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12 Cato J. 687 (1992-1993)
Currency Boards and Currency Convertibility

handle is hein.journals/catoj12 and id is 697 raw text is: CURRENCY BOARDS AND CURRENCY CONVERTIBILITY Steve H. Hanke and Kurt Schuler Standard textbooks characterize the evolution of an economy toward a modern market economy in the following way. Initially resources are privately owned but there is no money, so trade takes the form of unorganized barter. That is extremely costly and ineffi- cient because it requires a double coincidence of wants. The high transactions costs that result are a barrier to any trade taking place at all. To reduce transactions costs, economic agents attempt to organize barter. Marketplaces develop, with trading grounds divided into trading posts or stalls at which specified pairs of commodities can be traded. Typically, these markets will be open for trade on specified market days. Even such organized barter is very costly, however. For example, the pairwise trading of only 10 commodities requires 45 separate trading stalls. To further reduce costs, economic agents attempt indirect pairwise trading. That can be accomplished by establishing trading posts for all commodities except one, the exceptional commodity being distin- guished from all others by the fact that it is tradeable at all posts. The exceptional, intermediary commodity is money. Money facilitates the development of a modem market system by lowering the costs of acquiring information and making transactions (Brunner and Meltzer 1971). Now, let us turn our attention from the textbooks to the former Soviet Union. At the very time when the former Soviet Union claims Cato Journal, Vol. 12, No. 3 (Winter 1993). Copyright C Cato Institute. All rights reserved. Steve H. Hanke is Professor of Applied Economics at The Johns Hopkins University and Chief Economist at Friedberg Commodity Management, Inc. in Toronto. Kurt Schuler is a Post-Doctoral Fellow at The Johns Hopkins University; he was a Durrell Fellow in Money and Banking at George Mason University when the paper was written. They are the authors (with Lars Jonung) of Russian Currency and Finance: A Currency Board Approach to Reform (1993). 687

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