Western Technology and Soviet Economic Development

Originally appearing in The Objectivist in January 1970, reprinted below for the first time is Robert Hessen’s review of Western Technology and Soviet Economic Development, 1917 to 1930 by Antony C. Sutton. Many thanks to Dr. Hessen for allowing his review to be republished here, it is a great summary of the book and I hope it will introduce new readers to this important trilogy published half a century ago. In recent years we have witnessed the spectacle of a number of American businessmen scurrying to Eastern Europe, sniffing the scent of Soviet rubles. Their action was paralleled by British and Canadian businessmen eager to supply machinery and food to Red China and Castro’s Cuba. The men who pursue such policies evade the fact that, two generations ago, similar action by Western businessmen saved the Soviet Union from self-destruction, and helped to strengthen the dictatorship whose unchanging goal is our annihilation. The massive aid which Western businessmen have given the Soviet regime is recounted and thoroughly documented in an important new book, Western Technology and Soviet Economic Development, 1917 to 1930 by Professor Antony C. Sutton, who is a Research Fellow at the Hoover Institution of Stanford University. With meticulous scholarship, Dr. Sutton demonstrates the overwhelming economic ineptitude of the Soviets and their total dependence on Western technology. His documentation exposes the crude falsehood of Soviet propaganda claims. The official line propagated by Soviet spokesmen (and repeated by their Western sympathizers) declares that, when the Soviets seized power in 1918, they inherited an empty cupboard, which they then transformed into a cornucopia. Dr. Sutton shows that the truth was the exact opposite: the Soviets seized an economy that was industrialized to a significant extent, and proceeded to plunge it into chaos. Between 1918 and 1922, the Soviet government attempted to run the country on the basis of “socialist self-sufficiency.” The result, Dr. Sutton shows, was a breakdown of the economy. The Bolsheviks’ seizure of power caused a mass exodus of foreign engineers and technicians — and the flight of comparably skilled Russians, either into exile abroad or to the countryside, where food was easier to obtain. Men of ability were replaced by men of unquestioned Party loyalty; industrial managers were chosen on the basis of ideological orthodoxy rather than of managerial talent. Throughout Soviet industry, incompetents soared to the heights of power. By 1922, as a result of strict adherence to socialist policies, the Soviet economy reached a state of “catastrophic collapse.” Following Marx’s dictum that money is a capitalistic tool of exploitation unnecessary in a socialist society, the Soviets deliberately inflated the ruble in order to wipe out its value. They succeeded — and crippled the country in the process. The inflation triggered a decline toward a primitive barter economy; people would not exchange goods for paper money of steadily decreasing value. Socialist dogma also subverted industrial methods. As an example, Dr. Sutton cites the case of a Soviet steel mill built in contemptuous defiance of all concern for costs. The mill used raw materials which had to be transported a distance of 1,250 miles. Engineers and economists complained that this was uneconomical, but they were ignored. The official Party line proclaimed that transportation costs should not determine the location of factories in a socialist society; cost-consciousness, it declared, is a capitalistic concept. By means of an industry-by-industry survey, Dr. Sutton shows that, in the early years of the Soviet regime, output fell precipitously throughout the country. Virtually the only exceptions were a few foreign-owned firms that had been temporarily exempted from nationalization, because the Soviets did not feel competent to operate the highly complex factories involved. To revive their crippled economy, the Soviets desperately needed Western machinery and Western technicians. To finance imports, they were exporting food, even at a time when starvation was sweeping Russia. It was American “missions of mercy” that helped the Soviet dictatorship to survive. Dr. Sutton cites the following example: “the Soviets were loading a boat with Ukrainian wheat for export to Germany, while alongside was a boat from the United States unloading American wheat for the famine areas to the north of the Ukraine.” In 1921, Lenin conceded that the Soviet system could avert total collapse only by relaxing economic controls and by obtaining assistance from Western businessmen. He decreed a “New Economic Policy,” a temporary repeal of certain controls, which permitted retailing, wholesaling and small manufacturing concerns to return to private ownership. Lenin would not, however, relinquish control over what he called the “commanding heights” of the economy, which included foreign trade, mining, transportation and heavy industry. Dr. Sutton describes in detail the Soviet program of economic “concessions,” which was designed to enlist the services of foreign companies and thus to use the latest Western technology in the development of the “commanding heights.” A concession involved a contract by which the Soviet Union authorized a foreign company to organize, equip and operate a specified economic enterprise; the company did not acquire any ownership rights, but it was free (at least, on paper) to earn a surplus or profit for a specified number of years, after which all the assets of the concession were to become Soviet property. Other studies of Russia have noted the existence of these concessions, but have dismissed them as economically insignificant. Dr. Sutton emphatically disagrees with such an assessment; he proves that concessions were the primary