I have written at length about this in the past so won’t be doing a deep dive here. The economic problems of the Soviet Union began to emerge after Khrushchev reversed many of Stalin’s policies after his death and brought liberalism back into the system.

The most notable was the 20-year suspension of Soviet public debt repayment (effectively a default) in 1957.

The genius of Stalin’s Five-Year Plan was partly due to its ability to utilize the State Bank to effectively create an unlimited amount of rubles to finance its domestic development (implemented during the Credit Reform in 1930-32). The Soviet (internal) ruble was already unpegged from gold as early as 1933, and since the ruble was not convertible to any foreign currency or precious metal, the Soviet government will always be able to repay its public debt.

To make it even clearer, the Soviet (internal) ruble was effectively a fiat currency 40 years before the Americans discovered the power of monetary sovereignty by accident after abandoning the Bretton Woods.

However, Khrushchev and his finance minister Arseny Zverev believed that the Soviet government had “too much national debt” and the government had “no more money to service its annual debt”. This is no different than the Democrats and the Republicans in the US crying about trillions and trillions of national debt and not realizing that the US government as the issuer of a sovereign currency will always be able to create the amount of dollars needed to pay the treasury holders.

As a result of this “default” in 1957, the circulation of ruble in the hands of the people was disrupted. With less money to spend, this caused a slump in domestic consumption, and led to commodity shortages as demand weakened. This was also when the stereotypical “food and goods shortage in the Soviet Union!” began to occur.

Later, an attempt was made to fix the problem by increasing the prices to control demand for goods shortages, and spiraled into even worse and more problematic economic issues. This culminated in the Novocherkassk massacre in 1962 when rail workers began to strike in the face of rising prices while forced to take pay cuts, and was suppressed by the government.

A rare anti-labor stance by the Soviet government due to the introduction of liberalism back into the Soviet economic system.

The Soviet economy would eventually turn into stagnation by the 1970s after much of Stalin’s policies had been completely reversed, further deterioration prompting more liberal reforms, and the rest is history.