Currency Reform in Iraq
April 24, 2003
None of the grand plans for rebuilding Iraq will work without a growing economy rooted in private property rights and a stable currency, says the Wall Street Journal. Iraq hasn't had either for decades since nearly everything was controlled by the Baath Party.
The longer-term decision on what currency the new Iraq should adopt will be left to Iraqis, but for now the dollar is the de facto currency. If the Iraqis introduce a currency of their own, they should look at what is arguably history's most successful currency reform -- the creation of the Deutsche mark and elimination of the Reichsmark in 1948.
- As instituted by the U.S. occupation forces and implemented by Ludwig Erhard, some 500 tons of Deutsche marks were printed in the United States and secretly shipped to Germany.
- The currency reform took place on Sunday, June 20, and West Germans formed long queues to exchange their old marks for new ones.
- The next day Erhard did something even more radical: He abolished most rationing regulations and canceled price controls.
The effect was immediate: Prices stabilized, goods appeared on the shelves and hyperinflation stopped. The German economic miracle was born.
Along with a currency decision, Iraq must also decide whether to have a central bank or, as it did from 1932-47, a currency board, says the Journal. Under a currency board, the local currency is linked to a stable currency such as the dollar. The advantage -- especially for a developing country -- is that, unlike a central bank, the currency board doesn't have the option of printing more money, thereby adjusting the exchange rate. The exchange rate is fixed.
Source: Editorial, "A Wirtschaftswunder for Iraq," Wall Street Journal, April 24, 2003.
For text (WSJ subscription required) http://online.wsj.com/article/0,,SB105114401639048000,00.html
Browse more articles on International Issues