A synthesis of East-West research

This research intends to present for the first time the views of both eastern and western researchers on the intriguing subject the “Witte System”.

The core idea of the Witte System was to build a functioning “Capitalist” Economic System and to integrate Eurasia to the world economy. Witte’s policy of state capitalism or state monopoly followed by special economic measures brought prosperity. Also the word “capitalism” was first time mentioned in the imperial official papers (prof. Martynov 2002) According to professor Martynov: “The efficiency of the Witte System is probably related to that fact that Sergei Witte was at the same time the author and the executor of his System. Witte presented “a systematic view on the whole Eurasian market”.

According to the American professor Francis W. Wcislo Witte’s “International Business Model” could be summarized as following: Stable currency, expanding foreign and domestic commercial markets and a wide communication network were the framework within which the products of national labor circulated and engendered wealth. According to another American professor Theodor von Laue the basic plan of The Witte System remained a simple one: “Extensive railroad construction would stimulate the growth of the metallurgical and fuel industries supplying rails and other equipment. In turn, the expansion of the heavy industries would create favorable conditions for the growth of the light industries (…) Railroad construction served as the flywheel for the entire economy”.

According to professor Wcislo central to both foreign and domestic commerce was the railroads the chief instruments of progress. There was created an entire system of main and secondary railroad lines, tying the regions to each other, and which was necessary for the growth of national wealth. With the help of all types of railroads, the slogan was (…) make Russia “transitible”.

Seen from today’s perspective The Witte System is actual as ever. According to professor Sergei Martynov: A comprehensive scientific study of the Witte System is still missing. Most research on Sergei Witte has been done by historians. It is time for the economists to pay more attention to the “Witte System”. (Sistema Witte 2002).The urgency of the Witte’s business model proves the following statement of professor Sergei Martynov: “The present reforms in post-Soviet space are proceeding non satisfactorily. The reason can be related to the poor scientific research on the concepts and strategies of the past reforms, ignoring to study the economic achievements of the “capitalist” Russia when the country transformed to the Market Economy.

Many aspects need to be further researched by the economists. These aspects are Witte’s economic strategy, tax policy, monetary reform, state household, state regulations and support of entrepreneurship etc. professor Sergei Martynov, Sistema Witte, St.Petersburg, Russia 2002

A Model of International Commerce (see the picture below)

Minister of Finance Sergei Witte was the first statesman who Introduced “Capitalism” or Market Economy in Russian empire.: Witte’s international business model looked as following: stable currency, expanding foreign and domestic commercial markets and a wide communication network were the framework within which the products of national labor circulated and engendered wealth.

- Not even the most powerful government can create capital, Witte declared. Capital sought a stable currency environment, he believed, and the guarantee of that stability was a gold coin and the gold standard it symbolized

Witte defended the agenda he had pursued across the decade tariffs and commercial treaties to raise revenues and foster international commerce, foreign capital investment; the creation of a “national industry”; especially in metallurgy, textiles, and chemicals; development of agriculture, and creation of stronger domestic markets “based on two pillars” agriculture and industry, and the relations between them, profitable to both.

- Central to both foreign and domestic commerce was the railroad, one of the chief instruments of progress. The basic plan of the Witte System remained as simple one: “Extensive railroad construction would stimulate the growth of the metallurgical and fuel industries supplying rails and other equipment. In turn, the expansion of the heavy industries would create favorable conditions for the growth of the light industries (…) Railroad construction served as the flywheel for the entire economy”. Theodore H. von Laue, Sergei Witte and the industrialisation of Russia U.S:A 1969 (see the picture above)

- The Finance ministry had developed a full scale plan of constructing railroads extending across Eurasia toward the Pacific.

The idea was to tie the Far North to central European Russia and the Baltic Sea as well as opened “a new transit route to Europe for the east and Siberia”. The Ural Mountains with their rich mines, more tied to both central Russia and Siberia. The south promising to become rich industrial centre, was the site of new construction and both Caucasus and Central Asia were tied to central Russia – and all of this was set within “a detailed economic study” of the country, an investigation of its region, the elucidation of its industrial and agricultural needs, and consequently creation of an entire system of main and secondary railroad lines, necessary of the growth of national wealth.

