all your strength to persuade the forces that are interested in our market that it would be quite profitable for them to help in the reconstruction of our country and that the worker's and peasant's government is willing to make further concessions on the question of the foreign trade monopoly in the interest of the reconstruction of the country."^[16]

This initiative was one of a series of measures adopted in mid-February to ease the economic crisis and to sustain the industrialization drive without completely sacrificing the interests of the peasantry.^[17] Another was the reassurance given the peasantry that NEP was not about to be abolished combined with a warning to all party organizations against the excessive application of Article 107. The backbone of support for the February effort to restore allocation of resources based on market equilibrium was made up of Rykov, Bukharin, and Tomskii, men who believed the grain crisis to be the result of low productivity and bad price management rather than "kulak sabotage." Stalin went along with this easing of the coercive measures in the countryside, again backing away from confrontation, as he had the previous summer from the get-tough response to the war scare. Therefore, the initial imposition of "extraordinary measures" did not lead immediately and directly either to the end of NEP or to a permanent schism within the Politburo. However, it did open a rift among the leadership of the Central Committee majority for a second time. In the months that followed, this rift would open still wider as more objections were voiced in response to the arbitrary nature of Stalin's actions, to the way he shifted the blame for a complex crisis onto local officials, and to his proposals for the collectivization of agriculture.

Diplomatic Isolation and the Beginnings of Stalinism

Michael Reiman has argued that the Opposition remained a crucial factor in Soviet politics for some time after December 1927, when Zinoviev and Kamenev surrendered to the Stalin-Rykov-Bukharin leadership, and the recalcitrant Trotsky and seventy-five of his followers were expelled from the CPSU. In the winter of 1928, the struggle with the Opposition decisively influenced consideration within the Politburo of the strategies necessary to secure urgently needed foreign financial assistance. On the one hand, the requisites of international politics suggested that the Politburo would do well to eliminate the Opposition completely, once and for all. Signs of political instability in the USSR only made the Americans and the British hesitant about concluding agreements. On the other hand, open repression such as the executions that took place at the height of the war scare crisis would produce a negative reaction in the West and endanger the prospects for getting foreign loans and credits. Rykov, Stalin, and Kuibyshev were particularly concerned with securing foreign loans. Liquidating the Opposition was of lower priority for them, and they were inclined to believe that it did not continue to represent a serious danger.^[18] Viacheslav Menzhinskii, the chairman of the OGPU (1926-34), on the other hand, argued that the Opposition could still make a comeback from remaining

centers of resistance within the USSR.^[19] And Bukharin was alarmed at the prospect that Communist political figures linked with the Opposition might make substantial gains in the national elections pending in France and Germany. Should they be victorious, they might challenge the domination of the Bukharin-led Russian delegation within the Communist International.

In the economic dislocation and political turmoil of the winter of 1928, fear of the Opposition prevailed within the Politburo. There was a realignment of forces, and Stalin joined with Menzhinskii and Bukharin in their drive to suppress what remained of it in Russia. Since late 1926 his support for relaxing the foreign trade monopoly had been crucial to the search for agreements with Europe and America. Now he moved away from that position, concluding that loans and credits from capitalist states were of less urgency than the complete defeat of the Opposition. At a decisive meeting of the Politburo held on 26 February, the Menzhinskii-Bukharin-Stalin group defeated the position held by Chicherin, who argued against any change in the direction of foreign policy. Proposals for extensive relaxation of the trade monopoly were withdrawn lest they provide ammunition to the Opposition. Instead, the Opposition was to be blamed for the condition of the economy. Within days, Sovnarkom declared that Opposition activities in particular were responsible for the economic crisis, that any and all economic sabotage would be punished, and that the OGPU would be given powers of surveillance over both the economy and the party organization.^[20]

Suppressing opposition could not relieve the economic crisis, however, and the emergency measures for grain procurement did not. Although the grain procurement rate rose dramatically in February, in March it slowed and in April it dropped severely. For the 1927/28 economic year, grain exports declined to 410,000 metric tons from a level of 2.256 million metric tons in 1926/27. Increased export of industrial raw materials, timber, oil, sugar, ores, and furs compensated for this decline, all of them—with the exception of furs—being priced at below world and domestic market levels. As a result, the total volume of exports actually increased by 12.7 percent for the year 1927/28. However, imports, largely of industrial equipment, increased even more substantially, resulting in a negative trade balance. Gold and foreign exchange reserves were exported and short-term loans negotiated to cover the 247-million-ruble deficit.^[21]

The prospect of a persistent grain procurement crisis brought Soviet domestic and foreign economic policy to an impasse in the spring of 1928. As that impasse was perceived by those who would come to be called the "Stalinists," either imports of the technology and foreign industrial raw materials on which the industrialization drive was premised had to be

sacrificed or the market relations in the countryside that were central to the New Economic Policy must end for the sake of increased industrial investment. It was out of this Stalinist-defined impasse that the Stalinist solution eventually emerged—forcible mass collectivization of agriculture, rapid industrialization keyed to heavy industry, preemptive internal state terror, and the cult of the leader.^[22]

