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TOWARDS ESTABLISHING A STABLE CURRENCY IN THE REGION

by Assoc. Prof. Dr. Zuhaimy Haji Ismail, Institut Ibnu Sina, Fakulti Sains Universiti Teknologi Malaysia Skudai, Johor

 

Edited by: Norizan Esa

 

INTRODUCTION

What is currency? What is a stable currency?

In 1997, when Malaysia's currency, the Ringgit was attacked by George Soros the well known financial speculator, the Prime Minister Dr. Mahathir Mohamad publicly declared the need for a stable currency in this region. He recognised that the practice of currency trading is damaging to the economy and is "unnecessary, unproductive and immoral". People are nowadays talking about standards, and when they talk of standards, they turn to the west and look at the US and US dollars. Everywhere we look, people have somehow been conditioned to turn to the US dollar in times of difficulty. As Muslims we must turn to Allah. We may start questioning ourselves, why do people behave like this!

When we talk of a stable currency, we normally refer to standards. That is why people turn to the US dollar and make it our standard. But what is the US dollar? It is just a piece of paper with numbers and some design printed on it. The world currencies were once gold, then followed by papers backed by a standard known as the gold standard. Today money is in digital form, without anything to back it.

 

THE NEVER ENDING CREATION OF PAPER MONEY

Let us look at what is money and its function, and explain some of the transactions which we will refer to in this paper. The role of money is to separate buying from selling and thus enable people to trade without needing to have recourse to direct barter - like trading goat for wheat and the like. Money is therefore a medium of exchange, and by extension, it is also a unit of account so people can keep track of what they have, more easily. Many things have been used as money but gold and silver have been widely accepted as money for more than 2000 years. They form a currency that owes its value to an inherent desirability. Both are worth something in themselves as they are also commodities.

There are two types of paper "currency", namely "fiduciary" money or promissary money which bears the promise that it can be exchanged for gold or silver. In principle, it represents something of value. The other is "fiat money". This is money issued by governments or banks - it is intrinsically worthless bits of paper with no actual value in themselves other than the illusion of value. This is the form of currency in circulation today.

Nowadays your deposits in the bank offer you some interest. The "Islamic Bank" calls it "keuntungan or faedah or profit". Banks will only lend money to businessmen with sound businesses at a particular interest rate that is not too expensive: say 10% or less. However, the bank can lend 20 times more than the amount of paper money that it holds in cash. So, mathematically, if you charge 10% on 20 times the amount of paper money, basically the bank is collecting 200%. The depositors are happy with some returns but the bank is making enormous profit. If the amount of money in circulation increases, this will result in the rise in prices and this creates inflation. The speculative game of paper money affects everyone in the market.

Paper money is also known as debt money. The establishment of the bank created new situations in relation to paper money. Since banks create money out of nothing, and if some people started a rumor that the bank does not have enough money or gold, it will create chaos in the society like what happenned in Argentina. So a law was passed giving the receipts the same value as the gold that they represented. The example was repeated successfully in other countries, until it reached its peak with the constitutional establishment of legal paper-money in the United State of America.

 

IT IS MATHEMATICALLY IMPOSSIBLE TO PAY OFF NATIONAL DEBT

The bank charges interest on the debt money created. Obviously the money to pay interest on the debt must come from the same source as the debt money principle, but the money to pay this interest is never created! Loan repayments to banks reduce the money supply, because money is removed from circulation when the debt is repaid. To keep the money supply from shrinking, more borrowers are necessary. It is mathematically impossible to pay off the aggregate debt principal plus the aggregate interest. In a futile attempt to avoid the day of reckoning, borrowers are forced to take on an increasing amount of debt to pay not only the principal of the debt, but the onerous interest as well.

Mathematically we can say that debt escalates at an exponential rate until borrowers are forced into bankruptcy. This phenomenon is not unique to government borrowing, but applies as well to individuals and businesses, and as horrific as at least five times greater than even that of the government's debt! This is common in almost all countries in the world.

