Iran Replaces the Rial with the 'Toman,' Wrecks Decades of Monetary Theory

Say you’ve got a business for sale, and the buyer offers you $10 million, or 156 million toman. What are you going to do?

You would likely first ask what the toman is. The answer is simple and sad at the same time. It’s the replacement for Iran’s former currency, the rial. As Farnaz Assihi of the New York Times reports, the rial has been “devalued 3,500 times since 1971.” Translated, the rial long ago ceased existing as a currency.

That’s the case because a real currency facilitates the exchange of products for products. I have bread and I want your wine, but you want the butcher’s meat. A real currency is an agreement about value among producers that makes it possible for producers of varying tastes to produce with an eye on exchanging that production with other producers.

So with the definition of “money” hopefully established at least somewhat as an agreed upon measure of value, it’s hopefully easy for readers to now see why the U.S. dollar long ago replaced the rial for all-too-many transactions in Iran. Stated simply, a currency that is routinely being devalued is not a currency. Think about it with the breadmaker, vintner and butcher very much in mind.

Assuming the breadmaker hands the vintner rials in return for wine, the odds of the vintner attaining equal value in terms of meat from the butcher are slim to none. With the rial in routine freefall, the butcher is logically going to hand over quite a bit less meat (if any meat at all) given his knowledge that those rial will likely be exchangeable for even less once he takes them to market in pursuit of equal value for himself. 

The rial once again long ago ceased existing as a currency simply because it ceased being a currency. That which is constantly declining in value is disdained by producers always and everywhere exchanging products for products. This blinding glimpse of the obvious exposes as mythical and sad various myths promoted by the monetarily confused in our midst.

To see why, readers need only think back to the countless opinion pieces over the years calling for currency devaluation. According to Keynesians, devaluation makes a nation more competitive. In truth, the devaluation simply impoverishes the holders of the currency in the nation devaluing.

An economy is but a collection of individuals, and devaluation shrinks the wealth of those individuals. Corporations are just collections of individuals, and assuming they operate in the devalued currency, suddenly their earnings are worth a little or a lot less. Individuals and corporations require investment to grow, but if the currency is being devalued, the investors whose capital commitments enhance our productivity are much more likely to hold back from investing. Why commit capital in pursuit of returns that will come in a devalued currency? It just means that the investor lucky enough to achieve returns will find they exchange for fewer and fewer products and services. Inflation is a cruel tax that harms everyone.

Funny is that some who identify themselves as “market monetarists” claim the increased creation of so-called “money supply” will boost economic growth. These monetarists who plainly don’t understand markets also plainly don’t understand money. Money only has a use insofar as there are goods and services to exchange. Just as a ruler is only useful insofar as there's length to be measured, money is only useful as a measure that facilitates exchange. In short, money is a consequence of production, as opposed to an instigator of same.

Of course others believe that the mere creation of money is the same as the monetary authority summoning copious goods and services for the government that the monetary authority serves. Call these mystics “modern Austrians.” They’re of the view that paper money issued by governments enables government growth without limits. Not really. Actually, not at all.

To see why, think again about Iran’s persistently devalued rial. If money creation itself could summon goods and services, then it seems the Iranian government would be massive to reflect the rial’s persistent creation. Not so fast.

A dirty little secret about over “printed” or over “produced” money is that it’s not much circulated. Lest readers forget, the dollar is the currency of choice in Iran, and also routinely replaces the bolivar in Venezuela, and the won in North Korea. That the dollar fills in for the three currencies is a statement of the obvious, and also a rejection of Keynesian, monetarist and Austrian mysticism about money.

The rial long ago ceased to be a real currency simply because producers long ago ceased trusting it. That producers did is a reminder that devalued paper money does not stimulate growth, or instigate growth, or facilitate the growth of government as Keynesians, monetarists and Austrians believe. In truth, devalued money is not much utilized much at all. Why exchange real products and services for paper that few will accept as payment for real products and services?

What of the toman? This replacement for the rial will be worth 10,000 rials. Basically, Iran’s monetary authorities created a new old rial, only to lop four zeros off of it. But if past management of the rial is any kind of indication of the future, the toman will soon enough shrink to nothingness much as the rial has. And the dollar will remain the currency of choice in the “enemy country” that is Iran.

Which brings us back to the hypothetical transaction that began this piece. Would you accept 10 million dollars or 156 million toman for your business? The question answers itself. You want to achieve goods and service compensation for your business, don’t you?

That you’ll only accept dollars explains quite a bit more than the obvious truth that you’ll only accept dollars. It also wrecks decades (and realistically centuries) worth of monetary misunderstanding by various schools of economics.