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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)

Chapter 96
A Gold Standard for Russia?

In their eagerness to desocialize in 1989, the Soviets called in Western economists and political scientists--trying to imbibe wisdom from the fount of capitalism. In this search for answers, the host of American and European Marxist academics were conspicuous by their absence. Having suffered under socialism for generations, the Soviets and East Europeans have had it up to here with Marxism; they hardly need instruction from starry-eyed Western naifs who have never been obliged to live under their Marxist ideal. 

One of the most fascinating exchanges with visiting Western firemen took place in an interview in Moscow between a representative of the Soviet Gosbank (the approximate equivalent of Russia's Central Bank) and Wayne Angell, a governor of the Federal Reserve Bank in the U.S. The interview, to be published in the Soviet newspaper Izvestia, was excerpted in the Wall Street Journal.

The man from Gosbank was astounded to hear Mr. Angell strongly recommend an immediate return of Soviet Russia to the gold standard. It would, furthermore, not be a phony supply-side gold standard, but a genuine one. As Angell stated, "the first thing your government should do is define your monetary unit of account, the ruble, in terms of a fixed weight of gold and make it convertible at that weight to Soviet citizens, as well as to the rest of the world."

Not that the Gosbank man was unfamiliar with the gold standard; it was just that he had imbibed conventional Western wisdom that the gold standard only be restored at some indistinct point in the far future, after all other economic ills had been neatly solved. Why, the Soviet financial expert asked Angell, should the gold standard be restored first?

Wayne Angell proceeded to a cogent explanation of the importance of a prompt return to gold. The ruble, he pointed out, is shot; it has no credibility anywhere. It has been systematically depreciated, inflated, and grossly overvalued by the Soviet authorities. Therefore, mark or even dollar convertibility is not enough for the ruble. To gain credibility, to become a truly hard money, Angell explained, the ruble must become what Angell, with remarkable candor, referred to as "honest money."

"It is my belief," Angell continued, "that without an honest money, Soviet citizens cannot be expected to respond to the reforms," whereas a "gold-backed ruble would be seen as an honest money at home and would immediately trade as a convertible currency internationally."

With the ruble backed solidly by gold, the dread problem of the inflationary "ruble overhang" would wither away. The Soviet public is anxious to get rid of ever-depreciating rubles as soon as consumer goods become available. But under a gold standard, the demand for rubles would greatly strengthen, and Soviets could wait to trade them for more consumer goods or Western products. More goods would be produced as Soviet workers and producers become eager to sell goods and services for newly worthwhile rubles.

Without gold, however, Angell warned that the Soviet reform program might well collapse under the blows of rampant inflation and a progressively disintegrating ruble.

The man from Gosbank was quick with the crucial question. If the gold standard is so vital, why don't the United States and other Western countries adopt it? Angell's reply was fascinating in its implications: that the dollar and other Western currencies "have at least a history of gold convertibility" which enabled them to continue through the Bretton Woods system and launch the present system of fluctuating fiat currencies.

What, then, is Mr. Angell really saying? What is he really telling the Soviet central banker? He is saying that the United States and other Western governments have been able to get away with imposing what he concedes to be dishonest money because of the remnants of association these currencies have had with gold.

In contrast to the ruble, the dollar, the mark, etc., have still retained much of their credibility; in short, their governments are still able to con their publics, whereas the Soviet government is no longer able to do so. Hence, the Soviets must return to gold, whereas Western governments don't yet need to follow suit. They can still get away with dishonest money.

It would have been instructive to ask Mr. Angell about the myriad of Third World countries, particularly in Latin America, who have been suffering from severe currency deterioration and hyperinflation. Aren't those currencies in nearly as bad shape as the ruble, and couldn't those countries use a prompt return to gold? And perhaps even we in the West don't have to be doomed to wait until we too are suffering from hyperinflation before we can enjoy the great benefits of an honest, stable, noninflatable, money? 

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