By Dr. Muslim Abed Talas
One of the major factors that ensured the continuation of the Syrian regime, despite the fact that nearly a decade has passed since the revolution begun and turned into a civil war with foreign involvement, is the corruption of the Syrian opposition, outside Syrian territories and regime-controlled areas which are in immigration or on the ground in the territories Outside the regime’s control, and its inability to offer an effective alternative that people can rally around or that can attract international support.
Indeed, the corruption of the opposition has been used to polish the image of the regime. And recently, authorities in northwestern Syria decided to replace the Syrian pound with the Turkish pound with the rapid deterioration of the value of the former due to the sanctions and economic collapse over the years.
The initiative was aimed at protecting people from the consequences of a fluctuating currency and from inflation. But, could the exchange process turn into an opportunity to support the Syrian pound? Would Gresham’s law staging that “bad money drives out good,” apply in these circumstances, with the Syrian pound driving the Turkish out of circulation?
Gresham’s law was named in 1860 by Scottish economist Henry Dunning MacLeod after Sir Thomas Gresham (1519–1579) an English merchant and financier who worked as financial advisor under king Edward VI and queens Mary I and Elizabeth I.
Under Gresham’s law, when two currencies with the same official nominal value but whose intrinsic values differ, the money with the lesser value is “bad money” and the one with the higher value is “good money”.
Good money (undervalued or more stable money) will be driven out and will gradually disappear from circulation. The law was originally based on the composition of minted coins and the value of the previous metals used in them at the time.
Dealers usually discover this issue, and considering that the currency derives its basic value from the content of the precious metal and with an equal par value, they naturally pay the value of their purchases with the same less content, and they maintain the same larger content in the safes or ask them to take advantage of the mineral content. As a result, over time the good old versions (with more content than the precious metal) disappeared and the new poor copies (with less content of the precious metal) remained in circulation.
However, nowadays, the theory has been applied to the relative stability of different currencies’ value in global markets. In fact, with the increased economic globalization, the law tends to operate in reverse; good money drives bad money out of circulation because people can decline to accept the less valuable money as a means of payment in transaction. Some countries choose to replace their deteriorating currency with a stronger foreign currency, leading to “dollarization” of the economy.
According to the reversed formula of Gresham's law, it is expected that the process of replacement to be automatic and without formal interference, and that government intervention is usually intended to suppress it.
Indeed, partial dollarization (or other currencies) have occurred to a large extent all over Syria in general, and in northern Syria in particular. The northwestern authorities intervened in order to speed up and to facilitate the process, as announced. However, this intervention did not produce the expected results, which brings us back to the Gresham’s law in its original version.
There are several reasons that can explain this, all falling under the issue of credibility in any and all action or initiative in the monetary field. With the adoption of paper money as legal tender, which has no value in itself, the value of a currency is derived from political credibility and the economic strength of its respective issuer. However, in the case of the Syrian north, there is no new currency to warrant examining the credibility of the issuing party. The currency is foreign. We can only suggest the following:
First, the currency that was offered as alternative does neither hold sufficient stability or credibility to tip the scales completely in it its favor in the Syrian market. The Turkish pound has gone through many fluctuations recently, which reduces its credibility and strength. Perhaps it would have been better to choose another currency, like the dollar or euro, despite the technical and logistical difficulties.
Second, the political credibility of the parties that have adopted the replacement process is weak at best. The absence of a unified political and administrative body and the ongoing conflicts between the symbols of authority and their administrative and financial corruption cast more doubt on any monetary action taken by them.
Third, money in the general sense has two forms: paper and coin currency, and credit money (bank deposits and some other financial derivatives), which is the larger and more significant of the two and which depends on banking infrastructure that simple does not exist in northern Syria. Hence, huge quantities of coin and paper currency are required to meet transaction needs. So, the unavailability of the alternative currency in sufficient quantities has led people to abandon it and return to the original and more accessible currency.
Fourth, money is mainly a medium of exchange and economic transactions based on trust and convenience as available for use in the appropriate quantities and units. Therefore, the body adopting the process should have provided currency exchange services in the more populated areas, which did not happen.
Fifth, it is natural given the use of two currencies and the monetary factors in terms of the abundance of the original currency, that a larger number of people will tend to use the local rather than the alternative currency.
Sixth, the strong (and possibly unified) influence of the war tycoons all over Syria and their common interests can obstruct the exchange, given the weak control over border lines and smuggling. In addition, the authorities controlling the exchange operations can achieve extra revenue from the frequent exchange of currencies whenever citizens have to pay foreign transaction fees whenever they access their income.
In conclusion, Gresham’s law has returned, it seems, in a third version. Syria’s special brand of a reverse dollarization, where, if announced as a legal tender, the bad money will drive the good one out.
Perhaps the exchange process has generated a backlash with the people holding on to the Syrian pound and thus increasing its value. Perhaps the rise of the Syria pound in Idlib is the best example of that. As a result, the foreign currency that is siphoned into the market will end up in the pockets of the regime.
Dr. Muslim Abed Talas - Economics School- University of Mardin
Zaman Al Wasl
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