means by which the Soviets acquired Western technology. The major scholarly contribution of his book lies in the fact that he has assembled a vast amount of data about concessions from widely scattered sources, and has shown that these concessions played an indispensable role in Soviet economic development. Thus, contrary to their propaganda claims of self-sufficiency, the Soviets were forced to appeal to the technology and talents of capitalism to save their system. If Western governments and Western businessmen had continued the policy of political ostracism and economic boycott begun in 1918, the Soviet economy would have collapsed. Dr. Sutton does not draw this latter conclusion explicitly, but the evidence he presents makes it inescapable. In turning to the West for aid, the Soviets were not, of course, abandoning their long-range dedication to socialism or to world-revolution. On the basis of a careful study of Soviet political writings in this early period, Dr. Sutton concludes: “The pleas to the Party faithful to accept foreign capitalists and engineers give the clue that Communist intent was to absorb capital, skills, and technology, and then, ‘when the lemon was sucked dry, to discard it.” To the shame of the West, this Soviet strategy succeeded, as Dr. Sutton illustrates in his discussion of the oil and coal industries. In 1900, Russia had been the world’s largest producer of crude oil. When the Soviets took over the oil fields of the Caucasus, they acquired an asset that could have become a major source of exports. Instead, the oil fields were all but destroyed. As a result of negligent operations, writes Dr. Sutton, “water percolated into the wells, and the flow of crude oil became first a mixture of oil and water and finally a flow of oily water.” Left to themselves, the Soviets would have been in the same position as primitive savages living in an industrial era, staring helplessly at the works of modern technology, finding their incantations useless to raise oil from the ground. But they were not left to themselves. An American firm operating on concession, the International Barnsdall Corporation, sent technicians and a massive quantity of modern oil-drilling equipment to the Caucasus, and restored the Russian oil fields to normal operations. A similar development occurred in the case of coal. Russia’s most productive coal fields were in the Donetz Basin, which in 1910 produced three-fourths of Russia’s total coal output. Yet, under Soviet operation, coal production fell sharply from 1917 through the mid-1920’s. The situation became so bad that, in 1921-1923, coal had to be imported into the region from England and America. This, Dr. Sutton observes, was “truly a case of ‘carrying coals to Newcastle.’” Once again, it was an American firm (Stuart, James & Cooke, Inc.) that bailed out the Bolsheviks. It reorganized Russian coal mines in accordance with the latest American mining methods, thus providing the Soviets with a productive and profitable enterprise. In his discussion of the Soviet electrical industry, Dr. Sutton draws a conclusion which is equally applicable to other industries: “All technological progress resulted from a transfer from West to East. Further, rather than just restoring and modernizing the prerevolutionary plants, the foreign associates introduced the latest innovations from Western laboratories — sometimes before they had been utilized in the Western country of origin.” Clearly, the Soviets drew enormous benefits from their dealings with Western business firms. What did the Western companies get in return? In terms of paper promises, profits; in fact, expulsion and expropriation. Dr. Sutton describes several Soviet methods employed to expel Western companies from Russia once they had finished the desired task: the Soviets encouraged crippling labor strikes, they accused foreign firms of bribing Soviet officials, they trumped up charges of economic espionage. One of the most successful methods consisted of raising taxes to the point where the foreign enterprise would be forced to run at a loss; then, when the company closed its doors, it was seized without compensation. Perhaps the most flagrant example of Soviet duplicity cited by Dr. Sutton involves the concession rights to manganese mining. In 1913, Russia produced 52% of the world’s supply of manganese, but production fell to zero in 1920, and reached only 25% of capacity in 1924. The Soviets granted concession to a group of German companies, and then unilaterally changed the terms of the agreement. When the Germans protested, the Soviets simply nationalize the companies’ assets, and proceeded to negotiate a new concession with W Averell Harriman, who represented an American syndicate. Dr. Sutton quotes a British observer who recognized that the Soviet motive in negotiating this new concession was primarily political: to establish “the fact that a big American company had taken the properties which belonged to foreign concerns… thereby recognizing the rights of the Soviet government to nationalize property.” Harriman in turn soon became Soviet prey. His agreement with the Soviets was signed in 1925; after only a year of full-time operations, manganese output climbed to half of the prewar total. A year later, the Soviets announced their plan to expropriate Harriman’s $4 million investment. In a rare offer to compensate a victim of expropriation, they offered Harriman long-term bonds — but only on the condition that he would “arrange a commercial loan for the Soviet authorities to develop the manganese industry.” As Dr. Sutton notes, Harriman’s acceptance of this offer was a double victory for the Soviets: first, in agreeing to take their long-term bonds, a leading American businessman was sanctioning and granting validity to Soviet paper promises; second, after Harriman had arranged a commercial