SOME REFLECTIONS ON RECENT MONETARY TURMOIL IN EASTERN EUROPE

This article makes the case for the use of “currency boards” in dealing with the monetary problems of Russia and other developing economies. The concept of the currency board was developed originally by the British in the 19th century to allow their colonies to maintain their local currencies without having an autonomous money supply or central bank. Currency boards hold out the promise of price stability because the local government gives up all discretionary powers over the money supply and the exchange rate. As the author puts it, “The country's monetary affairs, internal and external, will be running on automatic pilot, not on manual control. For the Russian people, the great advantage of this automatic arrangement, of course, is that the Russian government can no longer finance itself by inflation—that is, by printing money.” A currency board, to be sure, is not a panacea. It cannot substitute for the massive restructuring of Russian financial and governmental institutions that is so clearly needed. But, as happened in Argentina, a currency board can make that task easier by restoring stability and confidence. The promise of exchange rate stability that a currency board offers is also a major inducement to the foreign capital that is critical to the growth of the Russian as well as most developing economies.