Economist offers prescription for what ails Russia

Q&A/A Monday interview

April 13, 1992|By Michael Hill

Steve Hanke has a three-part prescription to cure what ails Russia and the other countries of the former Soviet Union -- the institution of private property, the rule of law needed to ensure that, and a stable currency.

It was an invitation to discuss his plans for currency that took Dr. Hanke to Moscow earlier this year for a meeting with Russian President Boris N. Yeltsin, a trip he has been invited to make again in June.

Dr. Hanke, a professor of applied economics at Johns Hopkins University, is a free-market, supply-side economist who was among President Ronald Reagan's original Council of Economic Advisers. He wrote the parts of the Reagan economic plan on converting various federal lands and other holdings to private management.

Among his proudest accomplishments, he says, is getting the word "privatize" into the dictionary, though among his bigger disappointments is not getting more privatization programs adopted.

Q. As you know, Richard Nixon recently called for a massive aid program to Russia to ensure that the country does not collapse. Do you think this is what's needed?

A. Certainly not. For one, I don't understand why anyone would give any credence to anything Nixon says about economics. He never had a coherent economic plan, never even understood the issues. You might remember we had price controls when he was president.

Q. So you would oppose the Bush administration's proposal for a $24 billion aid package?

A. Yes. You have to look at the history of foreign aid. Usually it blocks any attempts to liberalize an economy and on balance causes economic harm. In Russia, some currency speculators and former Communist bigwigs will fill their pockets with the aid from Western countries' taxpayers, and then a year later they will back again asking for more.

All it will do is raise the ire of the general population and help the opponents of Yeltsin. The aid is being given in the name of helping Yeltsin, but it will probably be a death wish for him.

Basically, Russia doesn't need the money. Estimates of the worth of the money the Soviet Communist Party and other previously state-owned enterprises have moved overseas in 1991 alone is $15 [billion] to $40 billion. Private investigators are now trying to track that money down, the same ones who found the Marcos money for the Philippines, by the way. [Former Soviet President Mikhail] Gorbachev is currently being questioned about where that money is. What you need is an environment conducive to attract that money to come back into the country.

Q. How would you go about setting up that situation?

A. One reason the money is not coming in is because Russia doesn't have a hard, convertible currency. The ruble is now so unstable that no one -- and that includes foreign investors who are needed to jump start an economy like this -- wants to convert hard money into rubles.

To correct that, I advised that Russia set up what is called a currency board. Rubles would be issued that would be backed 100 percent by a hard currency, like the dollar, which would be held in a foreign bank, perhaps in Switzerland. It would take only about $4 billion to set up this institution, a sum easily financed by Russia itself.

These rubles would be convertible to that currency on demand at a permanently fixed exchange rate. After it is established, the currency board will have only one function, to exchange new rubles for the reserve currency and vice versa. It is a simple idea that has worked everywhere it has been tried.

Q. Where has it been tried?

A. They have currency boards now in Hong Kong and Singapore. In fact, Russia had one in 1918 and 1919 in the north. The British couldn't get anyone to unload ships at Murmansk because the Russians didn't want to get paid in rubles. Everyone was issuing rubles at the time, there were something like 2,000 different types of rubles in circulation, and no one trusted any of them. Not knowing what to do, the British officers cabled for instructions.

What happened was the British government set up a currency board, issuing rubles that were backed by sterling that was kept in London. I had a feeling that John Maynard Keynes was involved in this -- he was working in the British Treasury at the time -- and the one bit of academic news I made was to discover that that was the case. Buried in the British archives, I found two letters, one that he had typed himself, the other handwritten, that he wrote setting this thing up. None of his biographers knew about this, nor was it mentioned in his 30-volume collected works.

These British-backed rubles quickly became the trusted currency throughout northern Russia, and even when the Bolsheviks got there, though the local office of the currency board was closed down, no one lost any money. The money backing the currency was still safe in England. Everyone just got the rubles to London, where they were redeemed into sterling until 1920.

Q. What was the reaction of the Yeltsin government to this proposal?

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