In the 1970s, Moshe Lewin and others argued that this outcome was not a socioeconomic necessity; the problems of agriculture need not have meant the end of the New Economic Policy. Economic development might have continued under some version of NEP if the impact of the crisis upon the peasantry had been eased by a combination of grain and goods imports and an increase in procurement prices.^[23] Lewin's argument has been extended by some economists who have asserted that the rates of economic growth achieved during the 1930s could have been duplicated within the framework of NEP. Others have contended in opposition that the New Economic Policy constituted an economic blind alley: NEP could not extract surplus grain from the peasantry, and it was fundamentally incapable of supporting industrialization. Both these hypotheses have been rejected by Davies, Wheatcroft, and Cooper, who have argued that by 1926/27, resource allocation and capital investment within the framework of NEP were sufficient to produce a level of industrial growth equal to or better than 1909-13 levels, but not an expansion equal to that achieved by the mid-1930s.^[24]

In actuality, extraeconomic, political considerations determined the way out of the impasse. In 1927, Stalin had been a strong voice within the Politburo for the search for agreements with Europe and America, despite his public rhetoric. Foreign capital and technology, he maintained, were indispensable to the industrialization drive and to the construction of socialism in the USSR, which he called "the economic dictatorship of the proletariat." To gain foreign assistance he pressed harder than any other member of the collective leadership at the time for a policy of concessions to capitalism. As the economic crisis worsened in the late spring of 1928, however, Stalin and those who became aligned with him became convinced that the pace of industrialization must be sustained despite the agrarian problem, even if it meant shortages, inflation, and disequilibrium in the internal market. He became convinced that the economic crisis could not be resolved within the framework of the market mechanisms of the New Economic Policy and that the search for foreign credits to finance industrialization was destined to fail. At this point, Bukharin broke with Stalin and joined with Rykov and Tomskii, who, along with Kalinin and Voroshilov, formed a moderate majority of five within the Politburo—a grouping that

persisted off and on until the latter two joined the Stalin group later in the year. Stalin responded by abandoning the consensus-building procedures by which the collective leadership had operated up to that time. Increasingly he resorted to making decisions either unilaterally or in consultation with his own group alone. In May and June the hard-line solution to the grain procurement problem, the punitive extraordinary measures, were reintroduced, apparently on Stalin's personal initiative.^[25] Soon Bukharin and Stalin were no longer on speaking terms.

Gradually the Rykov-Bukharin group and the Stalin group compiled antithetical strategies for leading the country out of its economic impasse and foreign relations dilemma. Stalin advocated a program of industrialization through a "tribute" or "supertax" extracted from the peasantry by a purged and rejuvenated party and state apparatus. The moderates lined up behind the advice advanced by the nonparty economic experts of the People's Commissariat of Finance (Narkomfin), which included cancellation of "the extraordinary measures," no further increases in capital expenditure, and restoration of market equilibrium. They also supported the foreign policy advocated by Narkomindel—the continued search for economic and political agreements with Europe and America and participation in organized multilateral cooperation. The central role played by imports, both in the agricultural strategy and in the industrial strategy of the moderate program, made the quest for foreign credits and the search for agreements a crucial factor in determining the future course of economic development and the outcome of the struggle among the collective leadership for control of the instruments of political decision making.

What stood in the path of the search for agreements with Europe and America in the spring of 1928 was the Shakhty case. On 10 March, Pravda announced that the OGPU had uncovered a large-scale and long-standing conspiracy of engineers in the coal-mining industry in the Shakhty region of the north Caucasus and the nearby Donets Basin of the Ukraine. More than fifty engineers, including three Germans, were accused of sabotage and treason, their acts ranging from what the prosecutor at the trial called "irrational construction projects," "unnecessary waste of capital," and criminal waste of foreign currency to the flooding of mines and the wrecking of equipment. All this was done allegedly in collaboration with former mine owners who had close connections with agents of German firms and the Polish, German, and French intelligence services.^[26] The show trial that began on 18 May was not the first in Soviet history, but it was the most highly dramatized and widely publicized one up to that time.