 

THE "ISLAMISATION" OF FINANCIAL INSTITUTIONS

The idea of Islamisation of the financial institution has become the common topic of discussion among Muslim bankers. They talk of forming an International Islamic Central Bank and its own gold-backed currency notes. By this they think that the Islamic world could establish the most stable money system on earth. They (the bankers) realise the statistics of the Muslims worldwide. Muslim nations consist of more than 10,450,000 square miles with the number of Muslim population beyond 1 billion. The combined Gross National Product of all the Muslim nations plus the blessing of having much of the world's oil supply running beneath each nation would give the Islamic gold-backed currency all the credibility it would need. Most people outside the political and economical circles do not realise that since 1945 the purchase of oil is only possible using the USD. This creates a guaranteed demand for dollars that no other currency in the world can claim. The fact that oil is dominated in dollars (meaning you have to use dollars to purchase oil) means that people will always need the dollar if they want oil. This is one factor that makes the dollar always in high demand and makes it unique.

The oil-producing nations ask for dollars because the dollar is the 'strongest' paper currency in the world. But nothing is stopping the oil producing nations from asking for another currency in exchange for oil. If the oil-producing nations with significantly large Muslim populations were to ask for their oil payment in the form of an Islamic currency, all the strength and purchasing power that the dollar gains from being the oil-producers' currency of choice would now switch to an Islamic gold-backed currency.

For the last 15 years, groups of Muslims have engaged in reforming the economy in Islam through what is known as "Islamisation of knowledge", central to which has been the "Islamisation" of economics. We know that knowledge of Allah is unveiling from illusions of other-than-Allah. Hence knowledge is either Islamic or it is not knowledge at all. Knowledge cannot therefore be Islamised. Under the banner of "Islamisation of knowledge", some scholars, taking knowledge from western human sciences, started to "Islamise" sociology, psychology, politics, medicine and most importantly economics. Islamic economics produced Islamic banks, Islamic Stock Exchange, Islamic insurance, Islamic mortgages, and next would be Islamic credit cards.

The methodology used was simple. First, these modernist or reformist rejects the madhhab system, seen as medieval scholarship. Second, the transformation of the Shariah from its existential jurisprudence base into a normative set of abstract moral principles and values, that could be accessed at random. For example, the principles of equality and justice, seen as Islamic values, if assigned to any institution or financial procedures can serve to islamise them. They have removed the original practice of Islam that is from basing their amal on revealed knowledge to text to principles and procedures. As as long it follows the principles, it may be considered "Islamic".

Islamisation has reached a point of evident absurdity, a nihilistic conclusion; that is to say, "their" Islamic values have been diluted into a hollow pragmatism. The ironic result of islamisation is a full assimilation to capitalism. We see what is happening now, the whole process of "Islamisation" of financial institutions as the process of "Islamisation" of capitalism. "

We do not want to Islamise capitalism, we want to create an alternative to it - a stable system"

 

THE END OF ECONOMICS

Economics is not neutral, it is an ideology based on presumptions opposite to Allah's injunction "Allah has permitted trade and has forbidden usury". On the other hand "Economics has forbidden trade and permitted usury". We Muslims have a superior way of thinking emanating from the Sunna of the Messenger (S.A.W). It is not islamising economics, but "ending" economics (Vadillo, 1994).

 

IS THE GOLD-STANDARD CURRENCY FEASIBLE?

Andrew Gause of SDL Inc, one of the most widely known rare-coin dealers in America said," An Islamic block could get together possibly with non-Muslim OPEC nations, could regulate their flow of oil and only accept payment for oil in a commonly-issued currency. This would really be power base, a power base that I don't think could be competed with". This is a common understanding of many on the potential of Muslims to dominate the world again. Their way forward is to make sure that the Muslims will not be united under one currency. Gold-Standard currency seems feasible!

The definition of a gold standard as the value of one unit of currency in terms of certain weight of currency in term of certain weight of gold. As an example, the US gold standard in 1934 was that one dollar (paper money) was equal to 1/35 of an ounce of gold. In other words, USD35 equaled to one ounce of gold". Cedric Muhammad suggested using the gold standard to establish a strong and stable currency that can be used to finance industry, technology, the building of hospitals, the promotion of entrepreneurial development and to establish high quality education systems. This proposal leads to the creation of a Central Islamic Bank. This central bank will issue the currency, you demand that wealth from Muslim lands must be purchased using this currency.

