US begins airlifting dollars to Iraq...

[MKSheppard]

Wall Street Jounal

U.S. Dollars Are Sent to Iraq To Replace Discredited Dinar

Stop-Gap Move Is Intended For Emergency Payments As the U.S. turns from bombing Iraq to rebuilding it, the U.S. government is airlifting dollars from the Federal Reserve Bank of New York to replace -- at least temporarily -- the discredited Iraqi dinar.

As an initial step, American officials charged with the reconstruction will use small-denomination bills to make "emergency" payments to hundreds of thousands of Iraqi civil servants in an effort to quiet civic unrest and to stabilize the chaotic Iraqi economy. Using U.S. dollars will make the U.S. currency the de facto currency, at least in the interim -- a move that could prove controversial in the Arab world, but one that would give the Iraqis a currency that will retain its value despite the uncertainties about the country's reconstruction.

By Bob Davis in Washington, Chip Cummins in Kuwait City and Simeon Kerr in Basra, Iraq.

American officials are working with finance- and postal-ministry officials from Saddam Hussein's government to figure out appropriate wages, U.S. officials said. Under the Hussein regime, the central government tightly controlled wages and prices. Setting wages too high could worsen inflation that is already running at about 70% annually.

At first, the Iraqi workers will be given $20 each -- in $1 and $5 bills. That is a large sum in Iraq, where a midlevel oil professional with a chemical degree used to make the equivalent of $50 a month in central and southern Iraq.

Funds for the payments will come from the $1.7 billion in Iraqi assets that the U.S. recently confiscated.

The dollar payments are occurring as the U.S. made its first step at putting together a postwar government. Dozens of representatives from Iraqi factions, including a number of exiles, met near Ur -- the birthplace of the biblical prophet Abraham -- to begin discussions on the shape of a new government. The group released a 13- point statement saying that the new Iraq should be democratic and the rule of law must be respected.

The U.S. has "no interest, absolutely no interest, in ruling Iraq," White House envoy Zalmay Khalizad told the group, which met under a gold-colored tent on one of Mr. Hussein's former military bases in southern Iraq. Several Iraqi groups boycotted the session to express their opposition to a U.S. interim authority led by retired Gen. Jay Garner.

Similar meetings are going to be held in other parts of the country, with the goal of choosing 40 members of an interim advisory panel that will write a new constitution, among other duties.

Regarding the dollar , U.S. planners stress they aren't making a formal decision about what currency Iraq should adopt. "The Iraqi people will choose their currency," a U.S. Treasury official says. That choice is one of the most significant economic decisions a new regime can make. The bills become one of the most visible symbols of the government, and foreign investors watch how well a government manages its currency before making big investments in the country.

To be sure, using the American currency extensively in Iraq, even temporarily, could have political repercussions in the Arab world, where there already is widespread fear the U.S. has wanted from the start to dominate a postwar Iraq.

FROM DINARS TO DOLLARS

With widespread looting and counterfeiting of the local Iraqi currency, the U.S. plans to pay Iraqi civil servants in dollars .

Amount of emergency payment: $20

Estimated number of civil servants in Iraq: 1.5 million-2.5 million

Approximate salary for a midlevel oil engineer: $50 per month

Sources: Department of Defense; Banknotes.com

British forces also are using dollars to pay dock workers in Umm Qasr and maintenance workers in Basra who are starting to clean up looted buildings. "You've got to put some kind of stable buying power in people's hands," said an official with the Pentagon's office of reconstruction and humanitarian assistance, which is overseeing Iraqi reconstruction.

Using dollars now is a stop-gap measure brought about by the looting of Iraqi banks and by large-scale counterfeiting.

Iraq now has two currencies. A pre-Hussein dinar, nicknamed the Swiss dinar because of Switzerland's reputation for financial probity, circulates in the northern Iraqi regions under Kurdish control. The rest of the country uses so-called Saddam dinars, which have Mr. Hussein's portrait. Looters and counterfeiters are dealing in Saddam dinars, causing the currency to fluctuate wildly in value.

Before the war, Saddam dinars traded at about 2,500 to the dollar . A few days ago, as looters emptied banks of dinars, the value of some large dinar bills plunged 84% to as low as 16,000 to the dollar . On Tuesday, smaller-denomination Saddam dinars were trading at around 2,800 to the dollar in Basra, as the looting appears to have subsided.

Even before the looting began, currency traders figured the Saddam dinar would be scrapped because it bears Mr. Hussein's visage. "This is money of Saddam Hussein," said Salim Abu Hisham, a money changer at the Qadhara marketplace in Basra, as he toyed with the dinars. "We know it has to go."

U.S. officials expect to start making payments in dollars later this week. They figure that local Iraqis will make change for the bills in either Saddam dinars or other Persian Gulf currencies. In many cases, payments will come from military civil-affairs officers, who have been working with local Iraqis.

U.S. Treasury and banking officials also are trying to figure out how to get the banking system working again, so money can be transferred electronically around the country. In Kosovo, that task took months and led to widespread dissatisfaction, as local merchants couldn't do business outside their area, and civil servants went unpaid.

U.S. Treasury officials will work closely with any new Iraqi government on its currency choice. In Afghanistan, the U.S. urged the government to use dollars for larger-scale government transactions as a way to stabilize the economy and reassure donors that Kabul would act responsibly. But the new government turned down the recommendation, and moved quickly to print a new currency as a symbol of national unity.

Producing a new currency could be difficult for a new Baghdad regime, which would have to trade in Saddam dinars and Swiss dinars. U.S. officials figure that a new Iraqi government would start making payments in dollars and then would have to decide on whether to link its currency tightly to the dollar , if not use the dollar outright. After bitter wars, Kosovo and Bosnia largely adopted first the German mark, then the euro.

Write to Bob Davis at bob.davis@wsj.com, Chip Cummins at chip.cummins@wsj.com and Simeon Kerr at simeon.kerr@dowjones.com

Updated April 16, 2003 12:17 a.m.

[Nathan F]

That's what you call dollar diplomacy...

OK, bad pun.

[Companion Cube]

That's what you call dollar diplomacy...

OK, bad pun.

Eh, I thought it was good.