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The experience of

in Russia will have trustworthy banks in

Russia lacks an efficient payments system

which to keep funds for payrolls, payments

because the government prevents private

Russia has been

to suppliers, and so on. Banks will have avail-

entrepreneurs from creating one.

that central bank-

able a substantial pool of savings to lend for

Why has the Russian government erected

ing has created

productive use. Resources will cease being

so many barriers to monetary reform? After

channeled to unprofitable enterprises

all, the government would ultimately benefit

far more shocks

through loans from the central bank and will

from dollarization. If it could regain access to

than it has

instead find profitable employment in a vari-

credit markets, it could replace the high-

absorbed.

ety of new industries. The transition to a

interest ruble debt that led to the financial

more productive economy will be difficult,

crisis with comparatively low-interest dollar

but, as described below, the experience of

debt. The economic growth that dollariza-

some other former socialist countries sug-

tion would encourage would also help the

gests that respectable economic growth can

government more easily meet its targets for

begin quickly.

tax collection.

The Central Bank of Russia, if it still

There are two reasons for the govern-

exists, will not be a lender of last resort to the

ment's behavior. First, the government is

dollarized banking system because it cannot

unwilling to resist pressure from interest

print dollars. Since the main justification

groups that benefit from subsidies and from

given for central banks today is that commer-

the monetary system that administers the

cial banks need them as lenders of last resort,

subsidies. Eliminating the central bank

it may seem that a dollarized banking system

would solve much of the problem by elimi-

would be unstable. Experience indicates that

nating a channel for subsidies that is not

the opposite is true. Many, if not all, foreign

transparent and not well understood by the

banks that enter the Russian market will be

public. Second, government officials have

globally diversified firms that can draw on

misplaced national pride in the ruble. They

substantial foreign reserves to protect them-

believe that Russia cannot be a world power

selves from local shocks. In August, when

unless it has a distinct currency, issued by a

Russian banks defaulted, foreign banks car-

Russian central bank and used by a banking

ried on thanks to refinancing by their large,

system that is owned mainly by Russians.

globally diversified parent companies. A dol-

Although dollarization may be a sensitive

larized banking system with extensive foreign

issue for political reasons, the Russian gov-

participation will be much less vulnerable to

ernment and its foreign providers of finan-

systemwide failure than is the current ruble-

cial support have failed to recognize that the

based system dominated by home-grown

case for free trade in currencies is as strong as

banks. Indeed, lack of a lender of last resort in

the case for free trade in bananas or automo-

Russia will encourage all banks to adopt con-

biles. Nobody would insist that Russia grow

servative lending practices that reduce the

its own bananas or that Guatemala produce

likelihood of failures.

its own automobiles. Each country is better

off producing the things it makes most effi-

ciently and trading for the things it makes

The Ruble and

less efficiently than other countries. It so

happens that Russia has long been and

National Pride

remains an inefficient producer of monetary

policy, owing to the socialist elements that

Russians are unable to take full advantage

still exist in its monetary system. Russia

of a perfectly good money, the dollar, because

would be better off ceasing to produce mon-

their government demands that they use a

etary policy at home and instead importing it

bad money, the ruble; Russia has a bankrupt

from the United States (or from Western

banking system because the government

Europe or Japan, to the extent Russians want

restricts competition from foreign banks; and

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