English translation of a pamphlet published in Russia by The Land Policy Association, St. Petersburg, Russia, April 1999
Instead of becoming wealthier and more like America since 1990, Russia is being turned into a third world country. In less than a decade the nation has been stripped of its capital and forced into debt to its former NATO adversaries. The point now has been reached where new credit merely covers the interest charges on past loans, so that the debt grows exponentially. Russia is being turned into an indebted raw materials exporter, told to sell off its natural resources and public utilities at distress prices to obtain the money to pay interest on its foreign debt – and to enable investors to convert their ruble earnings into foreign exchange.
Even after this experience, Russia is being told to take yet more IMF advice as the price for obtaining new loans. The alternative is to be declared a pariah in the global economy. The policy leverage obtained by creditors thus threatens to lead to the industrial dismantling of Russia under continued austerity, or else to isolate Russia commercially much as Cold War containment did prior to 1990. One is tempted to amend von Clausewitz’s famous dictum to read that economic warfare is the continuation of military policy by financial means.
Russia’s financial distress was not inevitable. It is largely the result of having followed IMF and World Bank directives. Foreign advisors are telling Russia to depend on other countries for its food, consumer goods and most other manufactures. Russia is to pay for these imports by exporting more raw materials (thus depressing their world price, much to the benefit of industrial raw-materials importers) and selling off yet more of its public utilities to foreign buyers. The rental value of these assets is thus to be taken by their new owners, not by the public sector.
Many Russians are coming to realize that this advice has been bad, but they may not realize the degree to which Western economies are experiencing a parallel financial distress. A real estate and stock market bubble that goes hand in hand with debt deflation is sweeping North America, Europe and the third world. Although this is heralded as a sign of prosperity, more and more income must be used to pay interest and amortization on the rising overhead of personal, corporate and government debt. This shrinks current spending on goods and services.
The result has been a downsizing of employment and a slash in government spending and social safety nets in the West as well as in Russia. Meanwhile, a rising share of government budgets is being paid as interest.
The entire world is experiencing a plague of debt, aggravated by a financial system that has become decoupled from the funding of new tangible investment. In the West, banks recycle about 70 percent of savings into the real estate market, while money market funds, mutual funds and retirement funds channel most of their savings inflows into the stock and bond markets. This pattern of recycling provides a rich field of speculative gains for global investors, but creates little new tangible capital.
This phenomenon raises the question of whether Russia really wants to be like the West. Should it perhaps view the U.S., European, Asian and third world experience as an object lesson in what pitfalls to avoid? One is reminded of the popular joke that what the West warned about communism and its bureaucratic inefficiency is true, but what the communists said about capitalism and its inequities also turns out to have been true.
Ideally, a banking system’s objective should be to finance industrial modernization and employment. The government can support this aim by not taxing activities it wishes to promote. Instead of imposing income and sales taxes that fall on labor and capital – that is, instead of impeding tangible capital formation and a thriving consumer market for the products of national industry – Russia may tax the rental value of its land and natural resources.
This option no longer is available to the West. Nearly all the net cash flow generated by its urban and rural real estate, mining and other resource extraction has been pledged as debt service on the loans that banks and other investors have attached to these assets. Russia’s land and natural resources remain free of such debt as banks have not lent money against these resources, thanks to the Duma’s resistance to Mr. Yeltsin’s proposed land privatization edicts. The rental cash flow of these resources amounts to 35 to 45 percent of national income, and as much as 90 percent of Russia’s foreign-exchange earning power. Public collection of this revenue would not impair the supply of these resources, for they are provided by nature. Their flow of rent exists regardless of whether it is taken by the banking system as interest, by the government as taxes, or is not collected at all (as often is the case in socialist economies).
The government may free labor and industrial capital from the tax burden – and thereby promote their employment and upgrading – by basing its fiscal system on this rental value. Not to collect this rent would be to let it be taken in rising amounts by buyers and, at one remove, the creditors who lend these buyers the money to operate.
The underlying fiscal question for Russia thus concerns who shall benefit from the enormous rent surplus capable of being generated by its land, mineral wealth land public utilities. Will the government collect their rental potential as taxes, thereby freeing industry and labor? Or will the revenue be turned over to foreigners and a domestic elite as interest and dividends?
At stake is not only economic prosperity but Russia’s geographic integrity. The nation faces a danger much like that which confronted Yugoslavia in 1990. At the hands of IMF advisors the federal budget was slashed, leading to economic shrinkage. Tax revenues fell, and IMF “bailouts” obliged the government to pay a rising proportion of its budget as interest on its mounting foreign debt. Currency transfers led to a declining exchange rate, forcing up import prices. This increased consumer prices, but labor’s wages did not follow suit, and the domestic market shrunk even more. IMF austerity blocked the central government from making its customary transfers to outlying regions, setting in motion the separatist pressures that led to Yugoslavia’s breakup.
To avoid a similar fate Russia needs to re-inflate its domestic market by creating its own money and credit. Rather than submitting to Western-directed austerity, economic shrinkage, mounting foreign dependency and the dismantling of its industrial plant, Russia needs more money to employ labor and finance new investment. This is best achieved by creating a development bank and financial system geared to long-term industrial modernization.
What Russia has instead are private banks that have not created financial linkages with corporate enterprise, except to gain control of corporate assets and siphon off their economic surplus in various ways. They have not used their financial power to mobilize savings to fund new tangible capital formation. In effect, Russia has simply lost the money with which it has endowed these banks with government deposits that have been re-lent the government at annualized interest rates often in excess of 100 per cent. The government also has pumped vast sums of money into these banks by letting them speculate against the central bank’s futile attempts to defend the ruble’s exchange rate, a policy whose main effect has been to subsidize capital flight. In these respects Russia’s existing financial system is parasitic, not productive.
How Western financial advice has impoverished Russia
During 1992-93 the savings that Russian families had been able to accumulate were deftly wiped out by hyperinflation. The promise was that this money could be converted into popular ownership of public assets. But the Russian people never were given a real opportunity to own their industry.
The most valuable resources have been sold to officials, former managers and bankers who in turn have sold (or are selling) their shares to foreigners and moving the proceeds abroad rather than investing them in new tangible capital formation. Capital flight is reckoned as having occurred at a rate of about $2 billion per month for the past five years, some $125 billion since 1994. An estimated one-third of the U.S. currency supply is now held in Russia – mere paper, in exchange for which Russia has relinquished control of its resources.
To enable Russians to move their rubles abroad at favorable exchange rates, the nation’s gold and foreign exchange reserves have been nearly depleted and the nation has been loaded down with foreign debt. Western governments are now demanding that the borrowings undertaken to sustain this capital flight be repaid by depreciating the rate at which Russian products exchange for the imports on which Russia is increasingly dependent.
