|
October 3 2003 New Iraqi Currency The Iraqi dinar was worth $US3.20 before the United Nations embargo that followed Iraq's 1990 invasion of Kuwait. By August 2002 it was trading at just below 2000 to the US dollar, and by mid-April 2003 it had slipped to anywhere between 3500 and 4000 against the dollar. In July 2003 one US dollar equaled about 1,500 Iraqi dinars. Nearly all the bank notes issued after the 1991 Gulf War were without watermark or metal line due to technical difficulties, which is why so many forgeries took place. In April 2003, following the end of major combat operations, the Iraqi economy was in distress because of closure of oil sales, imposition of UN sanctions. At that time, United States officials said that a new currency was needed, to introduce some stability. Without a proper currency in circulation there was a fear of inflation. The US decided to distribute $20 bills to the civil servents to boost the economy. This was not an issue of "dollarizing" the economy, but to get money that had real value into people's hands. As Brad Setser, former acting director of the US Treasury Office of International Monetary Policy, noted, "A currency that is tightly linked to the dollar would ... make it harder for the government of Iraq to manage its dependence on oil revenues. The dollar revenue from oil sales is highly volatile, so the government would have trouble paying the same dollar salary when oil is at $10 a barrel and when oil is at $30 a barrel. Rather than matching expenses and revenues by paying dollar salaries that vary in line with global oil prices, it is far easier to pay salaries in a local currency and let the value of the local currency fluctuate against the dollar." By the end of April 2003 the economic life and conditions in Kirkuk city were becoming increasingly difficult due to the severe shortage of fuel, the increase in market prices and the non-payment of salaries to the civil servants in Kirkuk. The produce in the market had become increasingly expensive due to the significant rise in the number of people from Erbil and Sulaymaniyah who traveled to Kirkuk for shopping purposes. These shopping trips by people from the northern governorates were a result of the more attractive prices at which products were available in Kirkuk compared to the north, due to the low value of the 'new' Iraqi Dinar used in Government of Iraq [GOI] areas as against the 'old' Iraqi Dinar in use in the north. In the long run, Washington wanted a new Iraqi government to pick its own currency, much as Afghanistan adopted a new one after the fall of the Taliban. As of May 2003 the US reportedly estimated that it was unlikely that a new government would be formed in Iraq in less than a year, and it would take at least three months after that to design a new currency. Until then, the Iraqis would have to use the various currencies floating in the market. In June 2003 the Iraqi central bank once again began printing Dinars, with fallen leader Saddam Hussein's image on them. The 250 dinar denominated banknotes were printed by the Baghdad mint, under the supervision of the manager of the central bank. This was an effort to overcome a severe shortage of Iraqi dinars and to offset fears of counterfeit currency. The new 250-dinar bills -- worth less than US$0.20 each, were issued because of a shortage that caused a liquidity crisis in the country. The administrator for the Coalition Provisional Authority in Iraq, Paul Bremer, outlined in an address to the Iraqi people 07 July 2003 the key spending priorities for the Iraqi national budget over the coming six months. These included commitments to improve the water, electrical, public health and telecommunications systems. Bremer announced that the Coalition would print and distribute new banknotes for Iraq. In response to this press announcement in Baghdad, De La Rue confirmed that it was in discussions to assist in the production of banknotes for Iraq. The Company led a consortium of global currency specialists to manufacture the banknotes. De La Rue is the world 's largest commercial security printer and papermaker, involved in the production of over 150 national currencies and a wide range of security documents such as travellers cheques and vouchers. Thomas de la Rue began printing British postage stamps in 1855, and obtained the contract for all Indian postal requirements. Banknote Corporation of America, Inc. (BCA) is the largest high security printer in the United States, with headquarters in New York City and a manufacturing plant in North Carolina. Banknote Corporation specializes in intaglio printing, producing stamps for the United States Postal Service as well as for foreign postal administrations. American Banknote Corporation (formerly United States Banknote Corporation) is primarily concerned with the engraving and printing of corporate and government securities and other secure documents, including the production of holograms. The American Bank Note Company, the first security printing company in the United States, can trace it origin over 200 years ago to the father of security printing, Paul Revere. The American Bank Note Company traces its beginning back to 1795, with the formal creation of the American Bank Note Company in 1858. On August 8, 2003, a jury found that Morris Weissman, former chairman and CEO of American Banknote, had