American Economic Review, 94: 2 (May): pp. 1-13..
On Tue, Aug 31, 2004 at 04:32:38PM -0700, Joseph S. Barrera III wrote:
> <http://mises.org/fullstory.aspx?control=1595>
>
> [...]
>
> 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.
>
> [...]
>
> ___________________________________
> http://mailman.lbo-talk.org/mailman/listinfo/lbo-talk
-- Michael Perelman Economics Department California State University Chico, CA 95929
Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu