Yeltsin’s Monetary Reform in Russia

Russia opened the 1990s in monetary chaos, manifested by soaring inflation, and a currency, the ruble, that had long been shielded from the free-market forces of foreign exchange markets. In foreign exchange markets, currencies are bought and sold with other currencies, as when Japanese yen are purchased with United States dollars.
Under economic reforms, prices, unfettered from state controls, took off, creating a ruble shortage that left some workers unpaid for months. Wages and pensions rose, and the Russian government cranked up the printing presses on a round-the-clock basis. For the month of July 1992 alone, the government printed up more rubles than the Soviet Union government had printed up in its last 30 years. To expedite the process, the government increased the largest denomination of the printed ruble from the 200-ruble note to the 1,000-ruble note. Coins also became available in higher denominations. Inflation reached its peak in 1992 when monthly inflation rates ran 15 percent, and prices increased 200 percent over the year.
In 1993 the government begin to step on the monetary brakes, but in ways that threw the country into deeper confusion. In July the government invalidated all rubles issued before 1993, and gave people only a few days to convert the old rubles into new rubles. It also put a limit on the number of old rubles that foreigners could convert into new rubles. Citizens could convert up to 35,000 old rubles into new rubles, and if they held additional rubles, these had to be put into savings accounts for six months. By the end of 1997 annual inflation had fallen to the 12 percent range, and the government announced a plan to lop off three zeros from the ruble. Effective 1 January 1998, in what was essentially an accounting reform, 1,000 rubles became 1 ruble, and all prices, balance sheets, debts, etc., were adjusted accordingly.
One legacy of the Soviet regime was tight control over the conversion of rubles into foreign currencies. Tourists were able to convert foreign currencies into rubles at a rate close to a black market rate, but set by the Russian Central Bank. Foreign-owned enterprises earning profits in rubles faced a special difficulty. If a foreign-owned company wanted to send profits home to the parent company, those profits had first to be converted from rubles to the home-country currency at a disadvantageous exchange rate set by the Russian government. To attract foreign investment, and integrate the Russian economy into the world economy, Russia had to make the ruble convertible into foreign currencies at free-market rates.

A loan from the International Monetary Fund helped the Russian government marshal the foreign exchange reserves needed to establish a convertible ruble. On 1 July 1992 the Russian government established a single exchange rate between the dollar and the ruble at an initial rate of 126.5 rubles per dollar. The responsibility for adjusting the rate fell to the Russian Central Bank, which planned to set a rate based upon twice-weekly currency auctions. After July 1993 the Russian Central Bank pegged the ruble to the dollar in a crawling peg system that avoided wild fluctuations but allowed the ruble to depreciate over time relative to the dollar. In 1996 Russia further broadened the ruble market by allowing foreigners to buy and sell Russian government bonds in secondary markets. Russian government bonds, paying over 100 percent interest at times, constitute a major demand for rubles. Rubles must be purchased first before bonds can be purchased. The astronomical interest rates on Russian bonds were sometimes necessary to maintain a demand for Russian rubles. Despite high Russian interest rates, the ruble steadily declined relative to the dollar, falling to a rate of 6,200 rubles per dollar at the end of 1997. After three zeros were lopped off, the rate became 6.2 rubles per dollar.
In 1998 the Russian government again turned to the printing press to solve Russia’s problems, putting pressure on the ruble in foreign exchange markets. The value of the ruble fell sharply in august, and to help cope with the crisis the government imposed a moratorium on payments on foreign debt, significantly adding to the severity of a global financial crisis. By the end of the year the ruble was trading at around 20 rubles per dollar.

See also:

Hanke, Steve H. 1998. Is the Ruble Next. Forbes (9 March): 64–65.
Wall Street Journal. 1991. “Soviet Printing of Rubles Soared in 11-Month Period.” 24 December, eastern edition, at A8.
1992. “Russia, Facing Inflation, Plans Bigger Banknotes.” 31 January, eastern edition, at A10.
1992. “Russia Plans to Make Ruble Fully Convertible by August 1.” 6 May, eastern edition, at A3
1993. “Chaos in Russia Mounts.” 26 July, eastern edition, at A8.
1997. “Russia’s Overhaul of Ruble Prompts Unease in Nation.” 31 December, eastern edition, at A7. 

Yap Money

The inhabitants of the island of Yap, one of the Caroline Islands in the central Pacific, adopted large, thick stone wheels for money, a primitive medium of exchange that survived into the post–World War II era. The inhabitants called this from of money fei. A study of the operation of this system of currency reveals interesting insights into the nature of money that are relevant for modern monetary systems.
The stone wheels ranged in diameter from a foot to 12 feet and the larger stones were virtually immovable. The hole in the center of the stone wheels varied with the diameter of the stone, and the smaller stones could slide over a pole and be carried. The stones were quarried from Palau, about 260 miles away, and sometimes from as far away as Guam. Stones could serve as fei only if they were made of a fine, white, close-grained limestone.
One of the interesting characteristics of this currency was that the owner did not have to take possession of it. In transactions involving these large stones, a buyer would give ownership of the fei to a seller in return for goods. The seller, however, would not actually take possession of the fei, but would leave it on the premises of the buyer of the goods. A mere acknowledgment that the seller owned the fei was all that was needed to signify its new ownership.

The logic of the Yap monetary system went so far as to acknowledge the wealth of a family on the strength of the ownership of a very large stone that had been lost at sea for several generations. According to tradition, an ancestor of this family had secured this fei and was towing it home on a raft when a storm rose, and the stone ended up at the bottom of the sea. Because all aboard the ship towing the raft testified to the size and quality of the stone, and that it was lost at no fault of the owners, the inhabitants of Yap agreed that the stone belonged to the family that lost it and that its market value remained unimpaired. Therefore the family enjoyed the purchasing power of this stone just as if it lay on their own property. 
Another interesting anecdote related to the Yap monetary system occurred after the German government purchased the Caroline Islands from Spain in 1898. The German government wanted the natives of Yap to improve the roads and make them suitable for more modern vehicles. When the natives rather obviously neglected to improve the roads, the German government was faced with finding a way to fine the natives. Since removing fei was difficult, and the stones had no value outside of the island of Yap, the German government hit on the idea of sending an agent around to paint a black cross on the most valuable stones to signify a claim of the German government. The natives of Yap immediately set to work to improve the roads. After the German government was satisfied that the roads were improved, it sent an agent around to remove the crosses, and a great rejoicing rose up among the natives.
The value of the primitive money on the island of Yap depended upon the faith of its inhabitants. The idea of accepting money on faith must seem ridiculous to modern-day advocates of a gold standard as the necessary backbone of any paper-money system. The acceptance of paper money in our modern economies, shorn of the assurance of the gold standard, requires that people have faith that government will not mismanage the money supply, causing it to lose its value from inflation.

See also:

Angell, Norman. 1929. The Story of Money.
Friedman, Milton. 1992. Monetary Mischief.

Gillilland, Cora Lee C. 1975. The Stone Money of Yap: A Numismatic Survey. Smithsonian Studies in History and Technology. No. 23.