Some among the party/state leadership feared the economic and politi-

cal consequences of the affair and worked to limit the scope of the prosecution. Among them were Kuibyshev and Rykov, who reminded Menzhinskii that "the Central Committee has declared that the reconstruction of the socialist economy is not possible without the help of foreign capital and foreign experts"; the activities of the OGPU, he added, were "likely to sabotage not only our foreign policy position but also our entire economic life."^[27] Chicherin informed the head of the OGPU that the arrest of German engineers threatened to bring economic negotiations in Berlin to a halt and that it only assisted the efforts of "hostile bourgeois elements in foreign countries, who for weeks have been working quite openly to try to win Germany definitely to a Western orientation and include it in the English front."^[28] Others, however, sought to extend the scope of the affair— Menzhinskii himself and, above all, Stalin, who saw in Shakhty another example (following "the grain strike") of bourgeois counterrevolution, this time aided by Western European economic intervention against socialist industrialization, all of which he used as a confirmation of his doctrine that class struggle would intensify during the building of socialism, requiring, accordingly, greater use of police measures and state terror.^[29] The Shakhty affair sustained the war scare mentality of suspicion and blame, a mentality that within months would lay responsibility for all that went wrong with the industrialization drive at the feet of "bourgeois specialists."

International reaction to the arrest and trial of the German engineers was both immediate and vigorous. A month earlier, German and Soviet negotiators had begun trade and credit discussions in Berlin.^[30] To entice the Germans into an agreement, the Soviet delegation promised that orders amounting to 600 million marks would be placed in Germany over the next two years if Berlin granted a 600-million-mark credit, made additional long-term loans, and opened German financial markets to Soviet bonds. German industrial, commercial, and banking circles were not disposed toward an easy agreement, however. They had assumed that, as a result of the German-Soviet commercial agreement of October 1925 and the government-guaranteed 300-mark credit, they would have an increased share of Soviet foreign purchases. Instead, cash orders that had previously gone to Germany were diverted to England and the United States.^[31] Germany's total share of Soviet imports had not increased, and the hopes of German business for an even greater share of the Russian market (of which they controlled the largest portion) went unfulfilled. In preparation for the trade negotiations, they had prepared a list of complaints and demands, including a demand for relaxation of the government foreign trade monopoly, which in their opinion placed cumbersome and arbitrary restrictions on German commerce.

At the German Foreign Ministry also this was a time of agonizing reappraisal. Many of the expectations of 1926 had evaporated. The Wilhelmstrasse could no longer assert with confidence that ties to the USSR would directly improve Germany's international position as Berlin shepherded an increasingly pragmatic and moderate Soviet regime out of isolation. In the aftermath of the war scare crisis, it could not even hope that German diplomacy would be able to abate that isolation. Russia's economic difficulties and diplomatic isolation meant that the Rapallo-Berlin relationship was not likely to be of immediate use, either in an effort to revise the postwar settlement in Eastern Europe or as a card to play at this time as the Stresemann-Schubert Foreign Ministry pressed for negotiations with the Allied powers on a definitive reparations agreement, an end to the military occupation of the Rhineland and what came to be called "the final settlement of the war."^[32] However, no other strategy was available to the German Foreign Ministry. It therefore encouraged the trade talks with Moscow lest a refusal by German banks to extend new loans to the USSR, what Stresemann referred to as a "withdrawal of German business from Russia," jeopardize German-Soviet political relations.^[33] The arrest of the German engineers, however, infuriated both public opinion and business interests, and on 15 March, Berlin broke off the trade talks.

In Moscow, a parallel policy review took place. Since early 1927 the Soviet military leadership had been concerned that Germany seemed to be moving into the British orbit, thereby creating the danger that intelligence gathered by German officers in the USSR would fall into the hands of Russia's enemies. To prevent security leaks, they pondered gradually severing relations with the Reichswehr.^[34] Similar concerns were apparently raised in the Politburo as a result of the Shakhty affair, and it appointed a special commission to review cooperation between the Red Army and the Reichswehr and to propose whether it should be continued. Informed of this, Krestinskii complained directly to Stalin. In an appeal paralleling that made by Kuibyshev and Rykov, he argued that military collaboration with the Germans was the only way "to overtake and surpass European military technology" and that it directly increased Soviet security. German military officers in Russia could see firsthand the strength of the Red Army, he wrote, and, as a result, estimation of Soviet military power would be raised throughout Europe. This would, he maintained, "reduce the danger of attack on us." All this was achieved at bargain rates, Krestinskii added, because "we take more than we give."^[35]

Elsewhere, the arrest of the German engineers was regarded as proof that one could not do business with Communists, and suspension of the trade negotiations in Berlin was applauded. Relations with France, in which

Chicherin had placed considerable hope, now quickly deteriorated. In a move that displayed little interest in improving them, the French government renewed its demands for the return of the French gold held in the Soviet state bank since the revolution.^[36] With such unfavorable turns in relations with both Berlin and Paris, the diplomatic and economic isolation of the USSR deepened. Russia's situation in international politics was reminiscent of what it had been at the time of the war scare crisis. New rumors of an impending Polish-Soviet war circulated. And what hope there remained for the policy of agreements depended on the United States.