- Siberian expanse was envisioned linked east to west by rail, and north to south by river systems that themselves might become more open to international shipping moving along Arctic coasts. Developing commerce with Central Asia and Persia was a priority especially along the Trans-Caspian railroad from the Caspian to Bukhara and Samarkand.

- Railroads were de facto nationalized. Their economic import as earners of currency and generators of commerce made them “a powerful economic factor” whose supervision affecting the most varied state and public interests, the government could not leave to private initiative.

- Finally, the report emphasized the industry’s centralized control of freight and passenger rate structure which had been Witte’s initial accomplishment in 1889.

Centralized control served the fiscal interests of the treasury, the report noted, but also gave priority to the country’s economic interest the development of its productive forces and the proper pace of its commerce.

The ministry was exploring and surveying. It was sponsoring commercial expeditions as a first step toward organizing ocean transit from the Pacific coast terminus of the Trans-Siberian Railroad at Vladivostok to the parts of China and Japan.

The Witte System’s transport part could be summarized as following. Railways were the chief instrument of progress. Building an entire system of main and secondary railroad lines was meant to create an interconnected network of trade and transit routes to tie different regions with each other and achieve “one integrated Eurasian market”. The aim was that the transport in particular railways should function as a base for trade expansion and economic growth.

Western business practice according to the Witte System

- Foreign investments and new business practices according to the Witte System: Western investors would bring with them culture-edge technology and business practices. A near trick, protection industry owned by foreigners from competition by foreigners, but such was stratagem its wily chief designed to foster greater competition within an underdeveloped Russian industrial culture

- A series of measures aimed to effect cultural change: “The enculturation of a new spirit” – decrease regulations, reduce impediments and formalities, gradually wean commercial-industrial elites from positions and efforts at influence-pedding and increase knowledge-able risk-taking

- Creation of a Central Board of Weights and Measures to combat widespread falsification.

- Resources to support statistical study of commercial- industrial life. Measures fostering vocational and polytechnic education, commercial credit and commercial infrastructure construction etc.

Monetary policy led logically to the banking system and its crown the State Bank

- The State Bank was the central fulcrum of commercial-industrial life in Russia, and the ministry sought to expand its institutional presence throughout the empire. It issued currency, and thus regulated the amount in circulation. It supplied pools of investment credit to large and small enterprises.

- It regulated domestic interest rates and terms of loan in a manner designed to encourage commercial activity. Most importantly, it served as the regulator of the country’s credit exchange.

- The bank explicitly was forbidden from intervening in specific commercial transactions, but charged instead to use its control of currency, interest rates, and the state treasury and impart tone the country’s system of corporate and privately owned banks, mutual credit institutions, and savings and loan cooperatives.

- A series of measures sought to organize the powerful ready weapon of a large gold reserve that the ministry had accumulated in the last decade. The use of gold in private market transactions, was forbidden. All transactions in foreign currency was to be conducted only through organs of Finance Ministry – the treasury, the State Bank, or the custom service.

- Private banks found to be engaged in speculative currency transactions were subject to ministerial audit.

- The State Bank guaranteed the foreign credit at any Russian business engaged in foreign trade. Treasury bonds that financed projects with strictly productive purposes as with the railroad network were touted.

- The general direction of Witte’s policy was to increase old taxes and create new ones. By the end of the nineteenth century, the paradigm that justified a progressive income tax already existed, but to rebuttal was the report’s dominant line. Acknowledging that theory preferred a more equitable distribution of the tax burden when the government’s reliance on indirect taxation upon consumption left the poorest elements of the population to shoulder proportionately the heaviest taxation. Existing excise taxes on alcohol, beer, kerosene, and matches were increased.

Infrastructural Projects

The minister oversaw project whose tentacles over the next ten years extended across Eurasia toward the Pacific.

- It embraced the colonization of Siberia and the land surveying necessary to support in the construction of rail factories,

- Topographical, economic, hydrographic, and botanical research along the Arctic Sea coastline.

- Siberian river systems and Lake Baikal,

- The exploration of mineral deposits, especially coal and gold, in Siberia, and

- Various construction projects from school and churches to commercial Port in Vladivostok.