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6/17/2019 "The Black Economy 50 Years After The March On Washington"

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How Iraq Could Have Been Stabilized

If there were two men the United States government should have listened to in 2003 it was Reuven Brenner and Steve Hanke. While an uncritical news media, compromised analysts, and otherwise respected historians were either applauding the U.S. bombing of Iraq, or providing superficial explanations of how Iraqi society worked - like two men crying in the wilderness, these economists, among others, were providing cautionary warnings that would prove to be prescient. Some might say prophetic.

Their motivation was not to be able to one day do what they could now – if they so desired – and that is, say, “I told you so.” No, with the rare combination of a grasp of history, real world experience, and articulate expression, Johns Hopkins Applied Professor of Economics, Dr. Steve H. Hanke, and the man who holds the Repap Chair at the Desautels Faculty Of Management at McGill University, and is Partner at Match Strategic Partners, Reuven Brenner, offered sincere and informed advice that they earnestly hoped would be taken by those in power.


In the Spring and Summer of 2003, with major military operations already having been declared over in Iraq by President Bush, Steve Hanke was focused on the subject of his expertise. Currency. At issue – the plans of L. Paul Bremer, then head of the Coalition Provisional Authority in post-Saddam Iraq, regarding the introduction of the new Iraqi Dinar. In a July 21, 2003 opinion editorial written for The Wall Street Journal, Dr. Hanke wrote:

Millions of fresh dinars, graced with the visage of Saddam Hussein, recently began rolling off Iraq’s printing presses at the behest of the Coalition Provisional Authority. This inspired about as much confidence and unity as the Allies would have garnered with the introduction of Mussolini lire and Hitler marks after World War II.

To belatedly correct this maladroit decision, L. Paul Bremer, head of the provisional authority, announced on July 7 that new Iraqi dinars will be introduced over a three-month period starting in October. These will replace both the Saddam dinars and the “Swiss” dinars that circulate in Iraq’s Kurdish areas. And to reinforce its adeptness, the provisional authority has handed the banknote-printing contract (awarded without competitive bid, as it were) to a company with a subsidiary that, on July 9, became the subject of a price-fixing investigation by the Justice Department.

Mr. Bremer has now declared that an independent central bank will govern the emission of new dinars. This seems like an unattainable objective. We should not hold our collective breath anticipating a Bundesbank clone to be plopped down in Baghdad.

Dr. Hanke’s concerns were well-founded, and grew out of a recognition that there would have to be life after war, and that such life begins with a steadily strengthening economy where business, trade, and commerce emerge out of the ashes of battlefields. His point of view grew out of years of experience advising world leaders on such matters, before, during, and after the guns fired and bombs had fallen. The Wall Street Journal, took notice early on, and presented its worries seemingly inspired by Dr. Hanke’s track record, insight and monetary evangelism, editorializing April 24, 2003 in “A Wirtschaftswunder for Iraq”:

…Iraq must decide whether to have a central bank or, as it did from 1932-47, a currency board. Under a currency board, the local currency is linked to a stable currency such as the dollar. The advantage – especially for a developing country – is that, unlike a central bank, the currency board doesn’t have the option of printing more money, thereby adjusting the exchange rate. The exchange rate is fixed.

Johns Hopkins economist Steve Hanke, the world’s expert on the subject, favors a currency board for Iraq – though he says no one except the Pentagon has called even to inquire about the prospect. Central banks don’t work in countries prone to corruption and without a strong rule of law, he says, and unlike Erhard’s Germany, Iraq “has no tradition of the rule of law.” Postwar Bosnia and Montenegro both have stable currencies today, thanks to currency boards linked to the euro.