As "the most technologically advanced capitalist country" (as it was termed in the Soviet debate on economic development), the United States occupied a highly significant place in the Bolshevik concept of economic foreign relations, both as a source of technology and machinery and as a model of large-scale standardized production, assembly-line techniques, economies of scale, worker productivity, and high growth rates. So important was America to Soviet economic development that the Soviet government made an exception to its standard practice and traded with the United States even in the absence of official diplomatic relations.^[37] Soviet engineers, designers, and planners preferred American technology to that of Germany, and by 1928 the American model of steel making, rather than the smaller German blast furnaces, had become the model for Soviet installations.^[38] Nevertheless, after having led the world in exports to the USSR in 1924/25, the United States thereafter fell to second place behind Germany. As viewed from Moscow, the policy of the U.S. government was responsible for this. While the German government had bolstered trade with the USSR by guaranteeing long-term credits, Washington refused to discuss credits and withheld diplomatic recognition, permitting only private trade contracts to be entered into by American firms. In turn, the NKID stopped asking Washington for diplomatic recognition after 1923, although Litvinov made known Moscow's desire for normal relations through occasional statements before the Central Committee.^[39]

According to calculations made by the NKID Collegium in the summer of 1928, however, the prospects for improving relations with Washington were growing. The November presidential elections would bring a change of administration, and the election of Herbert Hoover, they thought, would mean a shift in American policy toward the USSR. Such a shift would in turn influence the governments of Western Europe.^[40] In an effort to gain access to American policymakers and to influence American policy attitudes, the Soviet government indicated its interest in ratifying the peace pact proposed by Frank B. Kellogg, the American secretary of state (1925-29), and in attending the signing ceremony in Paris. The Kellogg pact was

another instance of multilateral international cooperation—following the Geneva Economic Conference and the Preparatory Disarmament Commission—where Soviet spokesmen could impress European and American policymakers with the sincerity of their "peace policy" and with the prospects for profit through economic exchange with the USSR. Diplomatically, participation in the pact was essential. To sign it would reduce the level of Soviet isolation; to remain outside could only solidify the capitalist powers into an anti-Soviet bloc.^[41]

The German Foreign Ministry played a mediating role in the negotiations leading to the Kellogg-Briand Peace Pact. In its continuing effort to shepherd the USSR out of isolation, the Wilhelmstrasse used its influence in Washington, London, and Paris to gain admission for the USSR to the group of nations signing the agreement. In response, articles appeared in the Moscow press encouraging the German Foreign Ministry in its efforts to bridge the diplomatic gap between Russia and the West and looking forward to a new era in German-Soviet political relations.^[42] In what may well have been a signal to Berlin and the other European capitals of a renewed desire for rapprochement and agreement, the Politburo liquidated the Shakhty case expeditiously and freed the German engineers.

In the Politburo, the decision to join the peace pact figured strongly in the efforts of the moderate group to rescue NEP through the financial assistance of Europe and America. This was not the only policy consideration however. Soviet participation in the pact was a way of continuing "the struggle for peace"—in this case, not only peace between the USSR and the capitalist world but also peace among the capitalist powers themselves— and of thereby preventing a repetition of the general European war of 1914. Inherent in this stance was acknowledgment that a second total war would inflict destruction on Russia as well as on Europe, on the bastion of socialism as well as on the centers of capitalism. In that sense, it represented a departure from the Leninist doctrine that counted on the antagonisms among the imperialists to promote the security of the Soviet state. Some substantiality is given to this interpretation of Russia's Kellogg pact policy by the way the supporters and defenders of the peace pact lined up as it was being formulated. Litvinov and Bukharin supported the idea of signing the pact, arguing that the USSR should be associated with any project that offered the possibility of establishing international peace. Chicherin, on the other hand, was critical, maintaining that it would allow the major powers to interfere in Russia's foreign affairs.^[43]

In what was probably the last dispute between him and Litvinov, Chicherin lost out in the decision. In September he left Moscow for a second extended period of medical treatment in Germany. Litvinov was appointed

acting commissar and took over operational leadership of the NKID. Chicherin was in effect leaving the Foreign Commissariat forever.^[44] Although he returned in June 1930 with some of his previous energy restored, he resigned the next month to be succeeded by Litvinov. What combination of ill health, discouragement at the course of Soviet foreign relations, rivalry with Litvinov, and the problems associated with conducting a consensus foreign policy for an internally conflicted party leadership led to the demise of Chicherin has not been documented. Sheinis suggests that the internal conflicts, along with his failing health, constituted the crucial factor in the erosion of Chicherin's position in policy making and his eventual resignation. Although Litvinov lacked Chicherin's powers of policy conception, he was well suited to dealing with the party leadership. He was less outwardly emotional than Chicherin, stronger-willed, and more capable of concealing his personal policy preferences. Above all, he was less confrontational and less demanding in his relations with the Central Committee.^[45] Typically, Chicherin's last interventions in policy formation were directed at reprimanding Comintern spokesmen for making public statements that he considered damaging to relations with Germany.^[46] He regarded Weimar Germany and Kemalist Turkey as the anchors of Soviet policy in Europe and Asia, respectively; promoting favorable relations with them was his major achievement as commissar and his chief legacy.

