A brief lesson in central banking: after a number of sources reported that the Saddam’s dinar is gaining against the dollar, the new Iraqi government is printing new dinars — complete with a photo of the deposed dictator on the front. Why? The dinar gained value against the dollar after the fall of the old regime becuase people thought no more would be printed. Printing massive amounts of currency is a favorite means of goverments to finance their Statist schemes, and an end to the old currency meant that the amount of dinars in the economy would be more or less fixed, increasing it’s utility as a currency. However, Iraqi bureaucrats wouldn’t let the demise of the dinar’s namesake stop such an easy and tempting source of revenue, so it looks like the printing presses will keep on rolling. Even if a new currency replaces the old Saddam dinar, it may still prove to be more popular (and valuable) if the people have reason to mistrust the soundness of the currency, just as the pre-1991 "Swiss dinar" is much more valuable than the Saddam dinar now.
Posted by David at June 10, 2003 10:13 PM | TrackBack