Many Russians have blamed this disaster that simply on bad administration. But it is time to recognize that for the United States and the IMF, it is a success story. Russia has been economically destroyed as a potential post-Cold War rival. Dismantling Russian industry has left the economy dependent on foreign suppliers for capital equipment and consumer goods, with only oil, gas and other raw materials to export.
Russian financial dependency on the West has been created in large part by convincing its officials of an illusion, taken on faith as it has been repeated again and again. The illusion is that it is inherently inflationary for Russia to print its own money to pay its workers and spur market demand.
To reduce prices, Russia has been advised to submit to a monetary deflation that has killed local markets, making the economy even more dependent on imports. Russia thus falls into a condition in which it must spend yet more rubles abroad. And as the ruble falls in value, Russians respond by saving what they can in the form of hard currencies.
The reality is that in conditions where substantial labor is unemployed or under-employed, more money is not inflationary. It sets labor into motion, producing more output to absorb existing purchasing power. Prices only begin to rise when full capacity is reached.
What has caused Russia’s inflation is primarily its currency depreciation. The ruble’s exchange rate has fallen as more rubles are thrown onto currency markets to obtain the dollars needed to pay interest and debt service on foreign loans (and to sustain capital flight in the absence of controls). This capital transfer exists independently of Russia’s need to balance its domestic ruble budget. The more dependent Russia becomes on foreign money and foreign bank credit, the more it needs to divert its ruble-money to pay debt service.
The major source of foreign money coming into Russia has taken the form of foreign purchases of shares in Russian firms. Unfortunately, this money has not found its counterpart in new tangible capital investment. The money is dissipated to subsidize capital flight or to pay Russia’s mounting foreign debt.
Nobody has been able to explain why creating credit to pay workers is more inflationary than borrowing the money abroad to do so. In both cases, ruble credit is created. But there is one basic difference. If the credit is created abroad, Russia owes substantial interest charges – often over 100 per cent per year for the GKOs on central bank debt. Money and credit created by governments, banks and corporations at home are free of such interest payments to foreigners.
It thus is mere pretense to claim that to pay back wages to workers (or current wages, for that matter) is inflationary. If they had more money, they would buy domestic goods that are now going unsold. There is plenty of leeway in the economy to produce more output without forcing prices higher. All that has occurred is a domestic collapse. Without a domestic market, companies and their workers have been unable to earn revenues on which taxes might be due, thereby aggravating the federal budget problem.
The policy that the IMF pretends to be non-inflationary has obliged Russia’s government to depend more on the proceeds of privatization sell-offs than on taxes. The government then is obliged to convert its ruble proceeds to pay its creditors rather than revamping the economy by supplying needed domestic credit.
In this way the IMF programs have created the balance-of-payments outflows that are mainly responsible for the ruble’s collapsing exchange rate. A vicious circle is created of falling currency values, rising import dependency, foreign debt and domestic inflation. The circle is closed as the ruble’s falling value increases import prices, and hence the price of imported consumer goods on which Russia is becoming increasingly dependent. This is just what has happened to Latin American and other countries that have submitted to IMF austerity programs.
To understand how Russia may break out of this cycle, it is necessary to clear away the illusions promoted by the United States and the IMF – monetary illusions, tax illusions, and an illusory picture of how finance-capitalism actually works.
Money, the credit system and government debt
Monetary systems are partly the product of fiscal systems. What renders money legal tender, after all, is its use in paying taxes. Until quite recent times, silver (supplemented by gold) formed the basis for most monetary systems. Increasingly, public debts (mainly war debts) have backed a credit superstructure for the world’s banking systems. Bank credit also has been created on the basis of the private-sector loans made by banks, from short-term trade financing to long-term mortgage lending.
Commodity money can be traced back some four thousand years, to the epoch when Mesopotamia denominated its public fees, tribute and taxes in silver and barley, making these two commodities the monetary standard. Governments still keep a portion of their international reserves in bullion, for that has long been “the money of the world” as James Steuart called it in 1767. Although this proportion of bullion is shrinking relative to foreign-currency holdings, its role for many centuries was to represent the foundation for banking and credit in nearly all countries. A holder of bullion was entitled to a universally equivalent value of goods, services or assets from others. In effect, the holder of bullion and coins made of precious metals was a creditor of the rest of society, or could use these metals to pay debts owed for such transactions.
Gold was effectively demonetized in 1971, when the costs of the war in Southeast Asia forced America off gold. For most of the twentieth century, central banks had kept their international reserves mainly in the form of U.S. dollars, supplemented by relatively small amounts of European currencies and the Japanese yen held in the form of their respective government bonds. In the absence of settling payments imbalances in gold since 1971, the international monetary system has come to rest on dollar-loans to the U.S. Treasury and central bank holdings of the bonds of a few other governments.
Basing international money on instruments of national debt in this way has transformed money from a pure asset (bullion) into debt-money. This use of debt to form the normal medium of exchange represents the culmination of many centuries’ development. Since the Bank of England was founded in 1694, banks in every country have tended to keep reserves in the form of Treasury bonds. National credit systems depend on the issue of such bonds by governments running deficits. Government deficits and debts thus provide national financial systems with their basic backing. (Government debt held by the banking system sometimes is called “high-powered money.”)
In his General Theory of Money, Employment and Prices (1933), Keynes established what would become a half-century of orthodoxy advocating such deficits as a means of pumping money into the economy by governments monetizing their budget deficits. Pointing out that running a budget surplus drained money from the economy, he blamed the Great Depression of the 1930s mainly on the deflationary behavior of governments in this way. Yet as recently as March 29, 1999, the IMF has is reported to have demanded that Russia either run a budget surplus, or minimize its deficit.
The IMF claims that running a deficit would pose the risk of hyperinflation rather than putting erstwhile unemployed labor and capital to work. Yet every hyperinflation in history has stemmed from the international transfer problem, that is, the conversion of large amounts of domestic currency into foreign currencies. As noted above, such transfers lead to falling exchange rates and rising import prices. Domestic prices rise to reflect the higher import costs, and more money is needed to transact business at the higher price level. The IMF’s demand that Russia balance its government budget by borrowing abroad – and that the nation give priority to paying foreigners over paying its own workers and reflating its economy – thus flies in the face of what has become traditional economic wisdom throughout the Western industrial nations. What Russia needs is not the spending cuts demanded by the IMF, but just the opposite: wages to be paid. Not to pay its wage-earners for their work only helps shrink domestic demand and domestic purchasing power. This does not “free” output for export; it makes Russia dependent.