That the Pentagon actually called on Dr. Hanke to put out a feeler early on is no surprise. After all, he was one of the advisers to the United States Government in their effort to stabilize another war-torn country suffering from inter-ethnic strife. Of that conflict the CIA World Fact Book explains, “Bosnia and Herzegovina's declaration of sovereignty in October 1991 was followed by a declaration of independence from the former Yugoslavia on 3 March 1992 after a referendum boycotted by ethnic Serbs. The Bosnian Serbs - supported by neighboring Serbia and Montenegro - responded with armed resistance aimed at partitioning the republic along ethnic lines and joining Serb-held areas to form a ‘Greater Serbia.’ In March 1994, Bosniaks and Croats reduced the number of warring factions from three to two by signing an agreement creating a joint Bosniak/Croat Federation of Bosnia and Herzegovina. On 21 November 1995, in Dayton, Ohio, the warring parties initialed a peace agreement that brought to a halt three years of interethnic civil strife (the final agreement was signed in Paris on 14 December 1995). The Dayton Peace Accords retained Bosnia and Herzegovina's international boundaries and created a joint multi-ethnic and democratic government charged with conducting foreign, diplomatic, and fiscal policy.”

Steve Hanke, before serving as adviser to the U.S. (even flown in to Bosnia under gun fire), was the personal economic adviser to the Vice –President of Yugoslavia, and even before the civil war had advocated a currency board for that country. His ideas and advice were well known on the ground and in powerful circles in government and finance - Slobodan Milosevic included. The history and context of the Bosnia experience and its relevance to a divided Iraq is important to digest in understanding the opportunity that was lost by the U.S. early on. In a CATO Institute Foreign Policy Briefing Paper , “Monetary Options for Postwar Iraq,” dated September 22, 2003, co-authors Steve H. Hanke and Matt Sekerke explain:

The successful establishment of a currency board in Bosnia and Herzegovina (BH) after its bloody civil war argues in favor of such a monetary system for Iraq. The civil war erupted shortly after BH declared independence in March 1992 and continued until the last of many ceasefires on October 15, 1995. The war devastated the country. The death toll was 250,000, and 3 million of the country’s 4.4 million people were displaced, with 1 million becoming refugees abroad. About 18 percent of the housing stock was damaged. The war left much of the territory covered with land mines, and the economy was in shambles, with output declining to about 20 percent of the 1990 level. BH was cordoned off into Croat, Muslim, and Serb ethnic zones. Although the German mark was the dominant currency in each zone, they each used distinct local currencies: the Croatian kuna, the BH dinar, and the Yugoslav dinar. To unify the postwar federation and provide the economy with a much-needed sound money confidence shock, it was deemed essential to establish a monetary system that would reintegrate and unify the ethnic zones. To do that, it was necessary to design a system that was strictly rule bound and insulated from ethnic backbiting.

With those objectives, the Clinton administration insisted that Article VII be included in the Dayton/Paris Accords of 1995. That article mandated a currency board for the first six years of the new federation and specified that the board’s governor be a foreign national appointed by the IMF after consultation with the presidency. With the mandate from an international treaty, the IMF staff and outside experts designed what has proved to be the most rule bound and automatically functioning of the modern currency boards. It commenced operation on August 11, 1997, and has successfully achieved its original objectives. Stanley Fischer, former first deputy managing director of the IMF, confirmed this in a press conference announcing his retirement from the IMF. When asked what his proudest moment had been during his tenure at the IMF, Fischer mentioned, among other things, the speed with which the IMF staff was able to put the currency board in place and the unqualified success of the board following its short gestation.

Perhaps in the ultimate sign of respect, to Steve Hanke and the success of his favorite prescription, the currency board, the same IMF and Clinton administration that desired and implemented a currency board in Bosnia, fought Dr. Hanke’s efforts advocating the same monetary regime for Indonesia (Mr. Hanke was serving as economic counselor to the country’s President Suharto.) The difference between Bosnia Herzegovina and Indonesia? The West, it was no secret, wanted the former stabilized and the latter destabilized.


“Currency stability isn’t the only thing, but its everything, Cedric” Dr. Hanke told me in a conversation two weeks ago. It is a statement he has frequently included in his writings, interviews, and speeches.

Perhaps it might have been useful for the United States to have remembered this nugget of wisdom.

In all of the discussion of national unity, solidarity, and ending inter-ethnic strife, the role that a single and stable currency can play was relegated to the sidelines by American officials and advisers.

