I. Money's role in the Soviet Union.
II. Georgia: first the ruble, and then the coupon...
Georgia's path since independence in 1991 had been rocky, and the history
of its national currency exemplified this. There had in fact been two currencies
during that time. In the beginning, the Georgian government chose to remain
within the ruble zone. The ruble was emitted by Gosbank under the Soviet
regime and then by the Central Bank of Russia (CBR) after the final break-up
of the Union. While the CBR controlled the timetable for printing rubles,
the Georgian government expected to receive periodic shipments of banknotes
for emission through the National Bank of Georgia (NBG).
No one had anticipated, however, the extent of the explosive rise in commodity prices once controls were lifted in January 1992. There was an initial burst in the first quarter of 1992, with an index of commodity prices rising 350 percent with liberalization. The four subsequent quarters were characterized by inflation of between 40 and 50 percent over the previous quarter. The CBR shipped banknotes to Georgia sufficient to increase cash in circulation by nearly three hundred percent, but this was insufficient to meet the hyperinflationary trend. Throughout the end of 1992 and the beginning of 1993, there were severe cash shortages in Georgia.
The CBR did not ship any banknotes to Georgia during the first quarter of 1993. The cash shortage was acute. Enterprises and government agencies were unable to obtain cash to pay workers. Government support programs were forced either to defer payments to the future or to make direct payments into bank accounts -- but then the banks had no currency to honor the depositors' demands. In this crisis, the NBG chose to issue a ruble supplement, or coupon. Georgia introduced its coupon on 5 April 1993. It was used to pay wages, salaries and pensions, including sums unpaid since December 1992 because of insufficient supply of rubles. The coupon was a supplement to the rubles in circulation and was priced to exchange one-for-one with the ruble. It could be used for all purchases except for those goods originally purchased with rubles (e.g., petrol and other imports from Russia).
The introduction of the coupon was by and large smoothly done, although the absence of small coupon bills led to initial confusion -- consumers purchased goods in coupons but had to accept change in rubles. Currency trading at the bazaar on that Monday and Tuesday was extremely light, with the coupon in the few observed cases trading for more than one ruble. Thereafter during the first two weeks the ruble and coupon traded one-for-one in bazaar markets.
In the two weeks after introduction, 31 billion menati were placed in
circulation, while 19 billion were drawn down by firms and the government
to make payments in arrears. In contrast, only 17 billion rubles
in cash had been drawn down during the entire first quarter of the year.
The introduction of this large additional mass of currency led to food
price increases of approximately 20 percent in the first two weeks.
During the first two weeks the rate of exchange of rubles for
coupons was one for one. This, however, overstates the substitutability
of the two currencies, as many shopkeepers would not accept the coupon
in payment.
The Committee for Social and Economic Information conducted a study on 21 April 1993 to examine the effectiveness of the menati as medium of exchange. 29 commodities and services were chosen for study, and representatives of the Committee visited sellers of these in three sectors: state and cooperative, commercial shop, and bazaar.
The demand for coupons rose during April and May with the decision by the government to demand payment for privatization purchases in coupons alone. There were reportedly large quantities of rubles and dollars traded for coupons for this purpose in mid-May, but this demand fell off as the privatization process slowed. The NBG also intervened by the sale of rubles to support the value of the coupon. Despite these efforts by the end of May two coupons traded for one ruble in the bazaar. Further, many bazaar merchants would no longer accept coupons and insisted upon cash rubles even for the purchase of foodstuffs.
The coupon's crash.
With the beginning of June the situation for the coupons grew
precarious. They were accepted
for few goods, and the price in rubles was inflated 2.5 to 3 times
for sale in coupons. State shops
continued to sell rationed goods (bread, sugar, macaroni, butter) for
coupons at par with rubles, but
these goods were in short supply. State shops were rapidly transforming
into commercial shops, as
well, so these rationed goods became harder and harder to find.
Remaining state shops had few goods
on the shelves for those wishing to spend coupons.
On 10 June the Vice Prime Minister made his long-awaited report
to Parliament on the status
of economic reforms. He proposed that the official exchange rate
for rubles be fixed at par.
The NBG will set up as many exchange offices as possible, and other
exchange will be illegal. He
proposed as well that from 1 July coupons should be the only legal
tender in Georgia.
The currency markets reacted with apprehension in the days preceding and following the Vice Prime Minister's speech. From an exchange rate of roughly two coupons per ruble the market drove to a high of nearly 5 coupons per ruble. This was subsequently recognized as an extreme response; by mid June the bazaar cross exchange rate had appreciated to over three coupons per ruble, but the depreciation was continuous thereafter. By 15 July the coupon/ruble rate had reattained its high of five menati per ruble. Despite the warning that coupon could soon become the sole legal tender, investors were placing their confidence in the ruble.