At issue is the character of the banking and credit system best suited for Russia (and, for that matter, other countries). The Western system of basing credit systems on debt –government debt in the first instance, followed by mortgage debt – is by no means the only system that could have evolved, or that did evolve. Nor is it inherently the best system.
For instance, after the Bank of England was founded in 1694, according to the account of Adam Smith, it did very little to provide the public with a suitable means of exchange. Few bank notes were issued. On the other hand, the bank was not the worst alternative. In 1696 a rival institution was formed, referred to as a Land Bank. It was designed to provide credit mainly to the landed aristocracy rather than to meet the needs of commerce or fund the new Whig government. The medium of exchange that the bank provided was not bullion or commercial bills of exchange, but debts secured on land.
The Bank of England’s lack of effective action caused others to provide alternatives. Prior to 1740 a major need for credit was to finance agreements among landowners to enclose common land. Local banks provided the credit, though little data about these transactions has survived, as loan documentation tended to be informal.
As the Bank of England did only a limited job in providing a paper currency secured by government debt or trade financing, the American Colonies took steps to provide themselves with a paper currency, in the form of local government debt. Benjamin Franklin made his living by printing these paper promissory notes (in effect, government debt stamped “legal tender” and accepted for payment of taxes), and in 1729 published a paper to advocate this policy.
In due course the bill of exchange, a debt instrument whose history goes back to Sumer and Babylonia c. 2000 BC, supplied the demand for a medium of exchange. By 1830 such bills had become the principal medium, and discounting them represented the Bank of England’s only significant banking activity. Indeed, Britain’s rapid economic expansion between 1832 and 1839 was financed largely by these debt instruments. The Bank of England’s own note issue was restricted by the withdrawal of notes of one pound denomination; its remaining currency was backed about 50 per cent by gold.
This pragmatic history is significant for Russia’s present situation. The nation has a liquidity crisis. In practice this means a deficiency of a debt-based means of exchange. Industrial companies owe gigantic sums, which could be monetized to remedy the deficiency of credit instruments that could be used as means of payment. Russia might make use of bills of exchange as such a monetary instrument. Backed by a good “Bills of Exchange Act” to provide the requisite legal support, such credit could cure the lack of liquidity, providing the payment instruments that Russia’s banks have not yet developed.
Every country’s money, from paper currency to electronic bank money, is a form of debt. Government debt usually represents the foundation, while private-sector bank loans provide the backing for most checking and savings deposits. The credit system is rounded out by commercial credit – IOUs in the form of commercial bills of exchange – as well as stocks and bonds. In this respect monetary systems rightly should be called credit or “creditary” systems.
The monetarist attack on government spending
Governments may cause inflation by monetizing their deficits. Most public deficits stem from military spending, social programs and government investment to create national infrastructure. By its nature, such spending is political, as it must be financed either by taxes or by borrowing the money. The more that is borrowed, the higher will be the government’s level of debt service.
Its growing obligations to pay interest crowd out other categories of public spending, just as private sector debt service diverts money away from new investment and consumption. In such circumstances output tends to decline, often leading to import dependency. Instead of curing inflation, recession may lead to currency depreciation as domestic industry stagnates. The best cure for inflation is to produce more output, not to deprive the economy of credit to the point where investors and consumers become impoverished.
Pension funds, other common investment funds and indeed, all investors other than those who turn their money directly into physical capital, hold their savings in the form of financial assets, that is, loans, bonds or stocks. Prices for financial securities (including loans sold by banks on the secondary market) tend to move inversely to interest rates. Investors therefore have ambivalent objectives. They know that high interest rates bring a good return on new investments, but lower interest rates can produce a large capital gain on fixed-interest securities.
Low interest rates ought to follow from low rates of government borrowing, all other things remaining equal. Investors therefore tend to oppose government spending, especially as this usually means that the wealthy will be taxed less. Since the 1960s, opposition to taxation has become a political movement. There is even more opposition to debt-financed public spending, in order to prevent inflation from eating into the fixed incomes yielded by bonds and other loans.
The financial bogey raised by monetarists accordingly is inflation – that is, consumer price inflation and wage inflation; asset-price inflation is praised as successful wealth-creation. The way to stem inflation, they say, is to curtail the government debt that forms the foundation for modern creditary systems. Anything on which governments spend money is deemed bad; whatever private investors earn is deemed good. One way of making gains is as worthwhile as any other way. Taxes are counted as a pure waste, a distortion of economic rationality.
This philosophy runs counter to the momentum of economic thought since the late 19th century in favor of social planning to shape the marketplace within which gain-seeking forces operate. Monetarism opposes itself not only to Marxian socialism, but also to Keynesian full-employment planning and the idea of economic engineering in principle.
It is claimed that government spending distorts the economy even when it is made by public enterprises, and that only unregulated markets (that is, markets regulated by financial managers rather than elected officials) can allocate resources efficiently. There is some empirical evidence for this view, given a political philosophy which holds that governments should only undertake public operations that are intrinsically unprofitable or that should be run for social rather than profit-making reasons. Typical programs of this sort include most public welfare spending, subsidized operations, and the pricing systems of many public utilities. The French and the Japanese governments have been remarkably successful in directing investment, but the reverse has been true in Britain.
The British philosophy of Margaret Thatcher’s government – that all enterprise should be private – is strongly supported by American academics and government officials, and has become the subject of proselytizing throughout the world. A well-subsidized political campaign is demanding that governments are to be tightly circumscribed fiscally and financially. They are to deregulate industry, including even the monopolies that have been privatized in recent years. And they are to relinquish public spending to private contractors, and not to interfere with the international flow of investment funds, not even to impede capital flight by domestic elites or speculation against their national currencies. The credit supply should take increasingly the form of private debt, not government debt.
This monetarist philosophy has curtailed public enterprise throughout the world since 1980, in favor of privatization programs to sell off public enterprises and use the proceeds to cut taxes, mainly for the wealthier classes and the real estate and financial sectors. This philosophy, best popularized by Margaret Thatcher in England and Ronald Reagan in America, has had a consequence never made explicitly: It spurred a vast increase in private debt. Corporate debt helped fuel the stock market bubble, while mortgage debt powered the real estate bubble. Personal debt financed consumption, at least until the debt’s carrying charges began to eat into disposable personal income. International debts grew as Western savings spilled over into “emerging markets.”