Washington meanwhile rejected the idea of Soviet participation in the ceremonies held in Paris on 27 August to sign the Kellogg-Briand Peace Pact. (The United States, the Locarno powers, Czechoslovakia and Poland, the British Commonwealth, and Japan attended.) It did agree, however, to a formula stating that no future distinction would be made between the original and subsequent signatories. Of the latter, the USSR was the first to adhere to the pact. The NKID also seized that opportunity to improve Russia's stalemated relations with Poland. In December, Litvinov proposed to Warsaw an agreement to bring the peace pact into force separately and in advance of its ratification by the original signatories. Warsaw agreed but insisted that the Baltic states and Romania be included too. Russia, Poland, Estonia, Latvia, and Romania signed the "Litvinov Protocol" (officially the Moscow Protocol) in Moscow on 9 February 1929. By April, Turkey, Persia, Lithuania, and the Free City of Danzig had also joined.^[47]

In the immediate aftermath of the Kellogg Pact negotiations, the Soviet government took steps to indicate to the United States and Europe the economic potential of improved relations. In September 1928, it authorized an easing of the regulations governing the granting of concessions to foreign entrepreneurs and approved a list of enterprises, including large-scale enterprises and municipal ventures, that foreign businesses might

take over. If the right offers were made, this move suggested, favorable deals could be concluded. The Soviet diplomatic offensive of the summer of 1928 was besieged with difficulties however. Foreign governments were well aware of the economic difficulties prevailing in the USSR and were reserved about signing trade or credit agreements. At the same time, the NKID suspected that an exhibition of too much eagerness for economic agreements would only bring increased pressure from Europe and America for more favorable terms. The proposed changes in the concessions policy yielded no new economic negotiations with the Americans, the French, or the British. Trade talks with Germany resumed, but Berlin avoided any discussion of new credits, and it made the outcome of negotiations dependent on payment of the first two installments on the credits the Soviets had received in 1926.

After 1928 the Soviets deemphasized foreign concessions as a channel for technology transfer. They had proved unpopular with foreign investors, and the economic benefits they yielded were offset by the threat they posed to socialist independence. Over 300 foreign concession contracts had been signed since 1920; in July 1928, 97 still operated—among them, 31 German, 14 American, 10 British, 6 French, and 5 Austrian. In 1929 only 59 of these still existed, accounting for less than 1 percent of industrial production in the USSR.^[48] During the period of the First Five-Year Plan, concessions were replaced by technical aid contracts, which foreign investors preferred because they were paid for in gold or foreign exchange and did not require long-term commitments.^[49]

The End of NEP and the Failure of a Moderate Economic Foreign Policy

By the late summer of 1928 the quest for agreements and the pursuit of international cooperation undertaken almost two years earlier had not pried loose new loans and credits from Europe and America. Instead the USSR was confronted with diplomatic isolation and with what Chicherin called "an intensification of economic pressure on us." Meanwhile the resumption of "extraordinary measures" in May, "the second wave," had effectively destroyed the internal market for grain.^[50] Rumors that NEP was to be abolished swept the countryside. Grain exports, which had formed the basis of the foreign trade expansion of the two previous years, collapsed. In 1926/27 they had amounted to 25 percent of 1913 levels; in 1927/28 they fell to 5 percent. Never afterwards would they play a positive role in the economic development of the USSR. By early July, Bukharin, Rykov, and Tomskii were able to persuade the Politburo to cancel the "extraordinary measures" and to raise grain prices. Nevertheless, at the Central Commit-

tee plenum that followed, Stalin spoke in favor of resuming the measures in the future if circumstances so required.

Out of this impasse emerged the alternative strategies for economic development and foreign relations that dominated intraparty discussions in 1928-29. Bukharin, the party's leading theoretician, and Rykov, the leading Bolshevik with the most practical knowledge of the workings of the economy, put forth one strategy. The policies they advocated have been summarized as follows: "Import grain from abroad in order to normalize the food situation in the cities; refrain resolutely from 'extraordinary measures'; comply with revolutionary legality; make use of a more flexible system of grain taxes and prices ...; and step up the output of the means of agricultural production."^[51] With these policies, NEP could be rescued and sustained. And they were moreover measures that would facilitate the program of long-range economic development Bukharin articulated (if only partially) in his published writings of 1928-29. This program, which historical scholarship of the 1970s and 1980s called "the Bukharin alternative," would have encouraged small and medium-sized farms and directed investment toward both light and heavy industry in a program of balanced growth. Finally, they were measures that were consistent with what might be called "the Rykov alternative"—development of the economy within the framework of economic exchange with the capitalist world.

