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In the third century, greed got the best of Rome's
emperors. As they spent through the silver in the treasury, one emperor after
another reduced the amount of precious metal in each denarius until the coins
contained almost no silver whatsoever.
It was the world's first experience with currency
debasement and hyperinflation. As people saw the value of their savings
evaporate, society grew angry and demanded a scapegoat. Christians became
that scapegoat, and Romans turned on them with incredible violence.
This pattern – currency debasement leading to
social upheaval and violence – would repeat many times over.
In medieval Europe, the number of women on trial for
witchcraft climbed in sync with the debasement of currency. In revolutionary
France, the Reign of Terror that slaughtered 17,000 wealthy
counterrevolutionaries aligns perfectly with the deterioration of the
purchasing power of the assignat note.
And in the most vile example:
dramatic hyperinflation in Germany in the 1920s allowed Hitler to rise to
power by blaming Jews for the country's economic woes.
The connection between currency debasement and social
upheaval makes sense – hyperinflation only occurs in times of domestic
drama. For example, in 1946 Hungary experienced the greatest episode of
hyperinflation on record – in the context of a small, economically
limited nation wracked by the Great Depression and then Nazi occupation in
World War II. Zimbabwe earned second place in hyperinflation's record books
when its dollar inflated 7.96 billion percent from early 2007 to late 2008.
The cause? Robert Mugabe's land-reform policy slashed agricultural output and
destabilized a fragile society.
That brings me to today… and to Iran, where that
volatile mix of domestic drama and hyperinflation is pushing a fragile
society to the brink of revolution.
If history repeats itself and Iran descends into
revolution, the outcome is both unclear and obvious. In the unclear category:
the details of the resulting regime and how far an Iranian revolution might
spread through the Middle East. What is obvious,
though, are the generalities: a post-revolution Iran would remain Islamist
and vehemently anti-US.
Another generality is also crystal-clear. An Iranian
revolution – and the potential for that to spawn a new set of
Shia-based alliances across the Middle East – would be very good for
oil.
And if Iran's currency continues its dramatic nosedive,
that revolution – and oil-price spike – might be just around the
corner.
Dark Days for Iran's Rial
On October 3, riot police converged on Tehran's Grand
Bazaar. With water cannons and batons, they dispersed a large crowd of
demonstrators who were calling President Mahmoud Ahmadinejad a traitor for
his mismanagement of Iran's economy.
The location was significant: The Grand Bazaar is often
described as Tehran's economic heartbeat, and its
merchants kick-started the 1979 revolution that ended Iran's monarchy and
ushered in the Islamic Republic.
The spark that lit the protest flame this time? The
Iranian rial had lost a third of its value against
the dollar in the three previous days.
But that was simply the latest drop in a currency
devaluation that has been both rapid and profound.
The rial had been slowly
losing value against the US dollar since international sanctions against the
country's nuclear program took effect in mid-2011. The devaluation was gentle
for the first year, but picked up speed in June. A few months later, the
currency started to free-fall.
On the weekend of September 8-10, the rial lost 9.7% of its value. On October 1 alone, the rial declined 17%. By the next day the black-market
exchange rate reached 35,000 rial to the US dollar,
marking an 80% decline in the past year.
The massive devaluation is fanning the flames of Iran's
burning fiscal situation. International sanctions over Iran's nuclear program
have accomplished one desired aim: major inflation. The Iranian government
says inflation stands at 25%, but unofficial estimates put it much higher,
between 50-70%.
It all translates into far higher prices on staples
like food and fuel. Iranians now pay three times as many rial for meat as they did a year ago. Iran's
farmers rely on animal feed and vaccines that are imported and therefore
priced in US dollars, and they have to pass on the increased costs to
consumers.
In the meantime, unemployment is also rising unchecked.
Overall unemployment is close to 15%, while youth unemployment is almost 30%.
The Iranian Influence
Soaring food prices, deteriorating employment
prospects, and heavy-handed police tactics kicked off a revolution in another
Middle Eastern country not long ago. Tunisian vegetable vendor Mohammed Bouazizi set himself on fire in December 2010 to protest
precisely those problems; the ensuing riots started his country down a rapid
road to revolution. Tunisia's transition turned heads across the Middle East,
and the Arab Spring was born.
Iran's ayatollahs are now facing a very similar
situation. The rial is dying and hyperinflation is
creating real potential for full-fledged economic panic. Continued protests
like the one in Tehran's Grand Bazaar would represent a real threat to the
ruling regime.
The response from above is easy to predict. Iran's
ruling clerics did not hesitate to use force to repress the widespread
discontent sparked by President Ahmadinejad's re-election in mid-2009, and
used the same riot police in the Bazaar last week to silence dissidence.
Bigger protests will almost certainly draw an even more aggressive response.
The regime will also likely offer up a scapegoat.
Ahmadinejad is the most likely candidate – he has been clashing with
the conservative elite for several years now, and his second and final
presidential term ends next summer anyway.
Will a combination of repression and Ahmadinejad's head
silence the masses? Maybe, maybe not. When people see their life's savings
evaporate – Poof! – in a pile of
worthless paper, they get really mad. And really mad people
with little to lose is precisely the fuel that feeds revolutionary
fires.
However, don't let Western ideals like democracy and
the separation of church and state cloud your idea of a reformed Iran. A new
regime in Iran would still be Islamist; indeed, the country would almost
certainly remain guided first by religion and second by politics. Generations
of Iranians have been taught to believe in Shia Islam above all else, with
hatred of the United States coming in a close second. Those pillars of
Iranian culture would remain.
As such a new Iran could closely resemble the old Iran
– but in the meantime, instability could easily spill across the
country's borders. Shia populations in other parts of the Middle East could
well gain confidence from Iran's uprising and begin uprisings of their own,
destabilizing the region's delicate Shia-Sunni balance.
Suddenly, Shia populations in eastern Saudi Arabia,
Syria, Lebanon, Iraq, and Bahrain could demand greater recognition, an end to
discrimination, maybe even some form of autonomy. The significance of this
cannot be understated. The Middle East is a balancing act on many levels, but
maintaining peace between Shia and Sunni Muslims is perhaps the most
important balance of them all.
Iran, unsteady after a regime change and constrained by
international sanctions, would undoubtedly reach out to these Shia
populations. Shia connections around the Middle East, long held back by Sunni
rulers, would strengthen. A pan-Shia block of allegiances could emerge,
replacing the Iran-Syria-Hezbollah partnership with a bigger, stronger group
standing against Saudi Arabian – and American – interests in the
Persian Gulf.
Truly, a riled-up Shia population connected through a
new, Iran-based set of allegiances stretching across the Middle East is a
recipe for regional disaster.
Disaster in the Middle East is a recipe for high oil
prices.
Whether the drama remains confined to Iran –
where a popular revolution puts a new leader in place who blockades the
Strait of Hormuz as a show of strength – or spreads to Saudi Arabia,
where a marginalized Shia population finally rises up against their Sunni
rulers, Iran's currency woes mean instability and infighting in the world's
most important oil region.
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