But monetarist philosophy focuses almost exclusively on government debt. The objective is to get governments to stop undertaking social programs. They are to pay for their rising debt service not by taxing the population, but by selling public assets to the financial, insurance and real estate (FIRE) sectors – the very sectors which are receiving the growing interest payments on the national debts resulting from lowering taxes on wealth.
The sale of pubic assets is only practical in economies with high gross saving rates and large amounts of savings already in place to bid at fair prices for the assets being sold off. This is true of Britain, but much less so in continental European countries, and not at all in Russia.
Because of Britain’s low level of tangible physical investment but high rates of saving, the pension funds, life insurance and mutual funds acting for the general public needed new sources of shares and bonds. The privatization program started by the Thatcher governments had become a necessity if these funds were to find investments with any worthwhile yield. They accordingly became the major buyers of the public assets being sold off. (The money needed by private industry to finance real investment came almost entirely from retained profits, so that contributions from other savers were not necessary, on balance.)
Such a privatization policy would yield little in economies that lack savings media. In such circumstances privatization only can be effected by the distribution of shares to the broad public. Unfortunately, Russia made a charade of this policy, largely at the instigation of IMF directives drawn up in 1990, years before Mr. Chubais followed the advice of Jeffrey Sachs in implementing the voucher program.
Privatization and deregulation have made the financial, insurance and real estate (FIRE) sectors the major beneficiaries, but some governments have found ways to obtain some share of the capital gains and profits. Once Britain had exhausted its inventory of assets to privatize, for instance, the continued growth of its savings caused asset prices to rocket. This provided the government with an enhanced source of revenue from the capital gains tax. The general public paid most of the tax revenue, as pension funds were declared tax-exempt. But Russia has not been able to collect taxes on capital gains or otherwise share in the rising market prices for the public assets that have been sold off.
Why did it adopt monetarism’s anti-government philosophy? The answer lies in the sphere of ideology. Too disillusioned with central planning to attempt to create a “third way,” Russia threw out the baby of market socialism with the bureaucratic post-Stalinist bathwater. Ideas of market socialism and worker control that had been developed since the 1950s were abandoned as Russia swung from one extreme to the opposite, not even pausing to consider creating a German-type social democracy, to say nothing of a Czech- or Hungarian-type system.
What was not recognized was that Russia’s adoption of Western monetarism was designed not to build up Russia’s industrial capital but to dismantle it; not to create prosperity but to make it more dependent on America and Western Europe. Prior to Russia such programs had been adopted only by the world’s poorest and most deeply indebted autocracies. Russia became the great experiment applying such theories to a highly industrialized nation.
Russia’s 1990 austerity program – America’s final Cold War Victory
U.S.-IMF advice was never intended to help Russia be like America. To have done this would have been to support a potential rival. The U.S. objective has little to do with communism or democracy; it is geopolitical, aiming to minimize the economic and military power of any such rival, be it capitalist England, France or Germany, or Japan’s mixed economy, post-socialist Russia or the rest of central Europe.
In 1990 a perverse economic philosophy – monetarism – was at hand to promote the dismemberment of the Russian federation Yugoslavia-style. Its military-industrial capacity was to be destroyed not by military force but by enmeshing its policy-makers in a web of false assumptions concerning how monetary and credit systems work.
The blueprint produced jointly by the IMF, IBRD, OECD and the European Bank for Reconstruction and Development (EBRD) dated Dec. 19, 1990, entitled The Economy of the USSR. A study undertaken to a request by the Houston Summit. Summary and Recommendations, shows that the dismantling of Russia’s economy was not been accidental not an accidental result of bad administration but was planned from the start to occur in precisely the way it did. Central planning was to be dismantled in favor of monetarist planning. “There is no example of a successful modern centrally planned economy,” the report asserted. Discussion of ways “to enhance performance under the old system” was foreclosed by the bald assertion that government planning had “proved to be counterproductive.” The system was not to be fixed but replaced by a market system, the quicker the better. Anticipating what the American advisor Jeffrey Sachs would call “shock therapy,” the report claimed not to know of any “path of gradual reform . . . which would minimize economic disturbance and lead to an early harvesting of the fruits of economic efficiency.”
Rather than setting out to create a class of entrepreneurs managing companies efficiently, the plan helped managers strip Russia’s assets and engage in capital flight while transferring ownership of Russia’s raw-materials export capacity to U.S. and other Western investors.
Focusing on the balance of payments, the IMF’s austerity program aimed at reducing the population’s purchasing power so as to leave more output to be exported. The government was to cut back its social programs while taxing money away from labor, and to raise more foreign exchange by selling public assets to global investors. The objective was to enable profits and interest to be transferred abroad at a higher exchange rate.
A class war thus became the natural successor to the Cold War. Insisting that managers operate free of worker control and public regulation, the IMF and World Bank implemented Russia’s privatization and voucher programs in such a way that workers and other minority shareholders had no voice in company management. Government rules that might have prevented managerial abuses were denounced on the ground that they would interfere with “free markets.” Russia’s industrial managers were permitted to bleed their enterprises, to make capital gains by selling them – at rates that were cheap by Western standards – and to transfer their takings abroad.
Perhaps not many Russians were aware of what had happened to the Latin American, African and Asian countries that took such advice. One can only wonder how many understood the fatal premise underlying the IMF logic: the assumption that austerity’s high interest rates, drastic cuts in government spending and general impoverishment of the labor force would not adversely affect productivity.
Urging that a market “must be accompanied by rapid and comprehensive price liberalization,” the Houston report promised that rising prices would cure shortages by eliciting more output. In fact, it advocated hyperinflation as a policy to wipe out the Russia’s savings. And by destroying Russia’s productive capacity, the IMF’s austerity program led to shortages. Prices were indeed liberalized, but the impoverished population was not paid enough to buy many domestic goods. (To be sure, shops dealing in Western luxuries thrived as Russia entered its period of “wild capitalism.”)
Russian savings – that is, purchasing power in the hands of consumers in excess of goods on which to spend this money – were dismissed callously as “the overhang problem.” The proposed way to deal with it was to let Russians use their savings to buy shares in the industries being sold off by the government. However, the report put the class war back into business by warning that “workers’ ownership in enterprises . . . would run counter to the desired objectives of enterprise reform.” There were to be no worker constraints on management. An almost unparalleled corruption in looting enterprises was tolerated by on the premise that Russia’s most important need was to create a vested capitalist class. Once given property, the theory went, these newly endowed managers would run their factories and other businesses along economically rational lines, even though they were the same managers who had run them into the ground under the old Soviet regime.
What enabled the Americans to achieve this coup was their perception that Russia was not only economically weak, it also was psychologically dispirited. Its politicians and intellectuals were undergoing an identity crisis, a trauma of self-disdain coupled with an envy of the West. Into this intellectual vacuum moved America and the global institutions it controlled.
