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foreign banks, or fanatical devotees of cen-

not based on free trade in money have not

tral banking. But can policies that have

explained how their approaches will do that.

worked well in other former socialist coun-

In contrast, free trade in money will change

tries possibly be more unpopular than the

the behavior of the central bank by either

policies that have created Russia's current

eliminating it at once or reducing the

financial crisis? The gravity of the crisis is

demand for rubles, thereby reducing its man-

precisely what makes thoroughgoing

agers' power to divert resources through

reform feasible.

inflation. It will also give Russians legal

Approaches that do not eliminate

access within their country to foreign banks

Russia's socialist monetary institutions are

of recognized competence, which will force

unlikely to put the monetary system on a

Russian banks to become better managed or

sound basis for the long term. There have

to cease business.

been a number of proposals about how

Russia should handle the current financial

Conclusion

crisis. Some favor a so-called controlled

emission of money, by which they mean

that the central bank should print money

Russia has not had for decades and does

To reestablish

for back wages and other ruble payments

not now have anything close to free trade in

orderliness--this

the government owes. The central bank has

money. It is therefore grotesque to blame lais-

already begun doing that, so in the coming

sez faire for the current financial crisis and

time the superior

months we will see just how well it can

for Russia's wider economic problems since

orderliness of a

retain control. Other people have suggested

the Soviet Union dissolved. Russia's problem

capitalist mone-

reestablishing the target zone for the ruble

is that it has retained many socialist practices

exchange rate that existed until August but

in its financial system yet eliminated others

tary system--

using a more depreciated rate against the

that gave the system some orderliness. To

Russia needs to

dollar and perhaps making the target zone

reestablish orderliness--this time the superi-

wider so as to allow greater day-to-day fluc-

or orderliness of a capitalist monetary sys-

replace protec-

tuations. Still others have advocated that

tem--Russia needs to replace protectionism

tionism in money

the exchange rate be allowed to float and

in money with free trade in money.

with free trade in

that the central bank somehow establish

The most effective thing that foreign gov-

the credibility of a free-floating ruble. There

ernments and international financial institu-

money.

are also various ideas about recapitalizing

tions can do is to stop supporting both the

banks with government funds or by debt-

Central Bank of Russia and attempts to

for-equity swaps, toughening regulatory

reform Russian banks from within. Russia's

supervision, and so on.18

current financial institutions have not

worked and will not work well. The sooner

As ingenious as some of those ideas are,

people understand that, the better off the

they would merely tinker with a system that

Russian public and taxpayers in Western

has clearly not worked well, rather than over-

countries will all be.

haul it. They would leave the central bank in

place and allow (though not necessarily

approve of) continued restrictions on the

Notes

ability of foreign banks to compete with

Russian commercial banks. But the central

1. Recent economic statistics on Russia can be

bank and Russian commercial banks alike

found in Russian Economic Trends, a publication

have performed wretchedly, and there is no

resulting from the joint efforts of the Russian

government and the European Union. Monthly

reason to expect them to change anytime

updates are available, after the hard copy version

soon. To work, reform of the financial system

has been distributed, at http://www.hhs.se/

has to change the behavior of the people who

site/ret/update. See also International Monetary

manage the system. Advocates of approaches

Fund, International Financial Statistics, much of

15