Overview
The Iran Gold Currency Board is a monetary reform framework proposed by Professor Steve Hanke to address Iran's chronic hyperinflation and currency instability. Hanke's plan advocates for Iran to abandon its current managed exchange rate regime and adopt a strict, gold-backed currency board. This system would issue a new Iranian currency fully convertible into and backed 100% by physical gold reserves at a fixed, legally irrevocable rate. Hanke presents this not as a theoretical exercise but as a practical, historically-proven solution to halt the rial's dramatic devaluation and impose automatic monetary discipline.
Context: Iran's Monetary Crisis
Hanke's proposal is a direct response to what he diagnoses as severe, decades-long monetary mismanagement in Iran. His analysis focuses on:
- Catastrophic Currency Depreciation: Hanke cites the Iranian rial's loss of approximately 99.8% of its value since the 1979 Islamic Revolution as evidence of fundamental monetary failure.
- Unreliable Official Data & True Inflation: He contends that official Iranian inflation statistics, which reported rates near 10% at the time of his writing, significantly understate reality. Using his Purchasing Power Parity (PPP) methodology applied to black-market exchange rates, Hanke estimated Iran's true annual inflation rate was closer to 20%, criticizing the government's economic data as unreliable.
- Ineffective Superficial Reforms: Hanke was particularly critical of proposals to redenominate the currency—such as renaming the rial to the toman and removing zeros from banknotes—calling such measures "cosmetic" without a concurrent overhaul of the underlying monetary framework. He argued this would do nothing to address the root cause of inflation: excessive money creation.
Proposal: Core Mechanics of a Gold-Backed System
The proposed currency board would function on automatic, rule-based principles:
- Full Gold Convertibility: The monetary authority would hold physical gold reserves sufficient to back 100% of the domestic currency in circulation. Any citizen could exchange banknotes for gold at the fixed rate without restriction.
- Fixed Gold Parity: The new currency would be defined as a specific weight of gold (e.g., 1 new unit = X grams of fine gold). This parity would be enshrined in law and immune to political alteration.
- Automatic Money Supply Adjustment: The money supply could only expand or contract in direct response to inflows or outflows of gold. The monetary authority would have no discretionary power to print money, set interest rates, or finance government deficits.
- Elimination of Discretionary Policy: The system would operate without capital controls and would replace the discretionary functions of the Central Bank of the Islamic Republic of Iran with a mechanical conversion mechanism.
Rationale and Advantages Cited by Hanke
Hanke argues that a gold anchor is uniquely suited for Iran's situation for several reasons:
- A Neutral, Non-Sovereign Anchor: Unlike pegging to another country's currency (e.g., the U.S. dollar, euro, or Chinese yuan), gold is not subject to the political or monetary policy of a foreign state. This neutrality is crucial for a country like Iran, which faces international sanctions and may find adoption of a rival's currency politically unfeasible.
- Imported Credibility and Discipline: The system would immediately halt inflationary finance by removing the government's ability to monetize debt. Hanke cites historical research, like Roy Jastram's The Golden Constant, to emphasize gold's long-term stability as a store of value over centuries.
- Escape from a "Chaotic Non-System": Hanke contends that the current global monetary order, since the end of the Bretton Woods system in 1971, is a volatile "non-system" of competing fiat currencies. A gold-based board would provide Iran with a stable, rules-based monetary constitution external to this chaos.
- Superior to Foreign Currency Adoption: While acknowledging that adopting a stable foreign currency like the Swiss franc could work, Hanke notes it would require Iran to concede the total failure of its own monetary management—a significant political obstacle. A gold peg achieves the same stability while maintaining a formal national currency.
Comparison to Alternative Solutions
Hanke has explicitly rejected other proposed paths for Iranian currency reform:
- Redenomination/Renaming: Dismissed as a meaningless accounting change that ignores the quantity theory of money.
- Managed Float or Peg to a Foreign Currency: Viewed as vulnerable to the political risks of the anchor country's policies and ongoing sanctions pressure. A dollar or euro peg, for instance, would keep Iran tethered to the financial systems of nations imposing sanctions.
- Continued Central Bank Management: Considered the root cause of the problem, given the institution's long track record of failure to maintain the rial's value.
Learn More About Prof. Hanke’s Work On Iran Below
[link to page made by TCP]