A black-and-white set of assumptions was at work on both sides. Anything that was not communism was deemed to be capitalism, and that was that. The monetarist mantra held that private ownership was inherently rational, and government planning irrational. That Russians accepted this ideology is a reflection of how exhausted by self-doubt they had become. Many imagined America to be the paradigm of efficient capitalism, a nation that would be glad to help Russia develop emulate its prosperous economic system as the Cold War gave way to peace. And following this hope, it seemed logical enough to Russians that if they really were to become as affluent as Americans, they should follow the advice offered by American diplomats and IMF technocrats.
This option was presented to the people as being more like joining a social club than structuring an economic system that would benefit the existing elite at the expense of workers and pensioners. So beautiful was the dream that Russians held onto it even through the 1996 presidential elections, by which time the economy had collapsed. Many voters were willing to believe President Yeltsin’s insistence that the nation’s problems stemmed from not being sufficiently diligent in taking foreign advice.
American national security strategists had a covert agenda in fostering this fairy tale. Their motive had little to do with their advocacy of democracy, save to the extent that popular opinion might be molded to support U.S. aims. The monetarist policies laid down by the IMF, duly subsidized by U.S. loans (euphemized as “foreign aid”), served to dismantle Russian industry and make the economy dependent on imports. Capital flight has made the balance-of-payments deficit even worse, crashing the ruble’s exchange rate.
Meanwhile, the IMF’s demand to restrict the money supply has been inflationary by creating unemployment and shrinking production. The lower the ruble has fallen, the more expensive imports have become (in ruble-terms), pushing up domestic prices accordingly. Russia has been subjected to a hyperinflationary austerity similar to that which has been imposed on Latin America and Africa for over thirty years.
The Cold War thus was won by the United States not militarily, but largely by foisting a specious financial theory on Russia.
The relationship between credit, prices, employment and output
The most outrageous IMF demand is repeated like a mantra year after year: Russia must not print money to pay its workers their wage arrears, as this would be inflationary. Foreign advisors parrot this nostrum, warning Russians about John Law’s Mississippi Bubble in France in 1720. What they do not explain is that Law’s initial infusion of money led to a fluorescence of employment and prosperity, for the early effect of providing money is like watering plants that have been living in parched soil.
Printing more rubles to pay underemployed labor does not increase prices proportionally. Where substantial underemployment exists, new money and credit are more likely to induce higher output than higher prices. The credit creation tends to be spent on buying goods, most of which are basic essentials that are produced domestically.
What proves to be most inflationary is a policy of starving the economy of credit. Matters are aggravated as high interest rates increase production costs, making the economy more dependent on foreigners. As the trade deficit deepens, the currency falls and imports become more expensive, pushing up local prices. To the extent that more money is created, it is mainly to finance transactions at the higher price level caused by currency depreciation.
This experience has been repeated throughout the world. Inasmuch as the IMF’s officials must have learned perfectly well about the consequences of their austerity programs since the 1960s, one must ask why such programs continue to be applied.
The answer is that a common front of vested interests supports such programs. Third world elites feel themselves well served by currency depreciation, as it pushes down the international price of local labor. Global corporations have a parallel interest in this phenomenon, for it keeps wage costs inexpensive in hard-currency terms for debtor countries.
The logic being brought to bear follows from the Quantity Theory of money and prices. The theory usually is abbreviated to claim that if more money (M) is created, prices (P) will rise, because there is more money to exchange for goods and services (T, representing the economy’s volume of transactions or national income) at a given velocity of circulation (V). Novice economics students are taught to repeat this formula almost unthinkingly: MV = PT.
If this formula sounds logical at first glance, it is because it is a tautology, true by definition. The balancing item “V” is artificial, derived from whatever numbers are used for M, P and T. The current national income usually is taken (T, not including capital gains, for assets are left out of the formula!). This is then divided by a price index based on a selected market basket of goods and services (but not assets, such real estate, bonds or stocks).
The size of the money supply depends how narrowly it is defined. The narrowest calculation includes only the paper currency in circulation, plus checking accounts at banks. Definitions are broadened for M1, M2, M3 and so forth as measurement of the credit supply is extended to include savings deposits, money market funds and liquid stocks, culminating in the economy’s entire gamut of assets that may be pledged as collateral for bank credit or related means of payment. In effect, the economy’s entire volume of debt should be used.
Unfortunately, monetarists tend to neglect this creditary aspect of money. Also neglected are capital assets – securities, real estate and other property. These are not acknowledged in the MV = PT equation. This omission is remarkable in light of the fact that most credit in modern economies involves the buying and selling of securities and property, not goods and services. In America, an amount equal to entire year’s national income or GNP passes through the New York Clearing House every business day to settle stock, bond and bank-loan transactions.
The narrower the definition of money, the more rapidly it appears to turn over to produce a number equal to PT. Velocity appears to be rising as more transactions are being financed by people, partnerships and corporations that keep smaller and smaller cash balances on hand. This is made possible by using more credit, of course. Companies may economize by paying their bills more slowly. In effect, their means of payment consist of issuing IOUs to their suppliers. These become bills of credit when bankers monetize them by accepting them and crediting the holder of such notes with money. (Otherwise, the suppliers report these unpaid bills on their own balance sheets as “receivables” or “moneys due.”) But when such unpaid bills mount up in Russia, the nation is called a “barter economy.”
In this context the term “barter” is coming to mean any transaction not settled by cash. It thus has become so difficult for monetarists to distinguish between a “credit” and a “barter” economy that they simply leave private credit out of their theorizing. Indeed, the Quantity Theory does not recognize the social institutions of finance – precisely what which Russia should be studying today in order to decide how best to structure its financial system.
The Quantity Theory may be traced back to the economic philosopher David Hume in the 1750s. A review of his formulation shows that today’s version is only a travesty of what he wrote. The theory may best be understood by recognizing the concern that prompted him to write his essay: his opposition to British bullionism and its belief that a country receiving an influx of money could grow steadily richer at the expense of countries losing gold. It was this belief that underlay much mercantilist policy, which aimed at drawing as much bullion as possible into the British economy.
Hume argued that such a concentration of monetary wealth could not occur. Hence, mercantilist restrictions on trade could only end up being self-defeating. Any influx of bullion would force up domestic prices, making the nation’s exports less competitive in world markets. Any disturbance of the initial balance therefore would be restored in due course.
