Tuesday, August 31, 2004

The monetary history of Gilligan's Island 

I love stories where economics is applied to odd, humorous places. This one is particularly funny.
...why do any of the other stranded castaways (on the TV show Gilligan's Island, now out on DVD -- kb) treat the millionaire's government money as valuable while stuck on an island where no such government can enforce its value?
Why should anyone care about this? Well it goes to the question of Iraqi dinars.
After the invasion of Iraq, there was no more central bank printing dinars and no more Iraqi government to put the fiat behind its fiat currency. The American military started handing out US$20 bills and expected the Dinar to fade from existence. Instead, to the chagrin of the occupation force, the Dinar's value doubled against the Dollar in two weeks. Statues of Saddam Hussein were being toppled, but his face was still on the preferred currency, and gaining in popularity. Some saw this as patriotism: a silent protest by the occupied population against the invading force. But we need only look further north, to the Kurd-controlled areas, to find a more economic explanation.

After the first Gulf War, Iraq changed its currency from the so-called Swiss Dinar to the more recent Saddam Dinar. When a government changes its fiat currency, it announces a transition period during which the old bills can be brought in and exchanged for the new. After the window closes, the old notes are declared worthless.

To no one's surprise, the rebel Kurds did not visit the Iraqi government to make such an exchange. They just kept using the old money. It was familiar, hard to counterfeit, and in its post-fiat status, it was no longer inflationary: that is to say, the relatively fixed supply of notes made the currency a better store of value than the new Saddam dinars being printed (and printed and printed) further south.

The Swiss Dinar may have been the first successful post-fiat money.
Another reason for Hugh to change the ad.