9.21.2012

Online Currencies - When Sovereigns Fail

A while back, I wrote about a pending academic research project I was embarking upon with Jeremiah Newhall, a good friend of the site. Below you will find a draft version of a minor section of the paper in which we discuss currencies which don't have the backing of a sovereign or a commodity. Part of the reason I am posting this is to solicit feedback, so please feel free to submit your thoughts in the comment section below.

While governments have sovereign interests in maintaining unopposed and solitary currency regimes, ranging from protecting citizens and commerce to controlling inflation, recent history also provides examples of governments turning a blind eye toward the use of parallel currencies. Somewhat more surprisingly in a historic context, recent times have seen nations giving up nearly all sovereign claim to currency issuance and maintenance to supra-national bodies. The former scenario was seen in Iraq in the early 1990’s, and will be discussed below. The latter will also be discussed below, and refers to the current European Monetary Union.

The original Iraqi dinar was introduced into circulation in 1931 to replace the Indian rupee, the official currency at the time of the World War I-linked British occupation. From that time until the 1958 coup, the dinar, also called the ‘swiss’ dinar due to the fact that it was Swiss presses it was printed on, was at par with the British Pound sterling. While after the coup the decoupled Swiss dinar subsequently remained relatively strong, the aftermath of the 1991 Gulf War, during which the government printed mass quantities of the currency, saw a decline in its strength.

After the end of the allied occupation in 1991, the Hussein government circulated a new currency, the so-called Saddam dinar. However, in the somewhat lawless and primarily Kurdish north, where persecuted citizens certainly felt no reason to support a Hussein-backed currency, the Swiss dinar remained the currency of choice. Though the old Swiss dinar fluctuated, it was a steadier, and stronger, currency than the official sovereign-backed Saddam dinar, particularly during the 2003 Gulf War. This remained true until the Coalition Provisional Authority introduced a new Swiss note (retaining any bill with Hussein’s face on the front was obviously a political non-starter) using a color scheme which differentiated it from the old notes still in circulation in the north.

The Swiss dinar in the interim period between the Gulf Wars of the 1990's and the 2000's is most notable for our purposes as an example supporting the proposition that currencies which are neither fiat nor commodity-backed specie can find support among certain populations. Indeed, it is not a stretch to say that some non-backed currencies are perceived as having more worth by virtue of the fact that they aren't backed by a government whose policies, strategies, or even existence is unpopular.

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email. Joshua Sturtevant is also a GW Law grad, and currently serves as an in-house legal fellow at a renewable energy financing and development firm.

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