The fact is, of course, that Britain did indeed get richer and richer, just as today America is growing richer while Russia becomes poorer as it is stripped of its means of payment. Without a credit superstructure, Russian labor is unemployed and the nation must pay high rates of interest. Meanwhile, America is consolidating its economic advantage on the basis of low rates of interest resulting from savings drawn in from all over the world.
So we are brought back to the principle that as long as labor is available and only needs credit to be put to work, more money tends to lead to more output. Only at full employment is new money creation inflationary. This point was made already in the 1750s by Hume’s friend Josiah Tucker. He also warned that the populations of countries being stripped of money would move to richer nations, taking their savings and skills with them. James Steuart pointed out that interest rates tended to fall as money became more abundant, supporting a larger superstructure of credit and lowering production costs, enabling wealthy nations to export even more. The lower the interest rate was, the more the trade surplus would rise over time – just the opposite of the high interest-rate policy advocated by today’s monetarists.
Hume ended up conceding the points made by Tucker and other contemporaries. He acknowledged that the quantity theory would apply only when a nation’s labor was fully employed. But modern monetarists neglect these caveats.
The moral is that nations importing gold could consolidate their head start as international productive powers, incomes and costs would polarize rather than converge. England could run an export surplus and draw in the world’s gold without fear of inflationary pressures, as long as this gold was put to work productively by employing labor to create more output. Indeed, an abundance of money was a precondition for the capital-intensive technology that soon made England the home of the world’s industrial revolution resulting from the application of steam engines to mining, textile production, transportation and other sectors.
What Russia is experiencing today thus is not a new phenomenon. It was first described over two centuries ago, and subsequently was called British free-trade imperialism. As for monetarism, it is a doctrine for foreign consumption. The United States always has refused to submit to IMF austerity or credit stringency.
Russia’s confusion between domestic monetary needs and foreign reserves
In addition to demanding a passive government policy, monetarism’s narrow “hard money” view of credit serves to deter countries from creating the financial structures necessary to promote industrial and agricultural modernization. The upshot is widespread deflation.
The IMF’s bad advice has had especially destructive consequences for Russia. As the 1998 financial crisis loomed, the great Russian debate concerned whether or not to pay back wages to public employees. Many workers had not been paid in half a year, or even more. Nationwide unpaid wages by the government were estimated to amount to about $2 billion.
Russia was paying foreign creditors but not its own citizens. The problem, so it seemed, was that the central bank would have to “print money” in order to pay workers. It did not actually have to print physical currency, of course. It could simply credit the bank accounts of the workers. But the IMF claimed that either option would be inflationary. The only way to keep down inflation, it insisted, was to back the money supply 100 percent by foreign exchange reserves – mainly dollars raised by selling Russia’s public natural resource enterprises or borrowing from Western lenders at exorbitant rates of interest.
For example when Russia sold 2.5% of Gazprom’s shares to the German firm Ruhrgas for $660 million in December, 1998, the government said this would help plug a hole in its budget and thereby save it from “another round of inflationary money printing.” But what is the difference between printing money against foreign-exchange reserves, and printing it to meet domestic needs such as the payment of wages?
In both cases new credit is created and spending power is increased. But upon examination, creating money on the basis of what Russia can raise in foreign exchange from global lenders and buyers of its natural resource companies is seen to be more inflationary than creating domestic credit at will. For one thing, most domestic money created to pay back wages will be spent at home, bolstering domestic demand. By fueling Russian production, this may begin the process of replacing imports with domestic output.
By contrast, IMF loans to the central bank facilitate an almost immediate capital flight. The money is provided to commercial banks to engage in currency transactions that win a zero-sum game by betting against the government. Also, under monetarism the increase in spending power derives from an injection of credit (usually foreign credit) via the capital markets. The first effect is to push up bonds and stock prices, not those of goods and services.
One problem with borrowing foreign currency is that interest must be paid – indeed, interest in the form of foreign exchange. A “hard-money” philosophy thus has led Russia to pay vast sums of interest to the world’s investment bankers for the privilege of printing currency that it could just as well do for itself.
To date, the problem with foreign loans is that they have an almost 100 per cent leakage out of the economy. As described above, the money has been relinquished to Russia’s banks and large investors to move their rubles to safe havens in offshore banking centers such as Cypress, Malta, Switzerland, the smaller British isles, the Caribbean and North America. By contrast, domestic money creation has much less leakage.
The key question that must be asked is what will happen to the paper money used to pay back wages. How much will be spent on Russian products, and how much will be spent on imports or surreptitiously exchanged for U.S. dollars to hoard in the proverbial mattress?
The IMF program assumes that Russian wage earners are so affluent that they can afford to save all their money, and indeed would save it in dollars. But are they not more likely to buy food, furniture, and to save in the form of consumer durables? Given their degree of poverty and deprivation, it seems probable that only a relatively small amount would be saved in the form of foreign currency. Some savings will take the form of U.S. currency, to be sure. After all, Russians are still smarting from having seen their savings wiped out in 1992-94, except for people who converted their rubles into dollars. But the amount of such hoarding will be less, to the extent that wages are spent on Russian-made consumer goods, establishing a Keynesian-type earning and spending cycle to revive domestic manufacturing and employment.
The longer Russia’s economic collapse persists, the more Russians will feel a need to save. And the longer Russia persists in “dollarizing” its economy, the more likely this saving will take the form of foreign currency. Russia therefore needs to encourage greater use of domestic money and bank deposits. Until that happens, Russia’s reliance on foreign loans and dollar reserves will continue to make it dependent on the IMF.
The irony is that while Russia is being told that taking this advice will help make it an American-style economy, Republican congressmen in the United States have been denouncing the IMF and its austerity programs. Russia seemed to be the only nation to embracing such a plan voluntarily rather than under financial distress conditions. At the outset of the 1990s it had little debt problem, as the Cold War had isolated it from the global economy.
How ruble support subsidizes capital flight
According to the IMF, the way to prevent inflation is to stabilize the ruble’s exchange rate. By holding the price of imports steady, this limits the degree to which Russian producers can raise their prices. However, stabilizing the ruble by borrowing foreign money has led to an immense foreign debt.
Supporting the currency subsidizes capital flight, by enabling foreign and domestic investors to obtain more dollars for their rubles than otherwise would be the case. Russia’s central bank has used its foreign exchange to buy rubles, usually via forward contracts negotiated with the banks that were formed by the leading oligarchs. In such contracts the central bank agrees to deliver dollars at a specified future date, at an exchange rate that differs little from the current one.
