I’m shocked shocked! but it appears that neither Defense Secretary Donald Rumsfeld nor General Tommy Franks has read Ludwig von Mises, or even David Hume. Their economic ignorance has led to the only American defeat — not on the battlefield, but on the economic front. The ‘Saddam dinar’ (picture on the left) has beaten the dollar hands down as the currency of choice in Iraq.
So what’s all the fuss? Well, the US military has been acting as a de facto Federal Reserve in Iraq, first by paying thousands of Iraqis twenty U.S dollars and by further insisting on paying another million workers upwards of $575/month. All of this in the hope of displacing the Iraqi currency for the US dollar. To the military’s surprise, the inexorable laws of economics have dropped the equivalent of a bunker-buster on the U.S. plan. David Hume explains:
"All augmentation [of gold and silver] has no other effect than to heighten the price of labour and commodities; and even this variation is little more than that of a name…Money having chiefly a fictitious value, the greater or less plenty of it is of no consequence if we consider a nation within itself." (1)
"If you have one million pensioners getting $40 apiece, that’s $40 million coming onto the streets," said Ahmed Muhammad Ali, a trader on Kifah Street. "What did you expect would happen?"
With this huge influx of American dollars came a precipitous drop in their value. In its place, the Iraqi (and Saddam-faced) currency regained its value from years before the invasion. As Hume avers, this influx does nothing but "heighten the price of labour and commodities." In this case, its the price of goods in US dollars that rise (i.e. lower purchasing power). This helps to explain the Iraqis’ increased demand for dinars. Moreover, the dinar’s strength stems from the lack of a central bank in Iraq, which in normal circumstances can print money willy-nilly. The current situation leads to a fairly static supply of currency. Conversely, introducing new dollars in an arbitrary and prolific manner – as the US has done in Iraq- does little for Iraqi consumers searching for a good store of value.
Perhaps the US invasion has brought one positive change to Iraq: a stable and market-based currency. Given this, I predict that the US will use force to prevent any further erosion of their precious American fiat, similar to their policy towards industrious Iraqi entrepreneurs who were forced to close shop. For once again the market prevailed with efficiency and satisfaction of consumer wants. Cue the government intervention! (2)