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Sound Money

trying to prevent the ruble from being

devalued. Since it was spending its reserves

A capitalist monetary system requires a

of dollars without correspondingly decreas-

sound currency (a monetary base) for use in

ing the supply of rubles, the demand to

hand-to-hand payments and as reserves for

exchange rubles for dollars continued to

banks, and good banks that accept deposits

deplete its dollar reserves. On August 17 the

and make loans in that currency. A sound cur-

central bank gave up supporting the ruble

rency should maintain substantial value over

at the then-current rate of about 6.3 per

time, unlike the ruble, and should be widely

dollar. The central bank also imposed

and voluntarily accepted in payment. Russia

exchange controls on short-term invest-

already has a reliable base money: the U.S. dol-

ment by nonresidents, and the government

lar. Recall that Russians are estimated to hold

defaulted on its debt.

$40 billion or more in dollar notes alone,

The devaluation and default in effect

which is more than the value of all ruble notes

bankrupted many of the largest Russian

and deposits combined, and they hold billions

banks. They had a large proportion of

of dollars more in foreign bank accounts.

assets in Russian government debt, and

Russians favor dollars, not just as a store of

some had large unhedged dollar liabilities.

value (as is the case in some Latin American

They found their assets suddenly worth

countries), but for use in hand-to-hand pay-

much less, in rubles and especially in dol-

ments. The more important the payment is,

lars. The central bank and the government

the more likely Russians are to make it in dol-

have since announced plans to help the

lars rather than rubles. Ruble payments persist

worst affected banks but lack any way other

mainly in small transactions, such as grocery

than inflation to provide substantial help.

shopping, and in transactions in which the

government is directly involved or when it has

some ability to monitor payments. Larger

A Program for Reform

transactions beyond the easy reach of the gov-

ernment are made in dollars. The dollar is the

preferred currency of Russia's emerging capi-

The August financial crisis might seem

talist economy, while the ruble is the preferred

to make Russia's prospects for economic

currency of its decrepit socialist economy.

reform dimmer than ever. However, the cri-

Russia's currency crisis stems from the

sis creates a fresh opportunity for change,

government's attempt to force Russians to

for it reveals more clearly than ever the

use only rubles, despite the availability of the

socialist underpinnings of Russia's finan-

The government

dollar as a higher quality currency. To pro-

cial system and that system's uselessness as

mote a capitalist monetary system, the gov-

a foundation for developing a true market

should remove all

ernment should remove all barriers to using

economy. Setbacks to the ruble and to the

barriers to using

dollars or other foreign currencies in all

Russian banking system chip away at the

transactions. That means repealing the "de-

remnants of socialism. They also push

dollars or other

dollarization" measures of 1997 that, at least

efforts at reform in a more beneficial direc-

foreign curren-

on paper, restricted the ability of Russians to

tion, namely, toward building a capitalist

cies in all transac-

hold dollars and use them within Russia. It

monetary system in which the currency is

also means abolishing taxes on converting

sound and markets rather than the govern-

tions.

rubles into foreign currency, ceasing to

ment allocate credit.

require that Russians convert into rubles the

Building a capitalist monetary system in

foreign currency they receive, and removing

Russia does not require starting from scratch. The

the new restrictions that the government has

necessary institutions already exist in Russia or

imposed since last August on foreign-curren-

can be imported. The main obstacles to a cap-

cy transactions. Contracts specifying pay-

italist monetary system are political rather

ments in dollars should be just as legal as

than technical.

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