Coincident with the depreciation of the coupon against the ruble
during late June and early July was a progressive shift away from the use
of the coupon in transactions. As noted above, there had been in
April a reluctance to accept the coupon in commercial shops. This
tendency strengthened throughout June and July. A government investigation
of 21 July found that in state and cooperative shops in Tbilisi 60 percent
of a sample of 52 commodities and services were not available for purchase
in coupons. In private shops 55 percent of commodities and services
were not available for coupons, despite a roughly 50 percent mark-up in
coupon prices over ruble prices. Only in the bazaar were foodstuffs
available for coupons, but there the accepted exchange rate was 5.1 coupons
per ruble.
The system of state shops disintegrated, with many either closing or upon privatization becoming commercial shops. Other commercial shops were opened, including a growing number of hard-currency boutiques. These shops refused by and large to accept coupons; they priced western goods in US dollars, and CIS goods in rubles.
There was a final blow to the fiction that the coupon and ruble were perfect substitutes in mid-July 1993. Russia announced on 24 July that it was recalling all rubles printed prior to 1993, and would redeem them for "new" rubles only up to a cash limit. Although the press indicated that this was a surprise to most market participants, the news caused a jump in the value of the Russian ruble as early as 15 July in the bazaars of Tbilisi. The coupon depreciated by 20 percent against the (Russian) ruble on that date and remained at that level until the actual announcement.
The coupon as sole legal tender.
The Russian currency recall was announced on Saturday, 23 July.
For the next two days the Georgian economy was in shock: all commercial
shops were closed. Trade in US dollars was curtailed, with the only
activity by speculators offering to purchase "old" (Soviet) rubles at 7000
per US dollar -- roughly 15 percent of the value of "new" rubles and equal
in value to the coupon. The Georgian government decided in light
of this recall to remove the Russian ruble as legal tender in Georgia.
Accordingly, the government decreed that as of 2 August the ruble was no
longer accepted as domestic currency. Exchange offices were set up
throughout the country, with over 150 in Tbilisi alone, to handle the exchange
of foreign currencies (including the ruble) for coupons. Black-market
trading of foreign currencies became illegal.
The NBG introduced an interbank auction process in August to set
the official exchange rate of coupons for US dollars and Russian rubles.
The rate of depreciation remained low throughout August. This coincided
with a shortage of
coupons in the markets. Over the weekend of 4-5 September the
NBG received a shipment of 185 billion coupon bills from its French supplier,
and by the afternoon of 6 September 80 billion had been placed into circulation.
This had a predictable effect: the exchange rate for rubles depreciated
by roughly 50 percent.
By the end of September the menati had become once again a least-preferred currency for most transactions. State shops for commodities had disappeared, while commercial shops had obtained licenses to transact in any currency despite the coupon's position as sole legal tender. The only commodities sold for coupons were bread and the rations of sugar and butter, while these were available as well for other currencies in the bazaar. The Cabinet of Ministers responded to this situation by issuing a decree that forbade receipt of payment in foreign currencies except in limited tourism and international services trade. The NBG was assigned to issue licenses for use of foreign currency in these limited cases.
The private-sector response to this pronouncement was swift: most
commercial shops were closed during the first week of October, particularly
those that sold commodities for US dollars. They reopened in the
second week, still transacting in US dollars, seemingly without penalty.
The NBG received a new shipment of high-denomination (25000 coupon) banknotes,
and put them into circulation in the week of October 18: the coupon
depreciated nearly 100 percent against
the ruble during the following two weeks.
Cash shortages were a thing of the past -- but inflation shot up well above its previously elevated rates. Quarterly inflation for the third quarter of 1993 was 100 percent, and for the fourth quarter was 750 percent. This inflationary trend continued unabated for most of 1994, with inflation for the year an astounding 15600 percent.
While the government denominated all its transactions in coupons, private markets for the most part refused to accept the currency. Purchases of day-to-day goods were made in Russian rubles, while purchase of durable goods and accumulation of saving was done in US dollars. Private foreign-exchange markets became quite active in exchanging cash coupons received in wages or pensions for these other currencies. The coupon was accepted in payment only for goods and services that the government provided at subsidy: bread, public transport, utilities -- and privatization.
The introduction of the lari.
On 25 September 1995 the lari was introduced as a new currency.
The NBG exchanged 1 lari for 1 million coupons. In the course of
following months, 51.9 trillion coupons were taken out of circulation.
The “exchange banks” designated by the government also traded lari for
rubles at an initial rate of 4000 to one and for USD at the initial rate
of 0.8
USD per lari.
The introduction of the lari had three salutary effects on the economy.
I. What does money do?
II. What kinds of money are there?
III. What are the links between monetary policy and exchange
rate determination?