Iran's Official Currency Is the Rial, But Its Real Currency Is the Dollar
“They hate the Americans, but we don’t.” Those were the words of an Iranian currency trader in Thomas Erdbrink’s fascinating two-part Frontline documentary, Our Man In Tehran.
While Iran’s leaders chant “Death to America,” and American leaders needlessly validate their chants with economic sanctions and military threats, the typical Iranian on the street has a great deal of admiration for the United States. Erdbrink reports that over 1 million Iranians live in the U.S., its schools are the dream of top Iranian students, plus his admittedly unscientific polling of the people reveals a near-unanimous desire among the expat-oriented to make their way to America. But that’s a digression, for now.
In Part One, Erdbrink visits an open-air currency market in Tehran. Interesting but not terribly surprising is that the dollar is Iran’s currency of choice when it comes to settling trades. This was true even before the official Iranian currency – the rial – went into freefall in May. Figure that Part One of Our Man was filmed over three years ago. Irony of ironies, the Yankee dollar has long been Iran’s currency. As another trader quipped, the dollar is the only currency in the world with “In God We Trust” on it.
Iranian producers trust the dollar a great deal. That they do is a reminder of how worthless are the economic sanctions foisted on the country. Meant to isolate Iran economically, they generally only succeed insofar as they give the country’s politicians a voice and a complaint about the U.S. that they would otherwise lack. The sanctions that include banking restrictions certainly don’t keep dollars out of Iran as the documentary reveals. The greenback is once again the currency of choice among producers.
Getting right to the point, there are dollars in Iran because there is production in Iran. None of this was planned by central bankers, or self-serious members of the allegedly free-market “market monetarist” school who laughably claim that GDP, income and unemployment (among other things) can be centrally planned by central bankers if they faithfully abide monetarist “money supply” targets. Back to reality, there are once again dollars in Iran because there’s production in Iran. Iran’s producers want to get in return for their production, and because they do, the dollar is viewed as money par excellence. Money supply is an effect of production, not a driver of it despite what monetarists and other academics will tell you.
None of the above should be construed as a defense of Treasury’s less-than-impressive oversight of the dollar since 1971 when President Nixon errantly severed the dollar's link to gold. That it’s floated without an anchor for close to fifty years has robbed the U.S. and the rest of the world of much greater growth. Still, the greenback remains acceptable to producers around the world, including producers behind “enemy lines,” and it is because it can be exchanged for goods and services all over the world.
That the productive in Iran deal in dollars is a reminder of something economists have never much understood: money isn’t wealth. Money is a measure. That’s it. Money is an agreement about value that frees us all to efficiently exchange with one another even if our wants aren’t coincident. Thanks to good money, the butcher can trade with the vintner even if he solely wants the baker’s bread. With trade, it’s always and everywhere products for products, with money as the trade-enabling measure.
Applied to Iran, its producers don't want to be short-changed on what they create. In bringing goods and services to the market for sale, they want to receive commensurate goods and services in return. Since they do, the collapsing rial is of no use to them. On the other hand, the dollar is globally accepted, even inside Iran. That’s the kind of currency that works for true producers. While no sane entrepreneur would accept a rial on the way to receiving less and less in return for what's been brought to market, it’s a known quantity that the dollar will command goods and services credibly equal to what’s been sold.
That Iran is dollarized for all intents and purposes is a loud reminder that Milton Friedman didn’t run from monetarism quickly or prominently enough, that Gresham’s Law is anything but, plus it indirectly crushes the silly obsession among mercantilists about “energy security.” To believe those who think the U.S. must be "energy independent," a supposed lack of oil production in the U.S. would expose us to economy and nation-crippling supply shocks during times of war. Actually, no. We would just import the “foreign oil” from those not embargoed, and we’d consume it as though it had bubbled up in West Texas. Lest we forget, the Iranians use dollars even though Washington has gone to great lengths to isolate the country, including vainly trying to starve it of hard currency. It’s not going to happen. Where there’s production, there’s always money to facilitate exchange of the production. There’s always someone who wants to make a buck through the finance of trade.
Which brings us back to the wide gulf between Iranian leadership and the Iranian people about the U.S. The people like and admire us, while the leadership doesn’t. Because this is apparently true, let’s be wise. The sanctions only work insofar as they give the leadership a powerful country to hate, and to blame for Iran’s lack of progress. So let’s stop what’s mindless.
The size of Iran’s economy relative to the U.S.’s suggests that it’s the polar opposite of a military threat, and then its people are decidedly not a threat. They want to live like us, be educated by us, and as their population in the U.S. reminds us, they want to live alongside us.
Because they do, let’s act our age as it were and stop the demonization and penalization of the people who don’t share the views of their leaders. Rather than economic sanctions and military threats, Washington should do nothing. It can only make things worse. What's incompetent inside our borders is similarly clumsy outside them.