The key to the rescue of NEP proposed by Bukharin and Rykov was to import grain with which to provision the cities and the armed forces and to pacify the peasantry by a flexible system of prices and taxes. For an agrarian country to import grain, now for a second time since the end of the famine, amounted to tacit recognition that NEP as it had been practiced since 1921 had ceased to work. And it was a highly problematical measure to propose, because in the absence of foreign credits, grain imports would absorb foreign currency otherwise allocated to the purchase of the advanced American and European technology necessary for accelerated industrial development.^[52] Thus, adoption of the rescue measures would have amounted to a retreat, even if a temporary one, in the drive "to catch up and surpass." Without foreign credits, the moderates could point to no readily accessible exit from the impasse of 1928 other than a tactical retreat from socialist industrialization. In this manner, Russia's economic isolation both complicated the development strategy of those who sought to maintain NEP conditions and undermined their political position. They lost their hold on the management of the economy and on the direction of economic development and were reduced to criticizing and correcting the plans of the "Stalinists," which left them without the political currency they needed to stay in the contest for power.

The moderate road out of the impasse of 1928 constituted a temporary retreat from the socialist offensive, to be followed by balanced economic growth, gradual industrialization, and smooth socialization—what Bukharin called "more or less crisis free development." The other road, the one actually taken, was "the great leap forward" in economic development embraced by Stalin. His first step in that direction came with the "extraordinary measures" of grain collection in December. He took a second step when he decided that defeating the Opposition was of greater importance than were loans and credits from Europe and America; his reaction to the Shakhty affair indicated his willingness to write off foreign financial assistance to the industrialization of the USSR.

In the program Stalin was adopting, the only way to finance the foreign machinery and technical assistance required by the projected Five-Year Plan was to acquire hard currency through vastly increased grain exports and expend it on machinery imports. The need to export grain, he told a closed Central Committee plenum in July 1928, was why the collectivization of agriculture—and the control over the production and distribution of grain that came with it—was so necessary.^[53] And, of course, the grain imports advocated by Bukharin and Rykov were out of the question as far as Stalin was concerned; importing grain simply squandered the foreign currency needed for machinery purchases. After mid-1928, Stalin did not urge concessions to capitalism in the face of continued economic quarantine; he openly opposed any relaxation of the foreign trade monopoly; and he returned to the view that the USSR should remain independent of the ties that came with foreign involvements.

As the moderates lost control over the formulation of economic policy, they were excluded from political power as well.^[54] The struggle between Stalin and his allies, on the one hand, and the moderates, on the other, began in the spring of 1928 over the intensification of "the extraordinary measures." It continued as Stalin clearly abandoned some of the central tenets of NEP, including independent peasant agriculture, and called both for more rapid industrialization funded by "tribute" collected from the peasantry and for intensification of collectivization as the solution to Russia's problems of economic development. His confrontation with the technostructure, his doctrine of increasing class struggle, and his promotion of a permanent crisis atmosphere extended and broadened the conflict. The moderates recognized "Stalin's new program"^[55] as a departure from the consensus on industrialization that had formed around the "catch up and surpass" slogan in 1926, and Bukharin, supported by Rykov and Tomskii, said so in memoranda to the Politburo in May and June. Although the moderates succeeded in getting "the second wave of extraordinary

measures" cancelled in July, they lost their majority on the Politburo, as Kalinin and Voroshilov went over to Stalin's side. The struggle began in September—at the time of the diplomatic effort to open political and financial doors in Europe and America following the Kellogg-Briand Peace Pact. Bukharin openly attacked Stalin's economic policies with an article in Pravda entitled "Notes of an Economist"; the Politburo voted to condemn Bukharin's action over the objections of Rykov, Tomskii, and Bukharin himself. Pravda's editorial board was altered to end Bukharin's control over editorial policy. The decisive battle—for control over the Moscow party organization, a moderate stronghold—was fought in October and won by the supporters of Stalin.^[56] The moderates became demoralized and disposed to compromise. Bukharin lost his basis of support in the Comintern, as did Tomskii on the Trade Union Council. They made their last stand in January-February 1929 at meetings of the Politburo, where they ascribed to Stalin a policy of "military-feudal exploitation of the peasantry." The Politburo rejected this accusation as "slander" and reprimanded Bukharin. The defeat of the moderates was formalized in April at a joint plenum of the Central Committee and the Central Control Commission at which Stalin read a lengthy and insulting condemnation of "the group of Bukharin, Tomskii, and Rykov." The Bukharin-Rykov NEP rescue measures were rejected, and the "optimal variant" of the Five-Year Plan was adopted over their objections at the Sixteenth Party Congress. The latter constituted the single most crucial step toward Stalinist economic development, involving as it did drastic increases in capital investment, concentration on heavy industry, industrialization at a "furious pace" (Stalin's expression), development financed out of "tribute" collected from the peasantry (what Bukharin called War Communism "without a war"), coerced collectivization of agriculture, and assignment of blame for the economic crisis first to the Opposition and then to "bourgeois technical specialists."