inflated his company's earnings in 1996 and 1997. Based on the false numbers, the 1998 public offering of the company's subsidiary, American Banknote Holographics, was a success, netting the company $115 million. When the accounting fraud was uncovered in early 1999, the spinoff's shares dropped from about $16 a share to $1.80 a share. The stock was delisted in August 1999. American Bank Note Holographics ("ABNH") is in many ways a new company today, with new management that started in 1999. Bremer stated that the so-called "print" dinars in circulation in most of Iraq, nor the formal national currency (or "Swiss" dinar) still used in some parts of the Kurdish North were suitable for the new Iraq. "Print dinars" are poor quality, and in practice circulate widely in only two denominations -- the 250 dinar note, and the 10,000 dinar note [and no coins]. This made Saddam dinar notes very inconvenient to use. The "Swiss" dinars, while of higher quality, were so old that they are literally falling apart in people's hands. The former national ("Swiss") dinar notes were used throughout Iraq until the early 1990's, and this national currency still circulates in the Kurdish north. The bills nicknamed “Swiss dinar” either because of their relative stability and strength or because it was made in Europe, depending on the account. The Swiss dinar was trading at about 6.7 to the dollar in early July 2003. Bremer stated that a new currency had not been designed by the United States as only a sovereign Iraqi government could take that decision. The new currency would not depict Saddam Hussein. The design for the new currency, which was not been released in advance to the public, was taken from the designs of the "Swiss" dinar, though the new notes will have different colors and denominations. The new dinars will be printed in a full range of denominations: in 50s; 250s; 1,000s; 5,000s; 10,000s; and 25,000s. The new banknotes will be much better protected against counterfeiting, they will be much more durable and suffer less "wear and tear". The new currency would be made available to the Iraqi people on 15 October 2003. They will replace the existing Iraqi "print" dinars at parity: one new Iraqi dinar will be worth the same as one "print" dinar. The new dinar will replace the "Swiss" dinar at the rate of 150 new dinars to one Swiss dinar. These different rates reflect the different prices, expressed in local currency, in different parts of the country. Currency can be exchanged at branches of the Rafidain and Rasheed banks, and Iraqis would have three months in which to make the exchanges. On 18 August 2003 the Central Bank of Iraq advised Iraqis to deposit all their dinars in local banks to facilitate their change into the new currency. The Bank's governor, Faleh Dawood Salman, said the UK firm charged with printing the new Iraqi money intended to ferry the first shipments to the country in a few days. "The process of changing the money has started and I call on all Iraqis to open accounts in both government and private banks and deposit the amounts they are willing to swap," Salman said. On 01 October 2003 it was disclosed that agents from the Defense Criminal Investigative Service (DCIS) and the 812th Military Police Company assisted by Iraqi police and the Ministry of Finance had broken a counterfeit printing operation in Baghdad and seized counterfeit currency worth 100 billion dinars. DCIS agents and Military Police raided two locations, seized printing presses and arrested Amar Fadil Ramadan Al-Kayse, an Iraqi national who was subsequently released to Iraqi Ministry of Interior officials for prosecutorial action by the Iraqi Ministry of Justice and Courts. The investigation leading to the arrest of Al-Kayse revealed that Al-Kayse was printing and attempting to pass counterfeit 250 Iraqi dinar notes to the Central Bank of Iraq (CBI), which is funded and operated by the Coalition Provisional Authority (CPA). Al-Kayse owned and operated the Sarmad Company for Printing, a local Baghdad printing shop and worked as editor of Nuktat Dhaw (“Spot Light”), a newspaper in Baghdad. Stephen Cecchetti, Professor of International Economics and Finance at Brandeis University, noted in June 2003 that "Cultural legitimacy is the final and most important issue to confront in designing the new Central Bank of Iraqi. What any of foreigners write or say is irrelevant unless the people of Iraq are involved. Most importantly, we cannot go into Iraq and build a set of institutions that reflect American and Western European values. This will not work. The new Central Bank of Iraqi will belong to the Iraqis and so they have to set it up. While I might think it would be fitting to start printing new Iraqi currency with an image of King Hammurabi on it, I’m not going to use the currency." The new currency was unveiled during a press conference in the capital of Baghdad, October 4, 2003. Iraq's new banknotes include pictures of an ancient Babylonian ruler and a 10th century mathematician in place of the face of Saddam Hussein. An ancient Islamic compass, patterned on the an Astrolabe from Baghdad dated 1131 AD, on the new Iraqi 250 dinar banknote replaced the face of Saddam Hussein on the old note. This is the same Arabic Astrolabe that was used on the ˝ dinar note of the 1980s issue and the 1000 Dinar note of the 2002 issue.