loan for the Soviets, they “went about Europe bragging they could borrow money from Harriman… therefore their credit must be good.” Harriman’s policy was of far-reaching benefit to the Soviets; other American businessmen played a similar role in building up the Russian economy. Not all American companies were willing to play such a role, not even a majority, but the list does include a number of giants, among them the Singer Sewing Machine Company, General Electric, Westinghouse, Dupont, Ford and RCA. Nor did American businessmen have a monopoly on what, at best, was short-sighted stupidity. The examples provided by Dr. Sutton show that the Americans had keen competition from their British, German, French, Swedish and Italian counterparts. In the closing pages of his book, Dr. Sutton writes: “One surprising conclusion from this study has been that organizations which are often thought to be somewhat socialist in character, such as cooperatives and trade unions, have consistently refused to have anything to do with the Soviet Union in the matter of credits, aid, trade, or technical assistance…. On the other hand, the industrial and financial elements in all Western countries have, in the final analysis, provided more assistance for the growth of the Soviet Union than any other group.” While Dr. Sutton proves this point conclusively, he does not attempt explain why so many Western businessmen were willing to deal with a ruthless dictatorship that was, and is, openly dedicated to the destruction of capitalism. He offers evidence that a few Western businessmen were secret Soviet sympathizers; “their contributions,” he writes, “was to lead the way and instill confidence in the Soviet government in the hope that other businessmen would follow.” This, however, does not explain the behavior of the majority of the businessmen involved. What does explain it? The following is this reviewer’s explanation, consistent with the evidence provided by Dr. Sutton: The businessmen who cooperated with the Soviets regarded themselves as “practical men,” as “realists.” They acted on the premise that ideas (particularly political philosophy and morality) are irrelevant to business dealings. They treated communist ideology as “just words” that needed not affect their working relationship with the Soviet government. Their contemptuous indifference to ideas forced them to act in a “pragmatic,” range-of-the-moment manner; their occasional attempts to justify their actions were a grab bag of evasions, rationalizations and empty slogans. Some chose to declare that Soviet Russia was, or easily could become, a congenial member of the family of nations. Some asserted that Western trade and friendship would somehow induce the Soviet leaders to abandon their dictatorship and renounce their plans for world-revolution. Others claimed to believe that somehow “the people” would overthrow their Soviet rulers and establish a parliamentary regime. Such was the deliberate blindness of these so-called “practical men.” They paid for it. As Dr. Sutton shows, some firms signed concession agreements to invest new sums and build new plants in Russia in the hope of recovering property which the Soviets had previously expropriated. They ignored the possibility of being expropriated a second time — a fate that actually befell Singer, Westinghouse and International Harvester. Other firms, lured by exceedingly lucrative profit “guarantees,” evaded the possibility that the Soviets would seize their factories many years before the expiration of the concession term. The result of such evasions was that many firms lost millions of dollars. It was a loss they had richly deserved. No other book has demonstrated so thoroughly the Soviets’ economic ineptitude or the West’s role in saving and strengthening the Soviet regime. This is a segment of history that ought to be better known, and the coverage needs to be extended beyond the early years of the Soviets. The present volume, although self-contained, covers only the years from 1917 to 1930. Fortunately, it is the first of three volumes: the next two, scheduled for publication in 1970 and 1971, will carry Dr. Sutton’s analysis of Western aid to Soviet Russia up to 1945 and 1960 respectively. When completed, the series will undoubtedly rank as the foremost scholarly work in the field. A book published a few years ago, East Minus West Equals Zero by Werner Keller, presented the same basic thesis. It was ignored in academic circles, allegedly on the grounds that Mr. Keller is a journalist, rather than a professional scholar, and that he relied almost exclusively on secondary sources. Neither excuse can be employed to attack Dr. Sutton’s work. Dr. Sutton is an economist and an historian of technology; his book is based on research in six languages; this research included a study of Soviet periodicals and trade journals, U.S. State Department archives (which contain economic reports on Russia from our embassies abroad), and the captured German Foreign Office records (which contain similar economic reports). The thoroughness of Dr. Sutton’s documentation is the outstanding virtue of his book. He analyzes the Soviet economy on an industry-by-industry basis, and includes an extensive amount of technological detail. While this makes his book invaluable to scholars, it may present some difficulty to the general reader. Nevertheless, the book will reward the general reader’s patience, for it is a storehouse of information not available anywhere else. If you know any businessmen who mouth today’s liberal line, claiming that no harm can come from economic relations with Soviet Russia, Red China or Cuba, urge them to read this book. It illustrates why actions which are profoundly immoral are also profoundly impractical, and it makes clear why, if America perishes, the coroner’s verdict will read: Suicide.