What is particularly interesting about Iraq is the link between expectations of a change in political regime and movements in currency values. Prior to the Gulf War in 1991 the Iraqi currency was the dinar. Following that war Iraq was divided into two parts that were politically, militarily and economically separate from each other: southern Iraq was under the control of Saddam Hussein and the enforcement of the northern no-fly-zone meant that northern Iraq became a de facto Kurdish protectorate. In the South, Saddam’s regime struggled to cope with UN sanctions, and resorted to printing money to finance growing fiscal deficits. Unable to import notes printed abroad because of sanctions, the regime printed low-quality notes in Iraq that  12  This quote appears on page 5 of the NBER working paper number 9808 (Cambridge, MA) version of their paper. At the time of writing, the Journal of Economic Perspectives version, which appears in the list of references, was still forthcoming. BIS Review 5/2004  7  bore Saddam’s image. In May 1993, the Central Bank of Iraq announced that the 25 dinar note, then the highest denomination note in circulation, would be withdrawn and replaced by a new locally printed note. These were known as ‘Saddam’ or ‘print’ (because of the offset litho print technology used) dinars. Citizens had three weeks to exchange old for new notes.
At the very first gathering of economists to create the American Economic Association, in Saratoga in September 1885, Richard Ely showed that he had the makings of a good central banker when he said, “We acknowledge our ignorance, and if we claim superiority to others it is largely on the very humble ground that we know better what we do not know”. Or, in Hayek’s words, “It is high time we took our ignorance more seriously”. The inability to bind future generations means that institutions do not resemble an optimal timeinvariant design chosen from behind the “veil of ignorance”. They reflect, in Hayek’s words, “how nations in the darkness stumble upon institutions which are in fact the result of human actions, not the implementation of a human plan”.20 Suitably designed, though, monetary institutions can help to reduce the inefficiencies resulting from the time-consistency problem and can incorporate new ideas into a discretionary monetary strategy constrained by a mandate that has widespread support in the population as a whole. A central bank needs to explain to the population both what it knows and what it does not know. Such a framework of “constrained discretion” for central banks is far-removed from the world of 1930 when the Deputy Governor of the Bank of England explained to the Macmillan Committee that “it is a dangerous thing to start to give reasons”. In 1908 Congress set up the National Monetary Commission to report on “what changes are necessary or desirable in the monetary system of United States”.