As the ruble has fallen, the banks have won again and again on these contracts, growing rich by betting against the government. For years, writing contracts to exchange rubles for dollars at an unrealistically low dollar-rate was a no-lose proposition. The newly formed banks doubled their money again and again by betting against the government on highly leveraged currency contracts, especially during the hyperinflationary years of 1992-94. It cost the banks nothing to write such contracts, and any decline in the ruble/dollar exchange rate was a gain. This is how they built up their capital, not by lending to finance tangible industrial investment.
By being turned over to these banks to settle their bets against the government, the IMF loan proceeds financed capital flight. The more money the banks earned, the more they converted into foreign currency for their own account and for other arms of the holding companies to which they belonged. Rather than being part of the solution, they thus became a big part of the problem.
The sales proceeds from privatizing Russia’s public enterprises also were not used to fund tangible investment in new production facilities. Most of these firms’ revenue was taken by managers who moved it abroad. Even the money earmarked to pay wages was diverted to gamble in Russia’s financial markets, largely to speculate on the currency and buy GKOs – lending to the government money which it could have created itself. By creating its own money, the government could have freed the national budget of exorbitant interest charges. But taking IMF advice involved high interest rates that diverted resources away from direct investment and away from paying workers and suppliers.
The problem with Russia’s financial policy under the Yeltsin-Chubais regime was that it defended the currency in a purely financial way, not by putting in place the means to make Russia economically self-sustaining. The problem with merely financial solutions to structural production problems is that little borrowing finds any counterpart in new tangible investment. In fact, high interest rates channel money away from the production sphere to the financial sphere. The short-term principles of financial stabilization thus are antithetical to those needed to restructure the means of production. Indeed, failure to put in place the means to repay the foreign debt can only lead to increasing foreign dependency.
There is borrowing foreign money: Russia may levy a rent tax on companies exporting fuels and minerals. As these firms are being sold to foreigners, the U.S.-IMF plan has been to block this option, and to promote borrowing as an alternative to taxing their earnings. The intention is that these earnings be remitted abroad.
What is ironic about Russia’s acceptance of the IMF’s philosophy that domestic credit requires backing in the form of hard-currency reserves is that America cut its own links to gold in 1971. Russia is being told to borrow money that takes the form of foreign reserves held in the form of U.S. Treasury securities –in effect, Russian loans to the U.S. Treasury. The central bank earns almost nothing on its investments in these securities, while Russia must pay rates of interest approaching 50 or even 100 percent on an annualized basis.
High rates of interest divert savings away from financing new direct investment. Indeed, their stated aim is to cool down the economy. Whenever Britain’s economy has expanded since the 1950s, for instance, higher import demand has weakened sterling. The Bank of England has pursued a “stop-go” policy, raising the interest rate to attract enough foreign short-term loans to keep the exchange rate from falling. This quickly chokes off the business expansion.
As an economy with substantial underemployed resources, Russia hardly needs cooling down. High interest rates increase the international and domestic debt burden, while impairing export competitiveness by pushing up production costs. In a nutshell, high rates of interest deter the M-C-M’ process of industrial investment and employment, while promoting a sterile M-M’ rentier condition.
Monetarist bank policy thus runs counter to an industrial credit policy. After all, why should businessmen invest in hiring more labor to work in factories, when they can make higher rates of return by financial maneuvering and currency speculation?
The need to create an industrially oriented financial system
Russia does not need much foreign money to employ its labor and capital to best effort. The nation has skilled manpower, technology, low-cost fuel and raw materials, and even the option of low interest rates. All it needs to turn these advantages into economic power is a better grasp of how broad a range of financial dynamics and fiscal variables is available from which to choose. In a nutshell, Russia needs an alternative theory to that being promoted by the IMF’s monetarist adherents in the central bank and finance ministry.
The first requisite is to achieve something that so far has eluded the West. Russia needs to provide savers not only with a vehicle in which to hold their savings, but with a way to recycle savings and checking deposits in a way that will finance new tangible investment. This vehicle will be empowered to finance new construction (by writing loans against the value of buildings), but not that portion of property income attributable to land and other natural resources. (In the West the land component of rental value accounts for between 40 and 60 percent of total rent revenue or its equivalent value to users.) To the extent that a properly formed Russian banking system extends real estate credit, it should be only to about half the extent found in the West.
What is important is not to advance bank loans against the rental income of the land, natural resources and radio spectrum. To let such rents be pledged for interest payments would deprive the government from being able to collect them as its natural fiscal base. The government would have only labor and capital to tax, leaving the rentiers (including foreign investors in Russian raw-materials companies) free to pledge their revenue to their own creditors in return for the money to buy these companies. Failure to tax these rents thus would lead to an overburden of unproductive debt.
If Russia were to privatize the land rather than leasing it at its rental value, needy consumers would be tempted to pledge their housing rights as collateral for loans. Those who fail to keep current on these obligations will run the danger of forfeiting their homes to foreclosing creditors, much as Russia itself has had to relinquish its crown jewels in the oil, gas and public utility industries to domestic and foreign creditors.
To pledged the rental income generated by the land and other natural wealth as collateral against interest-bearing loans would produce a drain on the balance of payments – what economists call the transfer problem. Russians would pay mortgage interest in domestic rubles, but the banks would convert their earnings on this lending into foreign exchange to remit to the investors who would have bought control of them. The conversion of mortgage interest into dividends thus would put a steady downward pressure on the ruble.
If Russia avoids this quandary, it can make use of numerous potential advantages. Many of these advantages have been overlooked. In fact, it seems ironic today that in 1945, the U.S. State Department blocked Russian membership in the World Bank and IMF out of fears that Russian competition might produce exports at a lower price than could be matched by finance-capitalist economies. American diplomats feared that socialist systems had certain inherent strengths in shaping their particular kind of markets to avoid a rentier overhead.
For one thing, socialist economies had no interest to pay. Hence, their capital was factored into prices at zero-interest. (In the West, interest charges often double the cost of capital goods and buildings.) Planned economies also tended not to collect any of the rental value of their land or natural resources. This meant that the goods and services into which these rental values entered were priced as if they were free. Socialist economies did not even have to pay a tax overhead, because socialist states were self-supporting through their own enterprise.
What Russia did have, of course, was a bureaucratic overhead, to which the Cold War’s military cost soon was added. No doubt things might have been less wasteful without Stalinism, but in any event, no system of market checks and regulatory balances was put in place.
Since the Reagan era of anti-government monetarism, America has been in the process of destroying its own checks and balances against wealth. Libertarians are attacking government planning, yet in today’s world every economy is planned. Most business planning is done by financial managers seeking to squeeze out an economic rent, that is, a free ride. This free ride may be obtained either from the land and other natural resources, and from monopoly rights (including those of public utilities and broadcasting).
