Among the basic functions of a currency is to serve as a medium of exchange. In ages past, gold and silver fulfilled this role and made up much of the world’s currency. Today, most currency is paper money, either pegged to another currency or backed by nothing in particular. However, it is conventional wisdom that in the case of fiat money, some entity must still exist to regulate its value and maintain its purchasing power, usually a central bank. Even though it does not explicitly regulate its value, even Bitcoin has a formulaic protocol governing the creation of new bitcoins.

           However, there are circumstances where currencies have existed without an entity regulating the monetary system. While one could say that the use of cigarettes as a prison currency would be an example of this, at least cigarettes have value beyond their use as a currency. But how about paper money that keeps its value and continues to be widely used as a currency even without a governing authority, or long after that authority disappears? It turns out such ‘zombie currencies’ can be found in some fairly recent history.


           From its independence in the 1930s, Iraq used a currency called the Dinar which was pegged first to the British Pound and then to the US Dollar. For decades, the currency retained its value, with little inflation in the Iraqi economy. In fact, after an initial devaluation in 1949, it even strengthened in value against the pound following its own devaluation in 1967 and the devaluation of the US Dollar after the end of its convertibility into gold in 1971.

           The currency lost its record of stability not long after the purge that brought Saddam Hussein to power in 1979. The period of the Iran-Iraq War that followed began an era of high inflation; which in the mid-1980s ran between 25-50% per year. But the peculiar story of the Iraqi dinar begins in the aftermath of its invasion of Kuwait and the economic sanctions and foreign intervention that followed.

Swiss Dinars 

           Following the country’s defeat in the Persian Gulf War, economic sanctions prevented Iraqi trade with the West. Unexpectedly perhaps, among the consequences of this action was the need to print a new currency. This was because Iraq hadn’t actually printed its own banknotes. Prior to the 1990s, the country had its banknotes printed in Britain, by the printing company De La Rue which still prints banknotes and critical documents like passports for several governments. Furthermore, the printing plates used to print the currency were manufactured in Switzerland. Thus, the term “Swiss Dinars” was used to refer to the pre-1991 currency.

           Following the war, the Central Bank of Iraq began to issue new banknotes, manufactured both locally and in China, thus avoiding Western sanctions. So limited were the resources available to the state that these new notes were printed on regular paper as opposed to cotton or linen. They were of famously low quality; the ink ran if exposed to water and the notes tore easily. In contrast to the Swiss Dinars, these new notes became known as “Saddam Dinars,” the dictator’s portrait was included on almost every note. On the old series of notes printed by De La Rue, his likeness was only printed on the highest-denomination 25 dinar note. Thanks to the inflation that followed the war, many new higher-denomination notes were required and that meant more portraits of the dictator needed to be picked out.

           But another consequence of the war is crucial to this story. Almost immediately after the Iraqi defeat, several uprisings against Hussein, especially in the country’s north, prompted foreign intervention. A no-fly zone was implemented by NATO to protect the Kurdish north from retribution. The uprisings and no-fly zone had effectively split the country in two; the south ruled by Saddam Hussein and a north left essentially without a government. Due to the uprisings and division of the country, the residents of the north had far less opportunity to exchange their old Swiss Dinars for new Saddam Dinars before their cancellation after the elapsing of a sixty-day window. The result was one country with two currencies.

           The cancellation of the old notes in the south had no effect on the north, where the old Swiss Dinars were all they had to use as a medium of exchange. So, for years they continued to serve as the currency of northern Iraq, despite being officially worthless, backed by no government, and regulated by no monetary authority; they were essentially a zombie currency.

Reconstituting the Dinar

           Following the American invasion of Iraq in 2003, the launch of a new currency was planned. Even though it had been little more than ten years since the division of the currency, the value of the two dinars had diverged dramatically. When the Saddam Dinars were issued, they were exchangeable on a 1:1 basis. However, excessive printing of notes to finance state deficits had resulted in inflation of around 250% per year in the Saddam Dinar-denominated south. Meanwhile, the Swiss Dinar saw no meaningful devaluation because there was no new printing of banknotes after the early 1990s. By the time of the invasion of Iraq in the spring of 2003, it took 300 Saddam Dinars to buy one Swiss Dinar.

           Reconstituting the Iraqi Dinar required establishing an exchange rate between the two older currencies. The Coalition Provisional Authority decided to launch the new post-war Dinar at a 1:1 value with the Saddam Dinars and looked into a fair market value for the Swiss Dinar. Of course, the exchange rate stood at 300 Saddam Dinars to Swiss Dinars, but this had risen substantially right before the invasion. Also, using purchasing power parity to value the currencies suggested an exchange rate of ‘only’ 100:1, which was the exchange rate between the two dinars before the run up to the war. The Coalition Provisional Authority ultimately settled on 150 Saddam Dinars per Swiss Dinar, as a kind of compromise.

Other Zombie Currencies

           Not only did the Swiss Dinar retain value without any governing authority, it actually performed quite well, and all this despite being paper money. Still, it isn’t the only example of a currency without a government. After the Western Roman Empire fell in the 5th century, Roman coins, such as the Solidus, continued to be used as money in the barbarian kingdoms that followed. But in the case of a gold coin like the Solidus, this is less impressive; of course it would remain valuable. It is more difficult to find a paper currency that continues to serve as a medium of exchange even after its issuer ceases to recognize it.

           Nonetheless, there are other examples of this; a contemporary one could be found in Somalia. In the early 1990s, both the central bank and the national government were dissolved. Nonetheless, the currency that had been printed before the country’s civil war, the Somali shilling, continued to be used. However, in the case of the Somali currency, counterfeiting had steadily reduced its value which only stabilized after the purchasing power of the notes equaled the cost of producing the counterfeits, making no further counterfeiting profitable. Nonetheless, whereas a government keen on printing money would just create new higher-denomination banknotes and require their use as legal tender, counterfeiters were limited to reproducing the old notes. The public wouldn’t simply accept fake high-denomination notes, limiting the debasement of the currency.


           The economics of failed states, and those teetering on the brink, is a fascinating subject. They present incredibly distressed circumstances to study that no one would hope to ever re-create for experimental purposes. In particular, the unique dynamics of zombie currencies provoke questions about what exactly is the source of currencies’ value. This question is almost irrelevant for gold and silver coins and in the case of paper money, the presumption is usually that the commitment and ability of a monetary authority to preserving its purchasing power is the source of a currency’s value. However, the example of the Iraqi Swiss Dinar refutes this notion. It maintained its value as though by inertia. Perhaps, the ‘natural’ tendency of a currency is to retain its value and the real question is how their value changes, not how it is maintained. 

Further Reading

1.     Foote, Christopher L., et al. “Economic Policy and Prospects in Iraq.” SSRN Electronic Journal, 2004.

2.     “Iraqi Dinar History.” NYDinar, Drakon Asset Management.

3.     King, Mervyn. “Mervyn King: The Institutions of Monetary Policy.” American Economic Association Annual Meeting. Mervyn King: The institutions of monetary policy, 4 Jan. 2004, San Diego, CA, USA.

4.     Koning, JP. “Disowned Currency: the Odd Case of Iraqi Swiss Dinars.” Moneyness, 27 May 2013.

5.     Varian, Hal R. Why Is That Dollar Bill in Your Pocket Worth Anything? University of California at Berkeley, 15 Jan. 2004.

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