roulette: 10 Things I Wish I'd Known Earlier

Posted by Roseline on June 12th, 2021

ON THE morning of July 20, I was busy ducking requests from the editors of this magazine to write a column about Alan Greenspan when I opened the newspaper and discovered Tatyana Paramonova. The most recent nominee to head the Central Bank of Russia, Paramonova had been rejected for the second time by the Russian Parliament. In her eight months as acting chairwoman, she had cut the annual rate of Russian inflation from around 1,200 percent to 225 percent. But in the end she had run afoul of a superior force -- Russian bankers. Paramonova has declared war on large Russian banks, a banker was quoted in The Financial Times, so we have no alternative but to declare war on her. It turns out that Russian banks borrow long-term at fixed rates of interest from the Central Bank of Russia, and lend short-term to their customers. High inflation allows them to repay their debts to the Central Bank with cheaper rubles.

As a substitute for Greenspan, it is true that Paramonova had her disadvantages. She was a long way from New York; she had little immediate effect on the United States bond market; and while the slightest monetary miscue in America is surprising and newsworthy, total chaos in Russia is not. But thats almost the point. The American way of life is now more likely to be screwed up by the Central Bank of Russia than by the Federal Reserve Board. Central bankers in rich countries no longer have the power to commit serious crimes against their economies. Greenspan would be stripped of his authority by American bankers long before he would be allowed to debase the dollar badly. But whoever replaces Paramonova will be in precisely the opposite position: her successors mandate from Russian bankers will be to hyperinflate the ruble and thereby pave the way for yet another Russian revolution.

Back in 1988 at one of the first Fed meetings run by Greenspan, a fellow governor brought up a curious fact. There were fewer 0 bills circulating inside the United States than inside the Soviet Union. So meaningless was the ruble that the dollar had replaced the Soviet measure of value. In early 1991, as the Soviet Union unraveled, the need for a sound ruble became an article of faith among Russian bigwigs. An influential banker named Viktor Gerashchenko claimed that the Soviet people want a Central Bank that will sometimes say nyet to the Government. That year the Central Bank of Russia announced its first great ruble reform: it froze all savings accounts and declared all 50- and 100-ruble notes worthless, all of which lead a Russian electrician standing outside the bank that had confiscated his life savings to famously proclaim, First there was nothing to buy, and now there is no money to buy it with. In the Soviet Union, this is economic reform.

BUT THE SUBSEQUENT behavior of the new Russian state made the Soviet reform look like an economics seminar at the University of Chicago. By September 1991, austerity was again out of fashion. One chairman of the Central Bank was tossed out and another dragged in, namely the above-mentioned Viktor Gerashchenko. Fifty- and 100-ruble notes were printed again, together with a new 500-ruble note. In the fall of 1992, after yet another failed attempt at reform, the ruble was allowed to float a bit against the dollar. (The official exchange rate had been fixed so that the ruble appeared to be worth more than a dollar.) It opened at a penny and fell quickly to less than half a cent. In January 1993, with the Central Bank printing money so rapidly that it feared running out of paper, the ruble collapsed to one-tenth of one cent. In July 1993, the Central Bank declared yet another reform: all rubles printed before 1993 were worthless. At the same time, it printed new rubles even faster than before so that they, too, became worthless. Inflation spiraled upward until October 1994, when Gerashchenko resigned and the ruble fell to its low of about one-fiftieth of one American penny (that is, one dollar fetched 5,130 rubles).

AS ANYONE KNOWS who has skimmed The World Book Encyclopedia, the history of Russia can be understood as a struggle between the White Russians and the Slavs, or the Russians with long necks who want to be more like the West and the Russians with thick necks who dont. The long necks may drag Russia westward for a while, but the thick necks eventually drag it back into oblivion. To preserve their dignity and often their lives, the long necks erect a Potemkin village of sorts and then retreat hastily to Paris, until the time comes when the thick necks discredit themselves so much that the long necks are given another chance.

Last month, I think, may be viewed as the moment the long necks gave up and erected their Potemkin village. A few days before Paramonovas telling defeat in Parliament, the ruble was anchored to the dollar. Another reform! The Central Bank of Russia promises that from now until Oct. 1, the ruble will rise no higher than 4,300 and fall no further than 4,900. Supporters of the new move offer two arguments: the first is that it will reduce roulette system uncertainty and thus encourage investment; the second is that it improves discipline. That is, when hungry serfs demand rubles to reap the potato harvest, as they always have at this time of year, the Central Bank chairman, whoever that ends up being, can point to the dollar and say, Sorry, we need to keep the ruble strong, and so this year youll have to starve.

OR SO GOES THE THEORY. In practice, the pressures to finance the war in Chechnya, to pay the 1.5 million Government workers who recently took to the streets to demand back pay and to harvest potatoes are what they always were. That is why the behavior of the Russian bankers is so unsettling: Now is the time the Russian bankers are meant to unite and squash the serfs, to preserve the value of their debts to the banks.

Every once in a while some outraged journalist proves once and for all that the Federal Reserve is a conspiracy of American bankers to make the rich richer and the poor poorer. The argument usually turns on the belief that a low rate of inflation helps rich people by preserving the value of their dollars but hurts poor people by slowing the economy. The theory is in many ways ridiculous. For instance, the cost of inflation falls less on the rich than on people with fixed incomes, who tend to be middle class or lower, but it does include at least one indisputable truth: rich people everywhere do indeed loathe inflation. Everywhere but Russia, where the rich have long since abandoned their currency for ours.