Tehran, Iran, July 26
Trend:
John Hopkins University's professor in economics suggested “Great Escape” for Iran from U.S. financial sanctions and the country’s internal economic mismanagement, and called for establishment of a gold-backed currency board.
“Iran has a multiple exchange-rate regime. These regimes are always inferior to unified ones,” Professor at Johns Hopkins University Steve Hanke told Trend.
Talking about the major problem with multiple exchange-rate regimes, he said that they open ways to corruption. Those with good connections to the government are always able to obtain the favored exchange rate, which allows them to obtain foreign exchange at an artificially cheap rate.
“So, exchange-rate unification is always desirable,” he said. “However, a unified exchange-rate system alone will not solve Iran's fundamental problems.”
He went on to explain why the unification of exchange rates will not solve Iran`s problems. “First, it is a weak rial that loses its purchasing power year-after-year. Second, it is endemic inflation in the country,” noted the professor.
Responding to the question whether creating a local cryptocurrency or using the existing one is the solution, he said: “A cryptocurrency won't solve these problems, either. There is only one prescription that would guarantee Iran's currency health, and this is a gold-backed currency board.”
“In addition to Iran's own internal economic mismanagement, the weight of sanctions has apparently created additional great difficulties for the Iranian rial. It is vulnerable to sanctions, and this vulnerability is a threat to Iran's national security,” added Hanke.
Explaining how Iran can escape these risks, Hanke says that the country can make the rial as good as gold. This would provide an attractive escape.
“Gold is already an international currency that holds its purchasing power over time. It is also a currency that is not issued by a sovereign. So, it has no political baggage to carry. In addition, gold is already widely revered and used in Iran,” he added. “One foolproof way to stabilize the rial is via a gold-backed currency board.”
He went on to say: “Currency boards have existed in more than 70 countries, and a number are in operation today. They have more fiscal discipline, superior price stability, and higher growth rates compared to the countries with central banks.”
According to him, the currency board is a monetary institution that only issues notes and coins. “These monetary liabilities are freely convertible into a reserve currency (also called the anchor currency) at a fixed rate on demand. In this case, the reserve currency will be gold,” he noted.
“By law, a currency board is required to maintain a fixed exchange rate with the reserve currency (gold) and to hold gold reserves equal to 100% of the monetary base,” the professor in economics said. “This prevents the currency board from increasing or decreasing the monetary base at its own discretion. A currency board system is passive and is characterized by automaticity,” he said adding that no currency board has ever failed.
“Currency boards’ perfect record includes the National Emission Caisse, established by the British in northern Russia in 1918 during Russia’s civil war. The Caisse issued “British ruble” notes, backed by pounds sterling and convertible into pounds at a fixed rate. The father of the British ruble was none other than John Maynard Keynes, a British Treasury official at the time,” he said.
In his words, despite the civil war, the British ruble never deviated from its fixed exchange rate with the pound and in contrast to other Russian rubles, the British ruble was a reliable store of value.
“Naturally, the British ruble drove other rubles out of circulation. Unfortunately, its life was brief: the National Emission Caisse ceased operation in 1920 after allied troops withdrew from Russia,” he noted.
Hanke went on to suggest that the “Great Escape” from U.S. financial sanctions and internal economic mismanagement for Iran will be to establish a gold-backed currency board. “By doing so, the rial would literally be as good as gold,” he said.
Steve Hanke is a Professor of Applied Economics at the Johns Hopkins University in Baltimore (USA). He is one of the world’s experts on hyperinflation and currency boards. Currency reforms that he has designed have never failed to stop hyperinflation.
