was, it kept inflation low. Officially, there was
deposits; the state had a monopoly of bank-
no inflation. In reality, inflation averaged a
ing. Nor did they assess the risk of lending to
few percent a year, but the government
various enterprises; there were no differences
masked it by keeping administratively set
in risk because the state owned all enterpris-
prices constant and confiscating people's
es. Because the Soviet Union had no financial
currency from time to time. Hidden inflation
markets, banks did not speculate in foreign
finally came into the open near the end of the
exchange, bonds, or other areas in which
Soviet era, when the government allowed
banks in market economies commonly do.
more and more prices to be set freely.
As a result, when Russia emerged from the
Russia's financial system today has nei-
collapse of the Soviet Union at the end of
ther the crude coherence of a socialist finan-
1991, it had nobody experienced at commer-
cial system nor the more polished and effi-
cial banking as it is practiced in market
cient coherence of a market-based financial
economies.
system. It is in a chaotic state somewhere in
Even the central bank was not a typical
between, what might be called Potemkin cap-
central bank such as Western economists
italism. Superficially, the financial system
were familiar with. Like the state-owned
looks market based, which helps explain why
banks, the central bank was an agent of the
Russia restricts
so many foreign observers thought Russia
central planning bureaucracy and had no
freedom in cur-
was getting its financial problems under con-
independence to conduct a monetary policy
trol and why a former adviser to the Russian
different from what the government wanted.
rency and banking
government could write a book entitled How
The separation between the central bank and
in ways that weak-
Russia Became a Market Economy.3 Closer
the state-owned commercial banks was one
en its financial
of administrative convenience, not of inde-
inspection reveals that the Russian financial
pendence in management or ownership. The
system retains key features of the old socialist
system.
central bank had no experience in using most
system. Whereas retaining socialist elements
of the tools of monetary policy used by
in other sectors of the economy, such as agri-
Western central banks, such as the discount
culture, hampers those sectors but can leave
rate, reserve requirements, and open market
the rest of the economy free to grow, retain-
operations (influencing the supply of money
ing socialist elements in the financial system
indirectly by buying and selling bonds). Nor
hampers the whole economy. To work well, a
did the central bank have experience with
market economy needs a sound currency, a
Western-style supervisory functions such as
rapid and error-free payments system, and a
auditing commercial banks and setting
banking system that can gather savings and
requirements for the minimum capital or
lend them to people who will use them effi-
reserves they should have.
ciently. Without those things, prices are not
Socialism worked poorly, but it was a rel-
reliable guides for economic calculation; pay-
atively coherent system. Financially, it
ment through the banking system is uncer-
derived its coherence from making con-
tain; and savings are wasted, kept under mat-
sumers bear the burden of its mistakes. A
tresses in foreign currency or stored in for-
market economy revolves around con-
eign bank accounts, when they could be put
sumers. Businesses try to please consumers,
to productive use locally.
suffering losses and eventually ceasing to
exist if they are unsuccessful. In contrast,
Underlying Causes
the Soviet economy revolved around the
government's plan. If additional resources
of the Crisis
had to be used to achieve some goal of the
plan, consumers paid because the availabil-
This brings us to the underlying causes of
ity of goods was reduced.
Russia's current financial crisis. Like
As crude as the financial logic of socialism
Thailand, South Korea, South Africa, and
3