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Federal Reserve advised gold standard for Russia

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Quote Originally Posted by jmdrake View Post
I ran across this information by accident (providence?) while looking for something else. The first link is an essay from Jude Wanniski who went with fed governor Wayne Angell to Moscow right after the collapse of the soviet union. Note that Angell advocated the new Russia to go to a gold backed currency! The second link is an online Google book from the Mises institute that talks about the same essay. I've excerpted the essay bellow. (It's too long to post directly). It's interesting to note that the tension in the Baltics really resulted from monetary policy. (It really is the economy stupid). Also note that the writer advocated an eventual international gold backed standard! Is that what we are facing? Remember Medvedev recently showed the prototype international coin. Is the plan to finish off the dollar and advocate a new gold backed international currency? Why not simply back the dollar with gold and keep our own currency? Anyway, interesting read. I may write this up for a blog post at some point.

Mission to Moscow
Jude Wanniski
September 14, 1989

Executive Summary: Fed Governor Wayne Angell and I spent the first ten days of September in the Soviet Union at the invitation of the government, to offer advice on the deteriorating state of the economy. We went thinking Moscow had a year or two to work things out, but quickly realized the economy is on the verge of a serious inflation that could accelerate geometrically. We advised an immediate government commitment to gold convertibility of the ruble, at a gold/ruble exchange rate that would have immediate credibility with the Soviet people and international community. The USSR has neither a central bank, in our sense, nor a bond market, so cannot manage the forces that have ironically been put into play by Gorbachev's moves toward market socialism. Receptivity was very high because the economic and financial officials in Moscow are despairing of the approaches they have taken thus far. Angell argued that a gold-convertible ruble, a credible unit of account, is the first thing the government must do, not the last in a chain of policy moves. It could then issue gold/ruble bonds that would be in such demand in the USSR and foreign markets that the budget deficit could be financed with 3% interest rates instead of printing press money. There is no alternative we could recommend if they wish to prevent either the break-up of the Soviet Union, civil war, or a return to a fascist command economy. Fed Chairman Alan Greenspan's October trip to Moscow now becomes extremely important.

Mission to Moscow

Federal Reserve Board Governor Wayne Angell and I spent the first ten days of September in Moscow and Leningrad at the invitation of the Soviet Government and state bank, Gosbank. We were urged to speak frankly with economic advice, and as the visit unfolded, the central theme became our insistence that only by going immediately to a fully convertible gold ruble can the nation avoid economic disaster, which is almost upon it.


We told them in separate meetings that we found the situation worse than we anticipated, the state enterprise ruble economy on the verge of collapse. Its arithmetic deterioration is approaching geometric deterioration, as a result, ironically, of the market forces Gorbachev put into play in the last eighteen months.


The political unrest in the Baltic states is directly related to this banking issue, with Estonia recently asking for its own central bank and currency. Estonia, Lithuania and Latvia, where there is still a "market memory" compared to the rest of the USSR, are angry at seeing their shelves stripped by Soviets coming from other republics with the increasingly worthless rubles. The Soviets in Moscow insist the Baltic states are able to produce more because their raw materials are so heavily subsidized by the state. The Baltics have specialized in clothing co-ops, pulling in subsidized fabrics and threads from the other republics and peddling apparel at prices only other co-opers can afford. Petroleum, for example, is sold by the state at 3 rubles per barrel, which at the street exchange rate would be the equivalent of 30 cents a barrel. The high-income co-op employes and black marketeers pay the same 35 cents a gallon at the state gas pumps as the low-income state employes.


Angell also observed that the Soviet Union has no history at all of a "full-bodied money," as he put it. The United States has its roots in a gold standard, with elaborate mechanisms now in place to manage the dollar value of other currencies and commodities, including gold. Except for a very brief period in 1921-22, when the USSR had side-by-side gold notes and fiat rubles, the entire Soviet experiment over 72 years has been burdened by the absence of a predictable unit of account. In this connection, I advised our hosts that a gold convertible ruble might permit perestroika to proceed without privatization of property, as Gorbachev now insists. Angell emphatically agreed, although we of course said we were biased toward private property. Our relative neutrality on this point was a great relief to our hosts, who had been hearing from other visiting "conservatives" from the U.S. that private property was the essential key.

But neither a capitalist system nor a socialist system can do without a recognized, predictable money, we insisted. Operating without one, I said to several of the dozen groups we met with, was like trying to build a building with a meter that meant different things to the architect, the engineers, and the construction workers, sometimes six inches, sometimes between 15 and 30, sometimes 39 or more. Angell used as a metaphor a thermometer with lines but no numbers and no mercury. Such is the current uselessness of today's ruble, he said. Instead of being the last thing on the list of things to do, the cherry atop the cake, he urged the gold ruble be the first. He did so with great passion and intensity, believing after several days in Moscow that the Soviet Union is now on a course fraught with danger to its own citizens and the rest of the world. "You have to excuse my passion," he told Gosbank officials. "I'm becoming a little bit audacious and I'm almost embarrassed at my audaciousness, but I want you to know how strongly I feel about your present position."

In a speech Gorbachev delivered Saturday, September 9, which we read about upon our return, he himself warned of the prospect of civil war in the Soviet Union should the ethnic regions persist in pressing for independence. We addressed this specifically in our Soviet audiences, pointing out that the one economic tool a central government cannot decentralize is the value of its money. A gold ruble would set up centripetal forces, binding the outlying regions to Moscow, offsetting the centrifugal forces now working to tear the Soviet Union apart.


There were questions to us on how we could be recommending gold to Moscow while the United States has demonetized gold. I advised that I favored monetization of gold for the United States, and said I believed we have been moving toward a new international gold-based system in recent years. The Fed has increasingly paid careful attention to the price of gold, Treasury Secretary James Baker in 1987 proposed a currency link to a commodity basket that would include gold. Angell simply argued that it was far easier for the USSR to achieve immediate credibility in its monetary unit by tying it to gold. The US already has a mature bond market and mechanisms to manage money. There is no way for the Soviet Union to replicate these quickly, even within years. A gold standard is the only realistic option.


The better solution is Wayne Angell's supply-side prescription. Is there time? Can it happen? We will know more in October, when our Mission to Moscow is followed up by Fed Chairman Alan Greenspan's. Leonid Abalkin, who stood up Wayne Angell, has promised to meet with Greenspan. Greenspan, at one time a fervid advocate of a gold standard may in fact advise that he agrees with Angell, that a gold standard may not be quite appropriate for the U.S. at the moment, but that it is the only monetary option open to Moscow. Angell hopes he will do just that. It would be nice if the Fed Chairman did.