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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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