[FoRK] The Monetary Economics of Thurston Howell III

Joseph S. Barrera III joe at barrera.org
Tue Aug 31 16:36:40 PDT 2004



Undead Money

After the invasion of Iraq, there was no more central bank printing
dinars and no more Iraqi government to put the fiat behind its fiat
currency. The American military started handing out US$20 bills and
expected the Dinar to fade from existence. Instead, to the chagrin of
the occupation force, the Dinar's value doubled against the Dollar in
two weeks. Statues of Saddam Hussein were being toppled, but his face
was still on the preferred currency, and gaining in popularity. Some saw
this as patriotism: a silent protest by the occupied population against
the invading force. But we need only look further north, to the
Kurd-controlled areas, to find a more economic explanation.

After the first Gulf War, Iraq changed its currency from the so-called
Swiss Dinar to the more recent Saddam Dinar. When a government changes
its fiat currency, it announces a transition period during which the old
bills can be brought in and exchanged for the new. After the window
closes, the old notes are declared worthless.

To no one's surprise, the rebel Kurds did not visit the Iraqi government
to make such an exchange. They just kept using the old money. It was
familiar, hard to counterfeit, and in its post-fiat status, it was no
longer inflationary: that is to say, the relatively fixed supply of
notes made the currency a better store of value than the new Saddam
dinars being printed (and printed and printed) further south.

The Swiss Dinar may have been the first successful post-fiat money.

For a brief period after the invasion -- the time it took the Occupation
Authority to reestablish an Iraqi central bank and start printing new
dinars -- the old Saddam dinars joined the older Swiss dinars in their
post-fiat status. And lo and behold, Saddam's dead dinars rose in value
compared to the inflationary dollars of the occupation force.

But how can this be? A money backed only by the force of the State is
backed by literally nothing in the absence of that state. And yet the
dinars continued to change hands.

By the end of the year, however, the occupation government was printing
new dinars, at first with Saddam still on them (for familiarity), then
transitioning into something that resembled the Swiss Dinar (to promote
confidence). The brief, unplanned experiment in post-fiat monetary
theory was over, but the results were unambiguous: a stable money, even
a completely unbacked currency, beats out inflationary government paper
in both value and marketability.

While it may seem that Gilligan's fellow castaways would reject Howell's
dollars as worthless, the case of the Saddam Dinar (and the Swiss Dinar
before it) offers evidence in favor of "worthless paper."

For an understanding of the afterlife of government currency, we need
briefly to review the history and theory of money itself.


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