[Congressional Record Volume 140, Number 2 (Wednesday, January 26, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: January 26, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                        WHEN CURRENCIES COLLAPSE

 Mr. SIMON. Mr. President, I am not a great fan of Boyden Gray 
because of a personal reason. Some time ago during the Anita Hill/
Clarence Thomas hearings, he told reporters that I was the source of 
the leak on the Anita Hill matter. While I think the key question is 
not who leaked the material but who told the truth, the reality is, I 
don't operate that way, and I was not the source for the leak. My 
colleagues on the Senate Judiciary Committee know that. And I am 
pleased to say, when asked, that three of my colleagues who voted for 
Clarence Thomas said that they did not know who leaked, but they were 
sure I was not the person.
  Just as Boyden Gray can be wrong on some things, he can be right on 
some things. Recently, he had an op-ed piece in the New York Times, 
which is absolutely on-target about the currencies of Russia and the 
Ukraine.
  I was the chief sponsor of the bill for aid to Poland after the 
dramatic changes there. I remember borrowing a typewriter from 
Ambassador John Davis in Warsaw about midnight and typing up the aid to 
Poland bill, which was modified only slightly in the process of 
enactment.
  The dramatic changes that have taken place in Poland would not have 
been possible without a resolve on the part of the Polish Government to 
have a solid currency. That encouraged investment. They made the zloty 
a respectable currency. I can remember being in Poland, when at the 
airport in Warsaw, they would not accept their own currency if you 
wanted to buy something in the Warsaw airport. I know of at least two 
major American businesses that would like to invest in Russia today, 
but are reluctant to do so because of the instability of the currency.
  I assume there are many more than the two I know about.
  I ask to insert into the Record the statement by Boyden Gray. I urge 
my friends in the State Department and the administration, as well as 
my colleagues on the Senate Foreign Relations Committee, to encourage 
the Eastern European countries to do what they can to achieve a stable 
currency. Without that, frankly, I do not see much hope for things 
moving in a solid direction.
  The statement follows:

                [From the New York Times, Dec. 29, 1993]

                        When Currencies Collapse

                            (By Boyden Gray)

       Washington.--The big trade agreements of the past few 
     months have prompted rejoicing in the United States, Latin 
     America, Western Europe and Asia. But they will be of little 
     value to the former Soviet republics and Eastern Europe, 
     where the growing economic disparity with the rest of the 
     world will sow the seeds of enormous regional violence if it 
     is not corrected soon.
       The key to the economic plight of these nations is all too 
     easy to overlook: the terrible instability of their 
     currencies and the great difficulty of converting them to 
     other currencies. Yet if the U.S. and the rest of the world 
     ignore the currency problems of the old Soviet bloc, we will 
     be repeating the very mistakes that led to World War II--and 
     forgetting the lessons of the 1940's, which not only 
     corrected these mistakes but also laid the basis for a world 
     trading system and for the collapse of the Soviet empire.
       What were these mistakes and lessons? Apart from the 
     wrongheaded Smoot-Hawley tariff of 1930, the major mistake 
     was to pull the financial plug on Germany in the 1920's, 
     leaving it unable to establish sound money and trade with its 
     neighbors. And it was the genius of the Marshall Plan to help 
     re-establish all of Western Europe as a economic trading bloc 
     after the war, so that everyone, winners and losers alike, 
     could rebuild and prosper.
       The key to the Marshall Plan's success was not foreign aid 
     itself but the establishment of the European Payments Union, 
     which guaranteed that currencies could be freely converted 
     throughout Western Europe so that countries could attract 
     outside private capital and grow through expanded trade with 
     their neighbors.
       But today there is no reliable or predictable currency 
     convertibility and therefore no equivalent opportunity for 
     investment, trade and growth in Eastern Europe and the former 
     Soviet Union, no matter how much foreign aid we pump in. This 
     means economic decline and soaring inflation throughout the 
     region--conditions that closely resemble Germany's between 
     the wars.
       What can be done? As the Marshall Plan showed us, currency 
     convertibility is essential to outside private investment and 
     expanded trade. It requires special attention because there 
     are so many pressures to look the other way. In the short 
     term, the West lacks the incentive to correct the situation: 
     private financial institutions find it too easy to make 
     short-term currency profits out of the chaos. The countries 
     themselves have no short-term incentives, either: clamping 
     down on inflation means denying them the joys of a 
     discretionary fiscal policy--especially deficit financing 
     (used now primarily to keep the old state-owned enterprises 
     afloat).
       Yet without stable currencies throughout Eastern Europe, 
     privatization is certain to be a failure. We in the West take 
     for granted the legal institutions that make privatization 
     possible--the rule of law, the enforceability of contracts 
     and the independence of the judiciary. These are all legal 
     developments that took a thousand years to mature and are 
     essential to the preservation of property values that are in 
     turn essential to a market economy, if not also to democracy 
     itself. They are largely missing in the former Soviet bloc.
       Even without them, Eastern Europe could obtain much of 
     their benefit by looking to their currencies as the basis for 
     a stable, transferable and convertible store of property 
     values. The best way to do this--and to emulate the best of 
     the Marshall Plan--is to establish currency boards in every 
     Eastern European country.
       A currency board is simply a monetary authority that links 
     the money it issues to a reserve of hard currency, like the 
     U.S. dollar, by means of a fixed exchange rate and 100 
     percent backing for the notes and coins it issues. (The 
     reserve can be built up in any number of ways, including 
     loans from the International Monetary Fund with natural 
     resources as collateral.) The board earns a profit because 
     its assets (reserves) earn interest and its liabilities 
     (notes and coins) pay none. A currency board system is 
     automatic, like a gold standard. It has no discretionary 
     monetary or fiscal powers, and no power to act as a lender 
     of last resort.
       Since the establishment of the first currency board (in 
     Mauritius, in 1849), there have been more than 70 around the 
     world. All have delivered sound money even during civil wars.
       The key to their success is their simplicity and foolproof 
     nature. The Marshall Plan's payments union assumed a level of 
     sophistication in currency operations in Western Europe that 
     simply does not exist in the East. So a simpler, more error-
     proof mechanism is necessary.
       John Maynard Keynes established a currency board in 
     northern Russia in 1918, in the middle of World War I and the 
     Russian Revolution. It functioned very well for two years 
     until the Bolsheviks tore it down.
       There are, of course, modern examples of currency boards. 
     Hong Kong's is the most famous, and its dollar-backed 
     currency is providing much of the stability behind South 
     China's current economic miracle. Similar growth is happening 
     in Argentina, for similar reasons.
       A more pertinent case is Estonia. Like Argentina, it has 
     the substantial equivalent of a currency board; both nations 
     follow closely the advice given by Steve Hanke, the Johns 
     Hopkins University economics professor whose ``Monetary 
     Reform in a Free Estonia'' and ``Central Bank or Currency 
     Board?'' were published in Estonian and Spanish, 
     respectively. He has also provided advice on Lithuania, which 
     is seeking I.M.F. and World Bank help to copy the Estonian 
     experience.
       What's most urgently needed is for a Western banking 
     consortium to set up currency boards in Ukraine, whose 52 
     million people are saddled with inflation of almost 100 
     percent per month, and in other republics of the former 
     Soviet Union. As the recent Russian elections made all too 
     plain, economic instability can lead to political 
     instability. Who would want to promote such a risk in 
     countries that still have nuclear arsenals?

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