“Two things signified the emergence of national unity in Bosnia. The monetary system. And the fact that everyone in Bosnia and Herzegovina had to have the same license plate,” Steve Hanke stated to punctuate his point connecting the Bosnian experience to what he believed was possible in Iraq.

There can be no unity when inflation rates touch 70% as has been the case in Iraq as recently as August. With inflation rates still over 50% and an exchange rate that is operated by the Iraqi central bank under an impossible managed peg regime, the case has now gone from the evidence of 2003 to a state of proof three years later, that fatal mistakes and errors were made early-on in the planning (and lack thereof) laying the ground work for economic development and growth. It is hard to imagine that the United States government believed that everything depended upon an oil revenue grab, but the evidence suggests a second thought wasn’t given to other important economic basics.

Mr. Hanke explains, laments and advises, “In most developing countries, under no circumstances do you want a central bank. In addition to corruption and rule of law issues, they just don’t have the necessary market instruments developed to implement a reliable policy. Even if the fiscal management in Iraq is exemplary, the idea of an independent, Bundesbank-style Iraqi central bank is nearly laughable. The language being used to describe the operations of the central bank gives a false air of sophistication to what will be a primitive affair. Interventions in the foreign-exchange market will not take place at a Reuters terminal, but in the open outcry of the bazaar, where traders will have to be coerced in some way to buy and sell at the desired exchange rate. The interbank market – an indispensable institution for directing the course of interest rates and the availability of liquidity – will probably consist of several trucks plodding through the desert laden with banknotes and paperwork. Money markets – in which short-term paper is traded, and where central banks buy and sell bonds when conducting open market operations – will again be more like the bazaar than Lombard Street, if they exist at all. The Iraqi central bank can also forget about such modern conveniences as real-time gross settlement, indirect instruments of monetary policy, and any close supervision of the banking system. The best path has been laid by history. They either should have used a foreign currency, as they did from 1916 to 1931 with the Indian rupee, or implemented an Orthodox Currency Board as was the case from 1931 to 1949.”

Had a currency board been instituted, perhaps even tied to the euro, as part of a play to further attract European attention and involvement (to balance the dominant U.S. role), civil war may not have been avoided, but it almost certainly would have been delayed, giving peace a chance.


I was actually visiting Reuven Brenner the first day of May in 2003. That meant, among other things, I had the experience of watching President George W. Bush’s now infamous so-called ‘Mission Accomplished’ speech, while I was in a hotel room in Canada (“Admiral Kelly, Captain Card, officers and sailors of the USS Abraham Lincoln, my fellow Americans: Major combat operations in Iraq have ended. In the Battle of Iraq, the United States and our allies have prevailed. And now our coalition is engaged in securing and reconstructing that country” is how the President would open up his remarks).

The reaction on the street to the war in Montreal was what I expected. In cab rides, at the hotel, and in casual conversation, with those willing to speak with me in English, I heard a common theme: America was arrogant, the President thinks he’s a cowboy (specifically like those played by ‘John Wayne’), and this war would result in something far worse than what those who planned it thought.

Although I knew I was in the homeland of many who would openly style themselves as politically socialist or progressive, there was something I recognized that was rather non-ideological in what I heard. Folks weren’t just speaking about whether the war was right or wrong, but whether peace was workable or winnable.

“Cedric the United States did not take into account the complexities of the Iraqi society,” Reuven Brenner told me over breakfast at his home. “They underestimated cultural ties and the maze of institutions and leaders that Iraqis have bet on, and why.”

Dr. Brenner explained the varying sticking points that would be involved in ‘securing and reconstructing’ the country, as President Bush stated, and suggested a few innovative ideas that he thought might work. Casting a critical eye on superficial prescriptions advocating property rights in Iraq as an economic solution, Reuven Brenner spoke of ‘the Alaska model,’ for sharing oil revenues as a path that could lead to what he refers to as the democratization of capital.

Mr. Brenner was definitely out front with this suggestion (an honorable mention must go to individuals like Steve Clemons of the New America Foundation, who penned an op-ed called, “Sharing, Alaska-Style” published in the New York Times on April 8, 2003) that oil revenues that come into a central authority should be divided among all of the citizens of Iraq – as has been done in Alaska and Norway.

