The textbook for my Principles of Macroeconomics class, Macroeconomics, 2nd ed. by R. Glenn Hubbard and Anthony Patrick O'Brien, has a section entitled "Money without a Government? The Strange Case of the Iraqi Dinar" (Chapter 13, p. 435 for anyone who is interested) in which the authors point out what happened to the Iraqi Dinar in the months after the invasion of Iraq. They say that in early April of 2003 when the first troops entered Baghdad the US Dollar was equivalent to about 4000 Dinar, and about six weeks later, after Saddam's government fell and was no longer functioning, the Dinar jumped in value to about 1500 Dinar per Dollar. The authors go on and on about how amazing and incredible this is and explain it away thusly: "That dinars issued by Saddam's government had collapsed illustrates an important fact about money: Anything can be used as money as long as people are willing to accept it in exchange for goods and services, even paper currency issued by a government that no longer exists," (435, The italics were used by the authors).
Let me preface my question to you all by saying that I do not pretend to be any kind of expert on Austrian Economics--I have recently read An Introduction to Austrian Economics by Thomas C. Tyler and usually read the Daily Articles on Mises.Org amongst some of the other material available here, and the more I read the more I agree with the Austrians. So here is my question: Could the aforementioned case of the Iraqi Dinar be due to the nonexistence of the Iraqi government itself? I have not heard of any Austrians studying this issue, but it seems to me that since there was no Iraqi government to print the money, the increase of money supply stopped and deflation occurred. Am I totally off base? I do not know what the Saddam government was doing with the money supply (perhaps someone here does and could enlighten me), but I would guess that they were not much different than most states. This would seem to be a good topic for an article or something. Please, if anyone has any more information on this case I would love to hear about it.
I remember on the first day of this class my instructor (and our book) told us that there are two kinds of economic statements: positive and normative. He told us that in this class, we are only concerned with positive economic statements. In this section in the book, the authors quote an Iraqi who stated, "People trust the dinar more than the dollar. It's Iraqi," (435). This statement seems to be a normative economic statement to me. Later in the article, the authors say something else that I found amusing, “Eventually, a new Iraqi government was formed, and the government ordered that dinars with Saddam's picture be replaced by a new dinar. The new dinar was printed in factories around the world, and 27 Boeing 747s filled with paper dinars were flown to Baghdad,” (435). Doesn't that just make you proud to be an American?
Thanks.
I don't think it's strange that the dinar should go up in value like that. The same thing happened to the Afghan currency right after that government was ousted. Both the Bathist and Taliban governments were Kleptomaniacs.
I think you mean Kleptocracy. Since pretty much every government uses the stealth tax (inflation) to devalue people's savings, I think quite a lot of governments would classify.
http://www.mises.org/freemarket_detail.aspx?control=446
The fallacies of intellectual communism, a compilation - On the nature of power
Thanks, that was really helpful.
The vallue of money is determined by the command of resourceit offers. If a currency is dependent on a goverment to enforce all contracts based on it, then it will loose all vallue if that goverment topples. If the holders of this currency could count contracts based on it to be enforced by some other means, ether a private force or another goverment, then the currency can still have some vallue when the goverment collapses. What would also add to the sudden drop in the vallue of that currency is the fact that wars destroy good. With less goods in a country the currency can buy you less, so its vallue drops. This would not cause as large a drop as the currency could still be used but without any enforcement of the vallue of currency(Public or private) the currency is useless save for its phisical properties. In the case of fiat currency, that is very little