Authored by Jeffrey Tucker via The Epoch Times,
The revolutionary fervor in Iran today has deep political roots and invites every theory concerning outside influences that have a deep stake in the kind of regime that rules this country. But amidst all the speculation about what’s really happening here, there is an overwhelming factor rarely mentioned.
Iran has experienced the sort of inflation that brings down whole governments. This is why so many among the merchant class have joined the revolutionary movements.
For many years, the regime had pursued an inflationary monetary policy that devastated the value of the currency, the rial. Over a 10-year period, worsening in the last two years, the currency has experienced 3,500 percent inflation. Crucial in this country’s financial structures is the value of the currency on international exchanges. It is now one of the worst, making business nearly impossible and banking highly volatile.
The tipping point has been identified by the Wall Street Journal:
“Late last year, Ayandeh Bank, run by regime cronies and saddled with nearly $5 billion in losses on a pile of bad loans, went bust. The government folded the carcass into a state bank and printed a massive amount of money to try to paper over all the red ink. That buried the problem but didn’t solve it.”
“After decades of engineering workarounds and using shadowy flows of cash to keep the country’s battered economy functioning,” the analysis continues, “Tehran had reached a dead end, with no tools to address a deepening economic crisis or meet the needs of an increasingly desperate population. Hundreds of merchants, who don’t typically join the country’s mass protests, took to the streets of Tehran to demand relief.”
This is a familiar story. Money printing can create the appearance of temporary prosperity. Once it begins to fall apart, there are only two choices: retrenchment and recession or making more loans to continue the illusion.
Iran’s banking system backing vast projects of fake opulence had become wildly overextended. At some point, the house of cards collapsed and the currency along with it.
This is the essential pre-history to grasp in order to understand why people hit the streets and have been unwilling to be intimidated by shows of force. In these cases, even executions do not work to restore order. Indeed, this only creates martyrs that fuel more boldness and revolutionary fervor.
There is nothing unusual historically about this. In an inflation that wrecks peoples’ livelihoods, people find every problem with the regime that rules them even if they put up with its features in the past. In Iran, the blame falls squarely on the heads of the Islamic fundamentalists but it could have been otherwise even under a wholly secular regime. It’s the inflation and financial collapse that is the trigger.
The recent inflationary bout in the United States was mild by historical standards but you could feel the anger in the population rise. A major reason for the defeat of the party in power traced to the loss of purchasing power. Inflation works like a tax but a deeply surreptitious one. It steals your money’s value by increasing the quantity of money in circulation beyond which is supported by existing rates of economic growth.
The previous bout in U.S. history was in 1979–1980 and it too led to the equivalent of a revolution. Jimmy Carter was a decent man and a hard-working president who governed in a moderate way. But none of this mattered once inflation hit double digits and started wiping out the value of savings and saved capital. It felt like a pillaging. Carter was blamed even though it was the supposed independent central bank that was really at fault.
Inflation is the force behind many political revolutions. The story of the Russian Revolution of 1917 is not usually about the money but inflation played a big role. The ruling monarchy had used money printing as the means by which it paid for its involvement in the Great War. This hit the population hard even as regular people were being drafted into the army and killed in a foreign war.
It was this wicked combination of inflation and conscription in an unpopular war that destabilized the Czar’s rule and led to the Bolshevik Revolution. It was not the case that the population had suddenly and strangely converted to the teachings of Karl Marx. Russian culture is centered on three points: religion, family, and ownership. Marxism attacked all three, that which the people loved more than anything else. Inflation is such a powerful force that it even leads people into their own worst political hell.
Going back in time, inflation was the key to the destabilization that led to the French Revolution and the murder of the king and the overthrow of the monarchy. People today tell stories of royal opulence but the reason those stories resonated had to do with high inflation that people experienced in their own lives. They wondered why they were getting poor while the monarchy was getting richer. They sensed that the regime had become rapacious and they were correct.
The French Revolution began in high ideals but collapsed into a bloody mess of political execution and chaos. Even to this day, the country has not quite recovered.
Then there is the most famous case of all: the devastation of the Weimar inflation (1921–23) that destroyed the German currency and certainly ushered in the rise of Hitler and Nazi party rule. When the money fails, totalitarianism often rises. This is a lesson of history.
Everywhere you look today you see the hidden hand of inflation behind political revolutions. In Venezuela, inflation hit 800 percent in 2016, 4,000 percent in 2017, and 130,000 to 2,000,000 percent in 2018. This is one of the one of the worst hyperinflation episodes ever recorded. The cycle was a familiar one: public fury, regime crackdown, and eventual upheaval, this one assisted by the United States who flat-out arrested the leader of the country without a great deal of resentment by the public.
Any political leadership that presides over inflation is playing with fire that can end up burning down the entire house. Commentators most often look at the failure of governance and the rationale behind the regime to explain revolutions, the French Revolution being the most obvious case. But once you understand the underlying economic dynamic, all becomes clear. The key to maintaining the rule of law, longevity in leadership, and regime stability is sound money, zero inflation, a money on which people can depend, and a banking system that serves the public rather than collaborates with industrial elites.
This is why the Founders put a line in the U.S. Constitution about the kinds of money states could issue: only gold and silver. How did they know? Because of the experience of hyperinflation during the War of Independence. The phrase “not worth a Continental” comes from a time when the currency was utterly wrecked. The new country was born with a fear of what inflation could do.
“It is worthy of observation,” wrote Thomas Paine, “that every case of failure in finances, since the system of paper began, has produced a revolution in governments, either total or partial.”
Paine was correct. The slogans of a regime are largely beside the point.
If they cannot manage the money well and allow the logic of high leverage to take its course, it risks being overthrown, always and everywhere.
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