As the moderates were crushed, foreign relations began to improve. In August 1928, German manufacturing firms, trading companies, and banks formed the Russlandausschuss der deutschen Wirtschaft to promote trade with Russia,^[57] and economic negotiations resumed in November On the Soviet side there were strong diplomatic incentives for making the trade talks a success, despite the high interest rates charged by German banks. Only the tie to Berlin saved the USSR from virtual isolation from the capitalist powers. The break in negotiations with Germany had naturally accentuated all the old shibboleths about the USSR in the centers of European and American capitalism—namely, that the USSR was a bad credit risk; that Moscow used trade for "political" purposes; that the for-

eign trade monopoly made doing business impossible; and that economic crisis and political strife were about to bring an end to the Soviet system.^[58] And Germany was, of course, an important source for the technology required by the industrialization drive.

The way to a trade agreement was eased by the release of the German engineers imprisoned in the Shakhty case, by Soviet adherence to the Kellogg-Briand Peace Pact through German mediation, and by de facto tactical cooperation between the Soviet and German delegations at the Preparatory Commission on Disarmament in Geneva.^[59] They reached agreement on all outstanding economic issues in late December amid statements released to the press speaking of "unanimous agreement" and "continued cooperation." A Soviet-German Conciliation Treaty, complete with machinery to resolve future commercial disputes, followed in January 1929. Herbert von Dirksen took over as German ambassador in Moscow that same month and proclaimed full German support for the industrialization drive, a message to which the Soviet press gave extensive publicity.^[60] In 1930-31 he negotiated new long-term government-guaranteed credits for Soviet purchases, and, during the period of the First Five-Year Plan, Germany was the primary exporter to Russia, accounting for 47 percent of Russian imports in 1932.

Military relations improved at the same time. In the autumn of 1928, General Werner von Biotaberg, head of the Truppenamt , headed a delegation of eight German officers who inspected the joint Soviet-German installations for the development of armor, aviation, and chemical warfare. They also attended the Red Army maneuvers in Kiev and met with Soviet military officers in Moscow. Blomberg consulted at length with Voroshilov, the head of the RMC, who, according to Blomberg's report, was an enthusiastic proponent of military collaboration with the Reichswehr and who took credit for overcoming resistance within the party leadership to continued cooperation.^[61] Blomberg returned from Russia more convinced than ever that closer relations with a stronger Red Army were in Germany's interest, both as a way of developing weapons and as a way of gaining a future ally against Poland. As a result of his visit, many of the difficulties that had hampered collaboration between the Red Army and the Reichswehr since 1926 were ironed out, thus preparing the way for a significant increase in Soviet-German military cooperation. This flourishing military collaboration, along with formally correct diplomatic relations and the trade relations crucial to both countries, kept the Berlin-Moscow connection alive during the years 1928-1932 even as political relations between the two countries were declining rapidly.^[62]

The possibility of improved relations with England emerged in March

1929 when a group of leading industrialists from the export-oriented, depressed north of England arrived in Moscow to investigate trade possibilities. To them the president of the Russian State Bank promised orders of £150-200 million if diplomatic relations were restored. The visit played a role in the British elections of 1929, allowing the Labour Party to campaign on a platform of diplomatic recognition and increased trade with the USSR as means of increasing employment in Britain and establishing peace among nations. No mention was made of loans or credits.

The second Labour government, which took office in June, did not rush into diplomatic recognition, however "Russia has brought us down once. We can't afford to let it happen twice," Arthur Henderson, the new foreign secretary, told his parliamentary secretary. MacDonald, who had recognized the USSR in 1924 over the objections of King George V and without consulting the Cabinet, now insisted that Parliament give its approval in advance.^[63] The two countries exchanged representation at the ambassadorial level—for the first time—in October. Sokolnikov was appointed polpred in London, an action that the British press took as a certain indication of the prospects for improved economic and political relations between the two countries. So did the émigré liberal Russian press in Europe. In Paris, Pavel Miliukov, founder of the Constitutional Democratic Party and the leading postrevolutionary spokesman for Russian liberalism, called Sokolnikov "the only real statesman in Soviet Russia." Horrified by these tributes, Sokolnikov told his wife: "Stalin will never forgive me for this, and he will certainly take his revenge some day."^[64]

