The Iraqi dinar was ahead of its time. Years before Bitcoin was invented, day traders were drawn to the viral economic narrative that Iraqi currency was a ticket to retirement wealth after the fall of Saddam Hussein.
Economists and regulators warned it was a gamble, but bettors were still paying high fees to own an illiquid currency that some say could well become the most valuable in the world. Instead, it was devalued by 20% in 2020.
The dinar is once again on economists’ minds as the cryptocurrency market reels from its latest crash – with $2 trillion ($3 trillion) worth wiped out of a battered market to fraud, theft and the collapse of leading companies including FTX and BlockFi.
The parallels are not just in laser speculation, but in the historical development of the dinar as a medium of exchange. While optimists like investor Bill Ackman sees crypto making a comeback if the right technological use case presents itself, the experience of Iraq suggests that the survival of any form of currency depends more on trust in the institutions that support it.
In the 1990s, after the first Gulf War, there were effectively two Iraqs: a Saddam-controlled south and a north that was essentially a Kurdish protectorate backed by a no-fly zone. As a result, the dinar branched out into two paths.
In the south, Saddam has taken to printing money to prop up an economy struggling with sanctions. New banknotes bearing his likeness, called “Saddam” or “printed” dinars, were produced locally in mediocre conditions. Inflation soared to an average of 250% between 1991 and 1995 as the money supply in circulation soared, former Bank of England chief Mervyn King noted in a 2004 speech.
In the north, where the new dinar did not circulate and bank cash was not expropriated by Saddam’s regime, the old “Swiss” dinar – so called because it was printed on Swiss-made plates – continued to be used. It lasted until the fall of Saddam, although no central bank or government gave it any value.
The relevance for crypto is that confidence in the long-term value of its multitude of tokens could hinge on the existence of credible institutions, which it increasingly lacks.
Having two fiat currencies in the same country was obviously a surprising development. That the Swiss dinar has continued and risen in implied value against its sibling is perhaps not so remarkable given the extent of currency mismanagement taking place in the south.