(Fact sheet from the State Department's Bureau of Near Eastern Affairs) July 8, 2003 On July 7, the Coalition Provisional Authority in Iraq released the following fact sheet about the new Iraqi dinar that will replace aging Iraqi banknotes beginning October 2003. (begin fact sheet) Fact Sheet about New Iraqi Banknotes In close consultation with financial experts from Iraq and the international community, a new series of Iraqi banknotes will be introduced from 15 October. These new notes will address problems like the shortage of 250-dinar notes and the poor quality of the notes in circulation. Some key facts about these banknotes: The new notes will unify the currency across all of Iraq. Once the exchange of notes has been completed, these notes will be the official banknotes for the entire country. The official conversion rates will be as follows: One normal Iraqi dinar ("print dinar," as used in most of Iraq) will be worth one New Dinar. One former national dinar ("Swiss dinar", as used in some Northern areas) will be worth 150 New Dinars. Current banknotes -- both the normal Iraqi ("print") dinar and the former national ("Swiss") dinar -- will continue to be accepted at full value until the exchange has been fully completed. The new banknotes will be available from 15 October 2003. Official exchange locations will be announced before 15 October. These will include branches of the Rasheed and Rafidain banks. Exchange will be possible over a three-month period, from 15 October to 15 January. There is no need for people to exchange their notes as soon as the exchange begins. People who now hold money in bank accounts will not need to withdraw this money to exchange. All bank accounts will be automatically converted to new notes at the official rate. The new banknotes will look very similar to the former national ("Swiss") dinar notes that were used throughout Iraq until the early 1990's, and are still used in some Northern areas. -- The new banknotes will have a number of advantages over normal Iraqi ("print") dinars: -- They will be much better protected against counterfeiting. -- They will be much more durable and suffer less "wear and tear." -- They will have many more denominations, so they will be much more convenient for people to use. The new currency will be fully convertible into other, non-Iraqi currencies -- including the dollar -- at the prevailing market rate. (end fact sheet) Dollar or Dinar? by William L. Anderson [Posted April 29, 2003]  In the election of 2000, John Ashcroft managed to lose his Missouri seat in the U.S. Senate by losing to a dead man. However, in the last few weeks, we have seen the U.S. dollar do one better, as it has lost ground to what was supposed to be a dead currency, the Iraqi dinar, better known as the Saddam dinar, which portrayed the face of the allegedly-deceased Iraqi president. In both cases, the loser was thought to be invulnerable only to be bitten by reality.
When the first wave of hostilities ceased in Iraq (we shall see if a second wave appears later as Iraqis tire of the U.S. occupation), U.S. authorities made sure that dollars—lots of dollars—followed in the wake of the armed forces. The plan seemed to make sense; with the government of Iraq imploding, it was believed that the dinar would disappear with it, to be replaced by dollars, and at first glance that is what looked to be happening. As the Wall Street Journal tells its readers, when U.S. forces entered Baghdad April 9, the dinar traded at about 4,000 to a dollar.[i] Whenever U.S. personnel paid for anything in Iraq, it was in dollars, not dinars. However, the dollar's apparent rise has gone south, as the Saddam dinar two weeks later traded at 1,800 to the dollar. To put it another way, the dollar lost more than half of its value to what surely has to be one of the weakest currencies in the world. The dinar, like the regime that printed it, was supposed to fade into history. Instead, it roared back to the point that it was even preferred, on the margin, to the mighty dollar. With Saddam's picture all over the dinar, the U.S. looked upon this turn of events as something of a humiliation. For all the U.S. government's weaponry, all its tactics and bombs, its ability to overthrow governments and install new ones, and seemingly direct the course of history through sheer firepower, there is one thing that the U.S. was not able to do: abolish the operation of the economic laws of supply and demand. The central bank having been bombed, the supply of dinars was limited and fixed, even as dollars flooded into the country. That led to the stunning result that the dinar grew in value as the dollar fell, and all the firepower in the world couldn't stop it, at least it has not yet. 
