ABSTRACT
The U.S.S.R. and nations of Eastern Europe have experienced much more serious currency inconvertibility problems than the capitalist market economies. Currency inconvertibility is, in fact, an endemic disability in these nations and can be eliminated only by introducing free prices and markets in place of direct control central planning. This inconsistency between central planning with direct controls and convertibility does not seem to have been well-understood in the pre-Gorbachev period as indicated by the number of unsuccessful efforts made to eliminate the negative effects of inconvertibility on foreign trade and investment. For example, in 1963, CMEA established an International Bank for Economic Cooperation (IBEC) which issued a new international currency, the Transferable Ruble (TR). The TR was supposed to eliminate one of the most serious problems in intrabloc trade, namely, the need to balance trade bilaterally between each pair of nations. This attempt failed. Several other attempts were made, all unsuccessful. Also largely unsuccessful were attempts to launch joint ventures and investment projects. A third problem—how to determine an efficient commodity structure of trade with irrational prices and nonfunctioning 406exchange rates—was never successfully solved. In the 1970s, in an effort to cope with inconvertibility problems in East-West trade, the TR was declared “externally” convertible. Within two years, this effort was abandoned. With the exception of abortive externally convertible TR, Soviet efforts were not really designed to achieve convertibility, but simply to ameliorate the problems connected with the rigid bilateralism caused by inconvertibility.
With perestroika and its aim of “ultimately” replacing planning with decentralized economic activity and free prices, convertibility became a realizable goal, one that was understood by many eastern economists. Unfortunately, progress toward reform was slow and inflationary pressures grew rapidly constituting a multi-faceted deterrent to ruble convertibility. An even more serious deterrent developed when, as a result of glasnost, ethnic and nationalistic unrest burgeoned, reducing Soviet and increasing republican power. Before Gorbachev was replaced, the power over taxes and foreign exchange had largely shifted to the republics, making it impossible for the Soviet Government to manage the ruble. The major problem now, under CIS, is whether there will be a currency union with all the republics using the ruble or, more likely, whether each republic, in due course, will introduce its own currency. There are advantages and disadvantages to each course of action but it appears that there is so much diversity of interests between republics that each will have to manage its own financial affairs. The republics that have their own currencies will have to choose between a fixed or floating rate and, if the former, whether to tie to the ruble or to one of the major currencies. The latter course would seem to make more sense. Finally, each republic will have to decide whether to follow a “big bang” or a more measured, evolutionary transition to convertibility.
