Currency reform in Iraq

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 cancelled price controls.

    The effect was immediate: Prices stabilised, 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
    For more on International (Currency Issues) Issues http://www.ncpa.org/iss/int/

    FMF Policy Bulletin, 29 April 2003.
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