To suspicious minds, at least one of the reasons for the hostilities in Iraq was the fact that the U.S. dollar has become a second-fiddle currency to the Euro, at least when it comes to oil-producing countries accepting payment for petroleum. A stronger U.S. military presence in the Middle East supposedly would put a stop to that nonsense. But unlike the mid-and-late 1980s and 1990s, when the dollar was the de facto world currency, the dollar seems to have run out of steam. American authorities, not surprisingly, have tried to put the best spin on this turn of events. Iraqis are patriotic, we hear, tending to gravitate toward national pride. Perhaps so, but it would seem that the reasons are deeper and more complex than just Iraqi patriotism. After all, if Iraqis truly believed that the dollar was the better deal for them, they would be more likely to swallow hard and accept the greenback. Devotion to a dead tyrant does not seem to be reason enough for people to risk their life savings. The dinar rose because it still worked to facilitate exchange, and, without a central bank, it was suddenly protected from inflationary pressures. The dollar, meanwhile, was circulating in ever growing quantities, and the Federal Reserve always stands ready to print more. And there's a larger issue too: the dollar's decline in Iraq is a microcosm of a larger but more troubling issue, one that the White House and the Federal Reserve System cannot spin away with its political happy talk or pretend does not exist. Both the U.S. economy and the dollar are in trouble, and their difficulties are intertwined with each other. During the early 1980s, the U.S. economy was in its worst downturn since the end of World War II, yet the dollar was strong relative to other world currencies, many of which were mired in an inflationary morass, a holdover from the creepy decade of the 1970s. Although the U.S. Government had begun to incur massive budget deficits, the dollar was still the favored world paper, as producers of oil and manufactured goods overseas were more than willing to take dollars as payment. In return, dollars flowed back here to purchase U.S. securities to finance the deficits, build manufacturing plants, and Japanese investors even went on a real-estate buying binge in this country, purchasing landmarks such as the Rockefeller Center in New York City. Even though the bottom dropped out of the real estate market in the early 1990s, foreigners holding U.S. dollars still had not had enough as money found its way into the stock market boom. As we so well know, the party is over, and it has been over for a long time, except that few people here want to believe it, especially those who hold political power, at least for now. The dollar has been taking a beating for some time on overseas markets, and seen in that context, it is not surprising that Iraqis are making the same decisions that so many others have already made: dump your dollars. It would be nice to say that this is a temporary problem, but the facts speak otherwise. For one, the U.S.A. is not such a great place to invest. Sure, there are the U.S. securities to finance what is going to be another round of massive budget deficits, although one wonders if there are enough people out there willing and able to purchase at least $400–$500 billion of U.S. paper each year. After all, the Japanese "economic miracle" ended more than a decade ago and oil-producing states like Saudi Arabia have seen oil prices fall by more than 50 percent in real terms since the heady days of OPEC in the late 1970s and early 1980s. Moreover, the prospect of profitable investing in something like manufacturing here is at its lowest point in many decades. Savvy investors from overseas take note of things like the tobacco "settlements," and the asbestos quagmire that has bankrupted numerous firms and seemingly has a healthier appetite than a Great White Shark. From environmental regulations to the rigged civil court system, investors understand that the litigation explosion here presents a risk they would rather not undertake. Furthermore, we have seen assault after assault of governments at all levels upon private property rights, and no one wants to be played for a sucker if such actions are avoidable. That is why places like China—a supposed "communist" country—have become hot property for investors. For all of its ideology, at least investors believe the Chinese Government will be more likely to protect their property rights than the U.S. Government. This is nothing less than a searing indictment against the legal climate in this country, and nothing currently demonstrates that change for the better is coming. Ultimately, these things are—for lack of a better term—capitalized in the currency. Once upon a time, people overseas would have swallowed hard and bought dollars. Today, there is competition from the Euro, which goes in hand with the sad fact that the United States through thousands of self-inflicted wounds is losing its economic edge. The seller may be running out of suckers.
William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive. [i] Yaroslav Trofimov, "War Stories: Saddam Hussein is Scarce, but not the Saddam Dinar," Wall Street Journal, April 24, 2003. |