In an op-ed written for Asia Times in November of 2003, “Oiling The Wheels Of A Tribal Society”, Reuven Brenner outlined how things would work, “What can be done? First execute an idea that has been in circulation for a while, modeled after the Alaska public trust fund, which would offer each and every Iraqi a fraction of oil revenues. The other portion would be invested and could not be spent without well-defined voting procedures. This arrangement would ensure that people had an immediate stake in the new Iraqi system, and incentives to both prevent sabotage and cooperate. The oil revenues could be managed by an international trust fund.”

In a recent e-mail exchange with me he added more details, “I would say Iraq needs to look at the combination of what Alaska and Norway did with their oil revenues. Norway keeps it outside of the easy reach of its politicians. To achieve this in Iraq - after the initial distribution of part of the oil revenues to each Iraqi citizen - the money left over would have to be designated for public infrastructure, handled by central and local governments, but through institutions held accountable for the spending. Here is where you would also take a page out of the Swiss political model: you have referenda and initiatives to determine where the money goes. So if building schools and an educational system requires $3 billion, and road construction needs $2 billion – the people would be able to vote on the actual allocation of those funds. Having a stake in the future which allows for collateral, and a viable voting process would engage Iraqis in public debates. The various groups currently fighting one another would have incentives to watch each other, negotiate, and compromise. Of course this would have to be accompanied by some strict, maybe drastic enforcement of public order - to give a strong and clear signal to everyone. And as for the controversial question of who would be on the board of the international public trust fund managing oil revenues? I believe that by having Swiss nationals and Norwegians (NOT the UN), along with those from Muslim nations like Turkey and the successful Islamic city states, like Abu Dhabi etc..., that this could all can be done successfully, and in a way that would not cause conspiratorial suspicions to arise or enable corruption to germinate. I belive the opposition to this scheme comes from local politicians who will invoke anything to keep power from slipping away - power given by oil revenues. Remember the Mexican government still owns Pemex, and although Mexico is developing, the pace has been glacial."

As for how to deal with the Iraqi nation being divided along three major classifications – Shiite, Sunni, and Kurd – Mr. Brenner suggested, in a June 23, 2004 opinion piece for Asia Times entitled, “Unsettled Civilizations: How The U.S. Can Handle Iraq,” combining his oil revenue proposal with a redrawing of Iraq’s regions following the example of the cantons of Switzerland:

Since the distinct tribes that constitute Iraq do not display strong national identification and live in rather distinct areas (unsurprisingly, since it and other Islamic states were formed relatively recently), a number of political options would open once the revenues from the distribution of oil revenues are settled. The Iraqi tribes may decide to roughly remodel themselves along the - for the moment - unique Swiss lines, where the French, German and Italian-speaking groups have each carved out territorial entities. There is one Italian canton (Ticino), many German ones and a few French (the last French one - Jura - having been carved out from the German canton of Bern in 1974, through a series of votes because of the French minority's dissatisfaction with the German majority's misallocation of funds). With the revenues from oil having been solved first, a major potential obstacle for delegating powers to lower levels has been eliminated, since there is less to redistribute on the central government level.

With revenues from oil being widely dispersed, the chances of much funding going for rebuilding centralized military and police powers are diminished. "Power" is dispersed and brought closer to the people. Whether or not such dispersion of financial clout will lead to developing over decades, or maybe centuries - bottom up - a canton-like federal arrangement as in Switzerland, or lead to a breakup of Iraq along ethnic lines - time will tell. Both solutions seem more stable than what the world has been facing until now.

Mr. Brenner summed up the merits of his idea, telling me, “Combining the canton-like arrangements with the individual allocation of oil revenues, all combined with severe enforcement of law and security could work.”


Reuven Brenner’s ideas, although expressed two and three years ago, did not pick up steam in the United States until just recently, when Forbes magazine published two editorials advocating both the Alaska and Canton solutions. The most recent, dated November 13th and titled, “Slick Solution” explained:

In September Iraq's political leaders agreed to post-pone until 2008 any moves to "carve up" the country into autonomous states. The principal reason for the delay was the ever divisive question of who would control the country's immense oil wealth. Most of the oilfields fall in Kurdish and Shiite areas. The Sunnis are afraid that regional autonomy will mean they will be bereft of their share of the black gold.

