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How to Starch the Ruble


As hyper-inflation and economic collapse grip Russia, its government does what governments normally do: It compounds the problem.

Pressure to prop up factories and cushion consumers is insurmountable. The way to do this is for the central bank to print more rubles, lowering their value and defeating the purpose.

The question of shock (undiluted market economics) vs. therapy (subsidized full employment) for Russia is debated here as if it were a domestic American concern. Every so often, President Boris Yeltsin gets his back up, reminding all of Russia's power and sovereignty, as he did Thursday.

Addressing a hostile parliament Thursday, he insisted the reforms will continue, but "Our task is to find a reasonable balance between the pace of reform and the social cost." He did not say how.

Now along comes a Johns Hopkins economist who, with colleagues, suggests that our arguments are about the wrong thing, and that the Russian central bank is not the solution but the problem.

The book is "Russian Currency and Finance: a Currency Board Approach to Reform," by Steve H. Hanke, Lars Jonung and Kurt Schuler, published by Routledge.

Mr. Hanke is professor of applied economics at the Johns Hopkins University. He has helped Argentina, Estonia and Lithuania design currency reforms. Mr. Schuler is a post-doctoral fellow at Hopkins. Mr. Jonung is a professor at the Stockholm School of Economics and adviser to the Swedish government.

A central bank has monopoly control on the supply of reserves of commercial banks, and usually of the currency supply. It may regulate commercial banks. It lends. It sets interest rates. It can finance government programs. It can create inflation. It has discretion. It may be controlled by government.

A currency board supplies currency at a fixed rate of exchange with some other currency or stable commodity which it holds in ample reserve, and converts one to the other on demand. It cannot do much.

It does not regulate commercial banks. It cannot lend, it cannot create inflation, it cannot finance government programs. It has no discretion. It is unmoved by political considerations. Currency boards provide a stable convertible currency, and otherwise get out of the way. They have tiny staffs.

"A typical currency board cannot finance spending by the domestic government or by domestic state enterprises because cannot lend to them. It cannot finance domestic government budget deficits, so it avoids subordinating the monetary system to deficit finance." That is its beauty.

Fixed rates of exchange -- which great nations and central banks have failed to maintain -- create confidence in the convertibility of the currency.

True currency boards print the money in Hong Kong, Gibraltar, the Cayman Islands, the Falkland Islands and the Faroe Islands. The first four are relics of British empire, the last Danish. Argentina, Estonia, Singapore and Brunei have modified versions, described in a marvelous bit of jargon as pseudo currency boards.

Russia could follow these authors' advice by converting its central bank to a currency board, or by adding a currency board and letting parallel currencies circulate. A Russia currency board could use the U.S. dollar, the German mark, the European Union's European Currency Unit (ecu) or gold for its reserve currency.

Fashionable as it is to denounce imperialism, the currency board was a device that Britain invented for bits and pieces of the world it brought into the world economy. The first was on the Indian Ocean island of Mauritius in 1849.

Desirable as such a board is to conservative economists who denounce Keynesian ideas, a notable model was the North Russian currency board of 1918-9, designed by John Maynard Keynes.

Some countries that do not have currency boards now, such as Singapore and Jordan, did have them well into independence.

As things stand, Mr. Yeltsin is not following the advice of Messrs. Hanke, Jonung and Schuler. And Russia is reacquiring some of the Soviet empire economically, extending its ruble to Belarus and Tajikistan, which may drag them down.

It is hard to imagine a huge nuclear superpower accepting a device that was invented for colonies and little nations. It is easy to imagine Russia's crisis getting much worse before it gets better.

Daniel Berger writes editorials for The Baltimore Sun.

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