Back before World War I, when Iraq still formed the part of the Turkish Ottoman Empire, Turkish pound happened to be the main currency in circulation in Iraq, although different European currencies were also in circulation. That changed after the World War I when British took charge of the country. It was decided that Iraq, along with most other Asian countries under British rule would be incorporated into the then contemporary Indian monetary system, and subsequently, rupee became the principal Iraqi currency. The rate was 1 Iraqi dinar= 11 rupees. Rupees maintained the status of principal currency in Iraq till 1931 when the British Government established the Iraq Currency Board with its headquarters located in London. The Iraqi dinar became the official currency after the introduction of the Board which was responsible for maintaining reserves for the new currency as well as for issuing notes.
Right from the start of their operations, the board pursued conservative policies to keep the value of dinar up. This was done in two ways. First, Iraqi currency was pegged at par with the British pound and it remained so until 1959. Secondly, The board developed a practice of maintaining high amounts of reserves behind the currency. These measures ensured the stability and high valuation of dinar during the most of this period. The board was dissolved in 1949 when the National Bank of Iraq, founded in 1947, took over the responsibility of reserves maintenance and issue of note. The National Bank incorporated little changes into the conservative monetary policies pursued by the erstwhile board and they continued to maintain 100% reserves behind domestic dinar.
Establishment of Other Banks
The stability of the dinar was furthered by the establishment of other important banks by the Iranian government. The Industrial Bank, the Agricultural Bank, and the Rafdiyan Bank were already established before 1947. In 1948 came the Real Estate Bank, and in 1951, the Mortgage Bank. All these were part of the government’s efforts to strengthen the domestic economy and facilitate foreign trade. With the success in the operations of these banks, the position of the dinar was further consolidated in the 50s. Along side these government banking institutions, many foreign banks established their branches in the country and there were also private banks operating from different regions. All these refer to the healthy state of the currency during this period. All of this positive Iraqi dinar news was great for the country of Iraq and its people.
In 1959, the peg was switched to US dollar from the British pound at the rate of 2.8 dollars for 1 dinar. After the nationalization of the insurance companies and all the banks in Iraq, the value of dinar got further stabilized. In 1973, with the devaluations in dollar, dinar reached a value of US $3.37. For the rest of this period till the start of the 90s, dinar enjoyed a steady prosperity and kept intact its position as one of the most valued currencies in the world.
However, the Gulf War changed everything for Iraqi dinar during this period. With the economic blockades in place, came inflation and the steady decline in the value of dinar throughout the 90s. Economic blockade also made sure that the Swiss printing technology, used until now for printing the notes, was not available any more to Iraqi banking authorities. In its place, they were forced to use an inferior technology and the new inferior quality notes also became highly vulnerable to counterfeiting. To counter that threat, the new notes were printed in excessive quantities which soon flooded the market, resulting in explosive inflation of the currency. Already in late 1995, the rate was going 3,000 dinars for 1 US dollar!
2003 – Present
Iraq was invaded by American troops in 2003 and the US forces have been called back only very recently. Following the fall of Saddam government and the establishment of the new provisional authority, a new banking law, aiming at consolidating the banking system in Iraq in line with the regular international standards, was passed in September, 2003. The new authority started issuing new notes and coins printed using sophisticated anti-forgery technology. The following year, the banks issued a notice for exchange of old banknotes– both the earlier Swiss notes as well as the notes printed during the Gulf War years.
Following these measures, dinar recovered a bit. However, we are still far away from seeing a proper dinar revaluation and from gaining the status it enjoyed in the pre-Gulf War era. Currently, the rate is 1 dollar= 1163 dinar. The present conflicts in the middle-east (Israel- Palestine) makes it even more difficult for dinar to gain back in strength. However, many believe that dinar will ultimately go through a proper revaluation. This belief is also behind the trend according to which many US investors keep dinars in their retirement account. The investment specialists call it a gamble, but the belief is there that Iraqi dinar will eventually gain back its value, and substantially, too.
Below is a video talking about how many people are now investing in Iraq and the Iraqi dinar. Just like any type of investing, there is a risk associated with investing in this currency.