This setback underscores the need for us to forcefully push the so-called Alaska solution. About a quarter of Alaska's oil and gas royalties goes into an entity called the Permanent Fund, the assets of which are managed by investment professionals. About half the revenue stream is distributed to the state's citizens each year; the remainder is reinvested. This year each qualified resident of Alaska is receiving $1,106.96 from the fund.

The only way that Iraq can hold together--absent an oppressive, mass-murdering regime à la Saddam Hussein's--is by setting up Swiss-style autonomous regions. In Switzerland the German, French and Italian communities have lived peaceably side by side for more than seven centuries, while in the rest of Europe the three groups fought one another incessantly until the end of World War II. Switzerland is really 23 countries under one flag--that's how many cantons (autonomous districts) there are in that mountainous country. Plans to use such a sensible approach in Iraq, though, always flounder on the oil question. An Alaska model would neatly and equitably deal with that: Every Iraqi living in the country would get a cut, regardless of where he or she resided.

The editorials made waves, but perhaps appeared too late to influence an American establishment, opinion leaders, and politicians caught up in sound-bite and sensationalist election coverage.


I held out hope that perhaps, due to the respective influence of both Dr. Steve Hanke, and Dr. Reuven Brenner, that the power of their ideas and arguments – gradually gaining strength and salience over time – would somehow make their way into the minds and hearts of the members of the Iraq Study Group.

One quick read of the report made it clear that if the advice of these two men entered the ears of the so-called Baker Commission, it soon exited.

In a section called, “Economic Performance”, although taking the time to mention that Iraq has $12 billion in currency reserves and that inflation is at a crippling 50%, the report recommends absolutely nothing substantive to remedy the situation.

In a conversation after the Baker report was released Steve Hanke told me that Iraq has the reserves to institute a currency board at the proper exchange rate.

And after devoting attention to oil-related issues over a few of the report’s 84 pages, its recommendation - # 28 - is that oil revenue should “accrue to the central government and be shared on the basis of population. No formula that gives control over revenues from future fields to the regions or gives control of oil fields to the regions is compatible with national reconciliation.”

But, one would appear that this recommendation itself is not “compatible with national reconciliation. In reaction to “Recommendation 28”, Reuven Brenner told me, “Allocating money by ‘provinces’ - especially where ethnicity is an issue - is not a solution. In Canada it did not prevent repeated moves toward the break-up of the country. Now imagine this approach in a country as unsettled as Iraq, where the Shiites, Kurds and Sunnis have been at each others' throats for centuries. If anything, the incentives of the arrangement proposed by the Iraq Study Group would break up the country sooner, rather than later - the Baghdad Shiites would move South, whatever Kurd enclaves there are would move North. There will be much dispute about population movements and sizes. The big mistake in the commission’s plan is that instead of favoring opening up capital markets from the bottom up and dispersing power, this plan strengthens ethnic ties and places money into the hands of politicians. This is just the opposite of what the U.S. should be exporting. Capital markets have been an American strength, not nation building and inventing arrangements for the distribution of revenues within a government. Whenever the U.S. went for Nation building, as it did in Europe between the two World Wars in the hope of containing communism - believing that nationalism would be a stronger way to link people than class - it backfired. For different reasons, 'nation building' or maintaining borders that were artificially drawn in the sand, when the locals do not seem particularly keen to defend them under the existing political arrangements won't work as the designers may expect. Saddam Hussein was eliminated, now it is time to give a stake in the future from the bottom up - and leave the locals to go from there.”


