Ron Paul Statement on Russia and the IMF
September 19, 1998
(J. Bradley Jansen was Ron Paul’s legislative staffer for these issues at the time)
Opening Statement by Rep. Ron Paul
General Oversight and Investigations Subcommittee,
Banking and Financial Services Committee
Hearing on Russia and the IMF, September 10, 1998
What we are witnessing, now this time in Russia, is the natural consequence of a sustained world-wide credit expansion of unprecedented proportions. By following an inflationist, easy credit policy, the Russian government has brought many of the current problems on itself. Printing money to cover excessive government spending contributes to inflation which, in turn, devalues the currency. The monetary meltdown in Russia, worsened with International Monetary Fund involvement, is a natural consequence–the correction for the misguided policies. Market reality should be acknowledged and allowed to make the necessary corrections. According to free market/sound money economics, all credit expansions set the stage for the correction.
The new, post-Bretton Woods era is one where the IMF is not only unneeded but counterproductive. Martin Mayer, guest scholar at the Brookings Institution and author of The Bankers: The Next Generation, writes in a recent Barrons column, “Seen through a wide-angle lens, the storms that have buffeted banking (and incidentally, Asia and Russia) reveal our ongoing passage from a climate where banks dominate markets to a climate where markets dominate banks.”
Governmental institutions, such as the IMF, that attempt to “manage” the market are destined to fail. Better alternatives exist. Federal Reserve Board Governor Alan Greenspan makes clear that the gold standard approach makes adjustments automatically without the need for a money manager. His September 1, 1981 Wall Street Journal article could be applied to Russia now; he proposed to institute convertibility gradually by, in effect, “creating a dual currency with a limited issue of dollars [or in this case rubles] convertible into gold. Initially, they could be deferred claims to gold, for example, five-year Treasury notes with interest and principal payable in grams or ounces of gold.”
Wayne Angell, then senior member of the Board of Governors of the Federal Reserve, did in fact propose a similar gold standard approach specifically for Russia in the newspaper Izvestia (later excerpted in the Wall Street Journal) in 1992. He wrote, “ There is widespread agreement that in order for Russia and the other states of the former Soviet Union to reap the full benefits of a market economy, sound money with a stable value in terms of purchasing power is required.” IMF prescriptions for currency devaluations violate this simple principle.
Other thoughtful proposals to allow for market mechanisms to work are being proposed and deserve consideration. I hope that our speakers today could provide some insight into these ideas. One is to acknowledge the current reality and “dollarize” the economy such as Panama and use U.S. currency notes as legal tender in Russia–this action could legitimize much of the black market trade in the country.
A politically more palatable proposal could be to legalize dollars in parallel with a ruble governed only by a currency board as Argentina has instituted. Domingo Cavallo’s advice stems from Argentina’s successful experience arresting hyperinflation. Any market proposal must curtail the government’s ability to create credit artificially.
Murray Rothbard, in an article A Gold Standard For Russia, reprinted in his book Making Economic Sense, comments on the interview Wayne Angell gave for Izvestia, that he “proceeded to a cogent explanation of the importance of a prompt return to gold…To gain credibility [after being systematically depreciated], to become a truly hard money, Angell explained, the ruble must become what Angell, with remarkable candor, referred to as ‘honest money.’” Average Russians have suffered long enough with the IMF’s prescriptions for dishonest money.