However, it was in the United States that Soviet technology and credit requirements were met most immediately.^[65] In October 1928, International General Electric (IGE) granted to Amtorg, the Soviet Trading Corporation in New York, a $25-million six-year credit for the purchase of electrical equipment. Owen D. Young, chairman of the company, feared that otherwise the Germans would dominate the Russian market for electrical goods. "If Russia adopted European standards," he informed Kellogg, "it would mean an added and perhaps impossible barrier to our future business with Russia in the electrical field."^[66] In making the offer, IGE tacitly renounced its $2-million claim against the Soviet government for nationalizing Russian General Electric during the revolution. And by agreeing to higher-than-market interest rates on the loan, the Soviet government in effect indemnified IGE for its losses. This agreement represented a historic breakthrough in Soviet-American trade relations. Until this time, the USSR had been unable to obtain medium- and long-term loans in America because the Department of State permitted only short-term financing of sales to the USSR. The IGE credit was granted with the knowl-

edge of the State Department (although not guaranteed by the United States government), giving rise to false rumors that Washington was about to grant diplomatic recognition to the Soviet regime. Other technical assistance contracts and loans followed over the next two years; these involved the Radio Corporation of America, Standard Oil of New Jersey, and General Electric, which signed a ten-year contract. In May 1929 the Ford Motor Company agreed to build, and to finance, a 100,000-unit-per-year factory in the USSR. In July-August a delegation of ninety American entrepreneurs spent a month in the USSR, exploring the prospects for Soviet-American trade—the first such organized American effort to do so. So extensive were America's economic relations with the USSR in 1928-29 that one Russian scholar has stated that they amounted to "economic recognition."^[67]

By 1929/30, the United States, which had ranked second to Germany in exports to the USSR since 1925/26, had returned to first place—temporarily. The First Five-Year Plan relied on technology that came primarily from Germany and secondarily from the United States.^[68] Michael Reiman has well stated the ironic outcome of the behavior of international capital at this point in Soviet history: "The ruling circles in the industrial countries, who only six months earlier had refused to lend their support to the possible victory of a moderate course in the USSR, were now ready ... to finance Stalin's despotism. The planning bodies could count on international economic cooperation on a larger scale."^[69] And they did.

When the First Five-Year Plan was announced to the public, it was wrapped in the rhetoric of autarky. In a heroic appeal to self-sufficiency, Izvestiia proclaimed that industrialization would be based "exclusively on domestic accumulation" and on the "enthusiasm of the millions."^[70] In actuality, it was not until Soviet foreign trade collapsed in the years 1932-1934 that industrialization was switched over to the path of autarky. As set out in 1928-29, the Five-Year Plan assumed that technology imports would be financed by increased expenditures from the state budget and by renewed grain exports made possible by expanded foreign trade and improved ties to the world economy.

There were, however, good reasons to question whether grain exports and foreign trade could offer a stable basis for rapid industrial development. By 1928, foreign trade was the sector of the economy that had recovered least from the dislocations of 1914-20.^[71] In 1927/28, exports equalled 32 percent of their 1913 level, and imports were 47 percent. Grain had fueled the engine of Russian foreign trade before 1914, accounting (on the average) for 50 percent of exports during the immediate postwar era. In

1926/27—one of the best years of the NEP period for grain exports—they were 25 percent of 1913 levels. In 1927/28 they were only 5 percent. Increases in other exports, mainly timber, oil, sugar, furs, and cotton cloth, did not make up the difference. On the other side of the equation, chronic shortages of imported raw materials, rather than plant capacity or labor supply, restricted the development of light industry, and by the late 1920s these shortages hampered the metalworking industries too. Concession enterprises contributed little to economic development, amounting to one-half of 1 percent for NEP as a whole.^[72]

These conditions created significant problems for the modernization and expansion of heavy industry, which depended almost entirely on technology imported from the United States and Europe. Long-term development loans were not available, and the medium-term credits from Germany, England, and the United States during the 1926-1929 period could not make up the trade deficits of those years, which were financed by exporting gold, depleting foreign currency reserves, and increasing short-term debt. Thus the problem-plagued foreign trade sector of the economy hindered economic recovery, and in 1928 it threatened to bring the industrialization drive to a standstill. Why?

The chief model for a Soviet economy that was both stable and integrated into the world economy under NEP conditions was one in which exports and imports would be priced at world levels, in which foreign trade would be based on the principle of commercial profitability, and in which export/import choices would be controlled through the monopoly on foreign trade. Through policies and institutions like these, the government could secure the advantages of foreign markets for the Soviet economy without the disadvantages represented by foreign economic penetration, such as the selling off of important Russian assets and a domestic market flooded with foreign products extraneous to economic recovery and probably detrimental to the construction of socialism. By 1928, however, the mechanisms by which the Soviet economy was to be integrated into the world economy were not working, largely because the industrialization drive made heavy demands on grain exports and because central economic managers were unable to overcome the dilemmas of grain marketing. If they set prices high enough to encourage production and harvesting, this nourished inflation, and exports became commercially unprofitable. If they set grain prices below market levels to stabilize the currency and to ensure export profitability, the peasants withheld their grain from the government agencies, and shortages of goods resulted. Consequently, if they wanted to supply the expansion and modernization of industry with vast quantities of

foreign technology and machinery and do so in the absence of long-term development loans, economic planners had two alternative solutions available to them. Either exports had to be structured away from a reliance on grain, or agriculture had to be restructured. This was one of several crucial choices that confronted the party/state elite of the USSR at what has been called "the great turning point" in the history of the Soviet Union.