The rejection, dismissal, or ignoring of the sound and plausible advice offered by both Reuven Brenner and Steve Hanke suggests the type of obstinance and ‘groupthink’ that precedes the fall of empires. It also supports the conclusion properly growing among many in the Islamic World, that reliance upon the West to solve its own problems, is reaching the point of diminishing returns. The need to look elsewhere and turn inward for solutions will increasingly be a rallying cry of the Muslim masses, if not its leaders who are perhaps as much a part of the problem as are outsiders. One must remember that before America invaded Iraq, it was two Muslim ‘Brothers’ - Iraq and Iran - who slaughtered over a million of the faithful in war with one another. In 1998, at the Yale Club in New York, I asked then-Iraqi Ambassador Nizar Hamdoon about that nasty episode, after growing tired of hearing him blame America and Israel for Iraq’s problems. He seemed slightly offended at my question, but admittedly had no answer or justification for Muslims killing Muslims for nearly ten years.

Ideas like those proffered by men like Mr. Hanke and Mr. Brenner are consistent with many of the core principles, teachings and beliefs of Islam.

The idea of a stable currency and exchange rate brings back memories of Prophet Muhammad’s insistence on a fixed monetary standard 1,400 years ago, and it seems compatible with efforts to establish a gold dinar or Islamic gold standard, promoted by such diverse Muslim opinion leaders as former Malaysian Prime Minister Dr. Mahathir Bin Mohamad; Spanish Muslim Author ‘Umar Ibrahim Vadillo; and the Honorable Minister Louis Farrakhan in the United States.

The idea of democratizing capital and distributing it equally among a population is compatible with aspects of the Sunnah of Prophet Muhammad (Peace Be Upon Him) and intersects with instruments and leaders advocated in the world of Islamic finance. The institutions of referendum and initiative dovetail with the Islamic principle of shura, it can be argued. And even the idea of redrawing borders in Islamic nations that have been impacted by colonialism is an interesting one that might actually facilitate greater Muslim unity. On this point, although there are an estimated 1,000 tribes in Iraq, prior to the war, these loosely organized and affiliated themselves according to approximately 30 confederations, with some of these tribes having members that are Shiite, Sunni, and Kurd. A better organization of the tribal system and reform of its governance could be a source of unity far more than division.

While there is a confluence of forces at work encouraging chaos in the region, the impact of a stable currency, democractized capital, referendum and initiative, and redrawn regions holds great promise for establishing equilibrium, not only in Iraq but throughout the Muslim world. And if Iraqi culture and society is to buy into a nation-state, it must be given an incentive and stake in the future to do so.

Today, according to the Permanent Fund Dividend Division of the Department of Revenue of the state of Alaska, residents will receive a payment of $ 1,106.96 – their individual share of oil revenues. With this capital, many Iraqis would have the ability to pool resources, go into business, and develop an entrepreneurial economy. Those who simply believe pieces of paper identifying capital and assets, and constitutions outlining property rights, are the base of a thriving economy have it wrong. Without a stable currency, and an initial source and means that places that currency in the hands of the masses, property rights and titles to assets are virtually meaningless.

In addition, the emphasis on Iraqi oil as the source of revenue, wealth creation, economic development and growth while understandable and appropriate, is not immune from the old statement ‘the devil is in the details.’ If Iraq signs production sharing agreements with multinational oil companies that give up too large a share of revenues for too long a period of time (some of these agreements can last 40 years) there may not be sufficient revenue to take care of all that is hoped for, or promised – by Americans and Iraqi officials. estimates that that current Iraqi oil policy will allocate the development of at least 64% of Iraq’s reserves to foreign oil companies. Is this arrangement in harmony with President George W. Bush’s declaration that "The oil belongs to the Iraqi people. It's their asset,” made during a press conference on the White House lawn in June of 2006? Greg Muttitt, the recent author of "Crude Designs: The Rip-Off of Iraq's Oil Wealth,” cites polls that ask Iraqis what they believe the three main reasons were for the United States’ invasion of their country. 76% gave "to control Iraqi oil" as their first choice.

The United States appears to have blown its opportunity to stabilize Iraq. But that doesn’t mean the rest of the world has to stand by and watch hopelessly.

Ideas, solutions and willing men to carry and implement them abound, the world over.

Just ask Steve Hanke and Reuven Brenner.

Cedric Muhammad

Monday, December 18, 2006

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