The Soviet Union is beset with a myriad of problems as
the final collapse of socialism approaches. One of these is how to make
the ruble freely convertible with Western currencies.
What seems to be missing in the discussion about
convertibility is that this problem cannot be solved in isolation. It is
impossible to create a convertible currency without establishing
property rights and a system of free exchange such as exists under a
market economy. Recent proposals to establish a gold standard or to back
the ruble with a basket of commodities will fail in the long run if the
economy can't produce goods that are marketable to the rest of the
world.
What is Money?
In discussing the convertibility of the ruble, one must
first determine what money is, and why anyone would wish to possess it.
Ludwig von Mises established in The Theory of Money and Credit (1912)
that money is simply a medium of exchange. It is a good that is desired
not primarily for direct use, but because it can later be traded for a
good that the consumer wishes to use. Money allows indirect exchange,
not only in the present time and place, but across time periods and
locations. Mises pointed out that the advantages of indirect exchange of
goods, and the specialization of labor that this allows, are
sufficiently strong that some commodity will be established in the
market as the good that trades for all other goods. This will occur
naturally, without the need for government action.1
Thus, someone would want to possess rubles only because
he or she hopes to exchange them at a future date for goods or services.
When we say we want to make the ruble convertible, what we really mean
is that we hope individuals will accept it as a medium of exchange,
without being required by their government to do so. They will either
trade goods and services for rubles, or they will exchange other mediums
of exchange for rubles. In other words, the ruble will be convertible
when the market accepts it as money.
A Gold-Backed Ruble?
It has been suggested that backing the ruble with gold
will make it a convertible currency.2 This, of course, will
work after a fashion. But let us think for a moment about what we mean
by backing the ruble with gold. It means that the Soviet government
would be willing to exchange a certain amount of gold for a paper ruble.
This means that rubles will have become certificates that are claims to
gold.
Why would anyone want a gold-backed ruble? Only because
one wished to exchange it for goods or services, or for gold, and later
to use the gold to exchange for goods or services. Suppose that the
Soviet economy remains in disarray, unable to produce goods and services
that are competitive with the rest of the world. This means that Soviet
citizens will find their rubles are convertible all right, in the sense
that producers in other countries will accept the Soviet rubles in
exchange for goods and services. But the rubles that are accepted won't
be traded for Soviet goods and services. Instead, they will be exchanged
for gold. Eventually, the Soviet Union will run out of gold as its
citizens exchange the gold-backed ruble for foreign goods and foreigners
exchange the ruble for Soviet gold. When this happens, the ruble will no
longer be convertible, and the Soviets will have traded their stockpile
of gold for a basket of Western goods and services.
The Only Solution: Free Markets
The only thing that will lead to long-run
convertibility of the ruble is the production of goods and services in
the Soviet Union that can be exchanged for goods and services produced
in other countries. And this can only occur through the institution of a
free market system of production with full private property rights. It
is not the purpose of this note to argue the efficacy of the free market
system. This has been argued elegantly by the Austrian school of
economists and within the pages of this journal over the years. Mises
demonstrated over half a century ago that there is no method by which a
socialist economy can determine the proper allocation of
resources.3 Without free market pricing, value cannot be
assigned to the outputs of the system, and thus one has no way of
knowing how much to produce of any good or service, what resources
should be used in the production of goods or services, how much to
produce of intermediate goods, and so on.
Clearly this century's experiment in state-run
economies provides ample evidence of the failure of the socialist
system, in any form, to produce goods and services that meet the
standards of a capitalist economy. Any recent issue of The Economist
will document the inability of the Soviet economy to function. The
Soviet Union is having difficulty servicing its debts because the
markets for its oil and arms, the only items that have a ready market in
the rest of the world, are deteriorating.4
Institution of a market economy is the only method by
which the Soviet Union can become a sufficiently efficient producer so
that there will be a demand for its goods and services from the rest of
the world. This is really what the Soviets are after, since they wish
access to Western goods and services, with currency convertibility being
only the means by which that will be accomplished.
This is not to say that the ruble shouldn't be
gold-backed. As Mises and others have pointed out, the primary advantage
of a gold-backed currency is that it puts constraints on the issuing
government that disallow the debasing of the currency. 5 This
makes the currency more useful as a medium of exchange over time and
would aid in establishing the long-run convertibility of the ruble. But
the institution of a free market economy is the primary prerequisite to
making the Soviet currency convertible.
Once a free market economic system is established, a
gold-backed ruble would certainly trade in world markets for goods and
services as well as exchange for foreign currency. But why not move
further into the realm of free markets? In conjunction with a
gold-backed ruble and a free market economy, allow the Soviet citizens
to transact in any currency they choose. Those currencies that were most
useful as a medium of exchange would dominate the market. 6
Most probably, the West German mark, the U.S. dollar, and the
Swiss franc would be the primary competitors of a gold backed ruble
within the Soviet Union. The effect would be to make the ruble
convertible in the Soviet Union as well as abroad.
At the time of the original publication, Dr Wolfram
was the George Munson Professor of Political Economy at Hillsdale
College.
1. For a nice discussion of Carl Menger's theory of the
origin of money, see Murray Rothbard, What Has Government Done To Our
Money? (San Rafael, Ca.: Libertarian Publishers, 1985), or directly,
Carl Menger Principles of Economics (Glencoe, Ill.: Free Press, 1950).
2. See, for example, Murray Rothbard, "A Gold Standard
for Russia," The Free Market, January 1990, p. 3.
3. Ludwig von Mises, Socialism: An Economic and
Sociological Analysis, German editions in 1922 and 1932, (latest
edition: Indianapolis: Liberty Press/Liberty Classics, 1981).
4. "Russia's latest queue: for creditors," The
Economist, May 19-25,1990, p. 76.
5. See, for example, Mises, The Theory of Money and
Credit, (Irvington, N.Y.: FEE, 1971), p. 438.
6. A well-argued case for a free market in money can be
found in Hans Sennholz, Money and Freedom (Spring Mills, Penn.:
Libertarian Press, 1985).
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
January 1991, Vol. 41, No. 1.
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