This is a brilliant speech by Mervyn King, Former chief of Bank of England.
The speech is in a different context. It is on importance of monetary institutions and how they shape expectations. But in this he discusses the Iraq experience which is highly relevant for today’s discourse. The speech cannot be extracted due to security so here is a broad summary.
He points how Iraq was divided into two parts in 1992 – North and South with latter under control of Saddam. Due to restrictions imposed by West, Saddam decided to do deficit financing. Till then Iraq imported notes made elsewhere but they were not available anymore due to restrictions. This led Saddam to print new currency notes on an inferior paper with his image. He even demonetised ths highest denom note of 25 Dinars and asked it to be exchanged with Saddam Dinars. Eventually the Saddam regime printed many more dinars than required leading to high inflation. Plus, the Saddam DInar could be easily counterfeited as it was on poor paper and low tech.
Meanwhile in the North, the old currency continued as no avenue for exchange. No extra notes could be printed as there was no mon authority.
This presence of irresponsible policy and absence of any policy panned out differently as it became clear that Saddam regime will collapse. The North currency called Swiss Dinar appreciated as things were far more stable there.
Fascinating stuff. Time to dig in old speeches of former central bankers…