International Policy

The Dollar And The Ruble

Johns Hopkins University economics professor Steve V. Hanke suggests that Russia take a giant step toward financial reform by granting the U.S. dollar legal currency status immediately. Last year, the Russian government took the reverse step of decreeing that legal retail transactions must be conducted in rubles -- a currency whose value has been declining at an astonishing rate in recent years.

  • At present, Russians hold about $40 billion in U.S. currency -- double the supply of rubles in circulation after this week's devaluation.

  • In 1997, which was a relatively good year for the ruble, inflation diluted its value by 23.8 percent -- meaning that a basket of consumer goods which would have cost 762 rubles at the beginning of the year cost 1,000 rubles by year's end.

  • Over the same period, inflation diluted the value of the dollar by only 2.6 percent.

  • By legitimizing the dollar, a currency competition would develop which would force the Central Bank of Russia to produce a quality ruble -- or the dollar would drive it out of circulation.

Hanke predicts that Boris Yeltsin's shaky position would get a quick boost if he allowed his fellow Russians to make an honest choice between the dollar and the ruble.

Source: Steve H. Hanke (Johns Hopkins University), "Only the Dollar Can Rescue Russia," Wall Street Journal, August 21, 1998.

 

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