The great issue outstanding thus concerns who will do the planning: elected representatives or un-elected financial managers?
How a Russian-oriented fiscal system will promote a pro-growth banking system
Tax systems play a major role in determining the leeway for who will get what. The IMF, backed by the United States, wants Russia to push ahead with privatization, leaving nothing in state hands. As much income as possible is to be left proximately in the hands of its oligarchs, through whose hands it is to pass on to foreign buyers of their companies. Russian labor is to be paid wages above subsistence levels only to the extent that it can be taxed, thereby “freeing” as much non-wage income as possible from taxation –in particular, income for the privatized land, mineral resources and hitherto public utilities. Under this scenario Russia’s internal market is to be impoverished, with little domestic demand to work up its mineral output into manufactures. Its fuels and raw materials are to be exported to gain the foreign exchange to pay the debt service owed on the nation’s rising international indebtedness.
Fortunately for Russia, there are other ways to develop.
There are two approaches to creating a fiscal system. The first historically has been to levy taxes on the wealthy. In low-income economies, after all, they are the only people able to generate a surplus over and above their own basic needs. From ancient Mesopotamia, Greece and Rome to medieval Europe and the Byzantine Empire, wealth taxes fell first and foremost on the land as the most visible and prestigious form of wealth. A land tax also financed William the Conqueror’s occupation of England, much as it financed French and other European regimes.
Almost from the beginning, however, there has been an opposing dynamic. Creditors lend money at interest. As collateral they oblige debtors to pledge their land and its crop yield or other rental revenue – precisely that revenue that typically is earmarked for taxes. The land’s yield is turned over as interest payments to creditors, who often end up owning much of the land. Historically, this is how the land became privatized from about 2000 BC to the emergence of our modern era.
Throughout history, creditors have preferred to collateralize their loans with real property, for a simple reason. Even in today’s industrial economies it forms the largest tangible asset (about 40 percent). Capital improvements on real estate (homes, office buildings and industrial plant) form the next largest component (30 percent). In due course this real estate becomes “loaned up,” that is, loaded down with debt to the point where interest and amortization charges absorb the property’s entire rental cash flow. This has been the case in the United States for many years. Its real estate sector often shows no taxable profits at all, as all the cash flow over and above local property taxes and building depreciation is paid out as mortgage interest.
Russia does not need a financial system in which banks recycle savings into a domestic mortgage market. It is Russian industry that needs these savings. The government for its part can most appropriately collect the land’s rental revenue as its fiscal base.
Such a fiscal policy will have two major benefits. First, it will help minimize industrial costs by freeing labor and capital from taxation. Whereas taxes deter investment in capital and the employment of labor, they do not push land and raw materials out of production, for their usufruct is provided by nature.
Second, by precluding the banking system from basing itself mainly on mortgage lending, a land tax will induce the banks to find another outlet into which to channel the economy’s savings. These savings may be lent to industry and other capital users (including new construction). Recycling savings into the mortgage market Western-style serves mainly to bid up the price of real property and other assets already in the existence.
The West cannot shift to a land tax without removing the rental income from the banks, where it serves to back the economy’s savings. But Russia can avoid this financial mal-structuring. Indeed, it would be a disaster for Russia to repeat the real estate bubble experience that has plagued Japan and other East Asian countries in recent years. The tendency is for banking systems – and the currency – to collapse after such bubbles, as falling prices for their real estate collateral (aggravated by an exodus of flight capital) hollow out the banking system’s balance sheets. Such economies are left deeply in debt to foreigners, and must relinquish ownership of their own national assets and enterprise.
It is important for Russians to recognize how the West got into this dysfunctional financial bubble so that they may know what to avoid in advance. The finance, insurance and real estate (FIRE) sectors have brought pressure on the government to inflate asset values by channeling savings into real estate and stock market credit. They are able to bring such pressure to bear largely by financing the campaigns of politicians sympathetic to their cause. The moral is that Russia must beware of vesting its own FIRE sectors with such economic power as will enable them to distort market structures to serve their own special interests.
The FIRE sectors also have taken the lead in financing American business schools and establishing “think tanks” as tax-exempt public relations lobbies for theories that depict their own activities as producing wealth, not distorting the economy’s long-term prospects. This monetarist philosophy is intolerant of opposition, precisely because of its own internally irrational character. To appear convincing, it must appear to have a common front comprising the entire profession. And to achieve this unanimity, the economics curriculum has been narrowed drastically, so as to exclude almost everything of importance.
This debt-oriented philosophy has captured the IMF and World Bank administrative staffs to form the common front of advice that Russia is receiving today from the West.
To counter this trend, Russia needs an alternative body of theory. It may adopt the best aspects of classical political economy, suitably brought up to date to adopt whatever market checks and balances are deemed most desirable.
The nation still has a chance to make a fresh start. Instead of swinging from the extreme of centralized planning to the most brutal free-for-all of “primitive accumulation,” it may create a mixed economy with reciprocal checks and balances shaping market relationships between the state and private sectors.
Under current conditions, a land and natural resource rent tax is the only kind of tax the government can collect. Public collection of such rent has the great advantage of being able to be collected in foreign currency, at least for the production of oil and gas, along with other minerals such as nickel and platinum. This kind of tax would leave industry free of taxes.
The Western economies have permitted the financial sector to collect this land-rent as the basis for the interest that is paid to the economy’s savers. This flow of interest in turn is recycled into new lending, creating an economic bubble by pushing up land and monopoly prices (and stock market prices) all the more.
Such a pattern of recycling saving adds little to the economy’s productivity, but it enables a small number of people in the financial sector to get very rich. This is how Russia’s oligarchy got rich, through financial manipulation rather than by industrial engineering to make the economy more productive.
Prof. Hudson’s 1972 book on Super-Imperialism: The Economic Strategy of American Empire was widely quoted in Russian studies of international financial relations in the 1970s. As an advisor to the White House, State Dept. and Defense Department at the Hudson Institute, and subsequently to the United Nations Institute for Training and Research, he became one of the best known specialists in international finance.
Prof. Hudson has published a textbook reviewing the historical development of international trade and investment theory, Trade, Development and Foreign Debt (Pluto Press, 1993), as well as studies for various governments throughout the world, including Canada in the New Monetary Order (1979).
 On these points see Geoffrey Gardiner, Towards True Monetarism (London: 1993).
 I review the literature in Trade, Development and Foreign Debt: Theories of Convergence v. Polarization in the International Economy (London: Pluto Press, 1992, 2 vols.).
 I review America’s fears in Super-Imperialism: The Economic Strategy of American Empire (1972), ch. 2.