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A currency board

the only institution likely to produce a

have either experienced similar problems or,

sound locally issued currency in Russia

like China, have banking systems plagued by

is the only institu-

today. Anyway, critics of a currency board

extensive bad loans but have propped up the

tion likely to pro-

are strangely silent when it comes to dollar-

banks at a high potential cost instead of let-

duce a sound

ization, which works much like a currency

ting them fail. Estonia and Lithuania are now

board.17 Perhaps that is because the

attracting foreign ownership interest in local

locally issued cur-

banks; in Bulgaria foreign interest in banking

Russian people have already unofficially

rency in Russia

has been limited because the economy has

dollarized the economy. Official dollariza-

today.

only recently begun to grow again.

tion would not require big changes in the

The reforms we have suggested for Russia

habits of the people, big foreign loans, or

are somewhat more radical and comprehen-

high costs. It can proceed without foreign

sive than those undertaken in Estonia,

assistance even in Russia's current circum-

Lithuania, and Bulgaria. In particular, dollar-

stances, for it involves little more than mak-

ization may mean doing without a distinct

ing legal what Russians are already doing

domestic currency unit. But the overall impli-

illegally to preserve their remaining wealth

cations of dollarization are otherwise similar to

from the depreciation of the ruble.

those of switching to a currency board, except

Finally, there are the questions of

for a loss of seignorage (the revenue from cre-

whether free trade in money will work and

ating currency), which would be offset by a

if it can find enough political support to be

gain in credibility and correspondingly lower

implemented and to endure. Here again,

real interest rates.

there has been encouraging experience in

Prominent people have nevertheless offered

other former socialist countries, particular-

a number of criticisms of the idea that Russia

ly Estonia, Lithuania, and Bulgaria. In all

should import sound money from abroad,

three, the governments of the day were able

either through dollarization or by establishing

to pass monetary reform laws (all based on

a currency board. A typical criticism is that a

currency board­like systems) and imple-

currency board is undesirable because the

ment them. The governments found that

Russian government's budget and system of

sound currencies enhanced their populari-

tax collection are disorderly. The criticism aris-

ty, and the economic growth that followed

es from a misunderstanding of the difference

helped them further. The popularity of

between a central bank and a currency board.

sound currencies enabled governments that

Because central banks can and do finance gov-

sponsored them to make other reforms that

ernment budget deficits, especially in develop-

otherwise might not have been possible,

ing countries, in a central banking system

such as closing insolvent banks rather than

inflation is likely to be high and the exchange

subsidizing their continuing losses. By and

rate depreciating unless government spending

large the voting public has understood that

is already under control before monetary

sound currencies have costs but that it is

reform begins. An orthodox currency board,

necessary to pay the costs to enjoy the ben-

however, cannot finance government spend-

efits of higher economic growth. In Estonia

ing, so it forces the government to get spend-

and Lithuania the currency board­like sys-

ing under control even if spending is out of

tems have been sufficiently popular that

control when the currency board is estab-

the governments succeeding those that

lished. Needless to say, comprehensive dollar-

established the systems have left the sys-

ization also rules out the financing of govern-

tems in place. (In Bulgaria there has not yet

ment deficits by resort to the printing press.

been a change of government, but the cur-

Another criticism is that Russia lacks the

rency board­like system is popular.) As with

credibility to establish a currency board.

anything in politics, free trade in money

But how much credibility does the Central

will be unpopular with some Russians, such

Bank of Russia have? A currency board is

as bankers who will face competition from

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