It is critical to understand that Muslim nations can acquire wealth without depending solely on their natural resources, such as oil. The Islamic nations' reliance on oil have been used against them, to the extent of the oil shock of the 1970s. It is a fact that the rise in oil prices came about when Richard Nixon ended the dollar's link to gold in August of 1971. When the USD went off gold, there was no signal to guide monetary authorities. These monetary authorities made errors that increased inflation and this inflation spread throughout the world. In other words, by 1971 the Federal Reserved had already created an excess supply of dollars. Most of this excess supply of dollars was used to purchase gold, driving the price of gold upward. Then some of those dollars went towards driving the price of oil upward. The oil-nations saw that the dollar was able to purchase less gold and therefore questioned why they should accept less-valuable dollars for their oil. They saw inflation becoming a threat to their wealth and wanted more dollars in payment for their oil. This was a natural reaction.

 

NOT VIABLE TO RETURN TO THE GOLD STANDARD

By this argument, it does seems that the return to gold standard would be the natural and logical approach. This was what happened to gold. First there were gold coins, then paper that represented in part gold (the gold standard), and now there is only pure paper not backed by any specie of any kind. Even now money is in the form of signals. It is therefore appealing to suggest that since we came from the gold standard to the present situation, we should return to the gold standard and then go back to gold.

Regarding the validity of the gold, its greatest strength is the fact that it is and it has been the best international money in history. The difficulty comes when gold is seen as interfering with the needs of management of the economy by the governments a national level. Then monetarists see the gold standard as being unfeasible or not practical. The problem is - and we will agree with them in this point - that you cannot slim a fat man by simply tightening his belt. The solution would kill him. Monetarists have blamed the "shortage of gold" as being the cause of all the economic crisis in the past. Their argument is that it does not allow for monetary expansion at the time of crisis. Since we are always in a state of crisis, or preventing a crisis, they see gold as a restriction in their primary concern "dealing with crisis".

Financial markets need an occasional fix. It has always happened that way in the past. Earning money in the financial market is wonderful: I sell you shares for RM180, you sell them back to me for RM210, I sell them back to you for RM240, you sell them back to me for RM270, etc. Both of us make money, but we have not added one iota of wealth or services to our community. Nevertheless, the GNP will reflect a growth due to the increase in value of the stock. This is the speculative money economy that has driven most economies upwards. This speculative economy is more than 100 times bigger than the formal "real" economy. The problem is that when the stock reaches a point when there is no buyer, then the crisis comes. Why should there be a crisis? Why should the price simply fall, as with any commercial item? This is because the entire banking system is entangled in a chain of loans and collaterals that even reach certain levels of productive economy. In short, governments cannot afford the disarray, and they have to intervene in the only way they know, by pumping more money into the economy, bailing out the crisis with more papers. We have seen this scenario many times. The banking systems and financial institutions have come out stronger and stronger after every crisis. We must question, why? Because our politicians, in general, have been trained to think that the solution, always the same, consist of giving more money to the ailing market, relaxing the mode, one way or another, in which banks issue their credit.

 

OUR WAY OUT- THE ISLAMIC GOLD DINAR (IGD)

The Islamic Gold Dinar, is a coin in weight of gold equivalent to 4.25g of gold. In introducing this currency we should allow for the co-existence of the two systems: banks will operate normally with their paper money while the IGD is gradually introduced into the system through trading institutions. Yet, it must be understood that the ultimate purpose of introducing the IGD must be the elimination of usury, through a new re-understanding of the role of pure/open/Islamic trading. If we understand our goal, however ambitious, then we will be able to articulate positive policies in conservative terms.

The key to the successful introduction of the IGD is the creation of a new economy, a wealth that will be newly generated through the expansion of trade.

I wish to propose that the introduction IGD must be associated with the development of Islamic trade.

The IGD will be associated with trade institutions that can thrive with it and not left in the hands of banking or financial institutions, which will marginalize it. The Islamic Trade will generate a new economy, a new wealth from the expansion of trade itself both in quantity and quality. Therefore the introduction of IGD will not be competing with the existing wealth of the economy, but we will be creating a new one. The IGD will be offered to the people as a choice, not as a legal compulsion from the State law. IGD and the IGD-based payment systems such as the e-dinar, should develop in accordance to a general policy of promoting Islamic Trading (thus avoiding usury), such as that being done by the World Islamic Trading Initiative, and gaining gradually its place into the market as a practical service to the people rather than being imposed on them through the law.

Finally we can conclude that for the region especially among Islamic countries, the way forward to establish a stable currency would be to take on IGD and then establish real economy in the region. The real economy is the economy without usury. The real economy is the economy of the people who produce and trade honestly, contributing wealth to their society. The real economy represents wealth generated by real people trading and producing real merchandise and services, sold in real market places using real money.

 

Last Updated: 07/06/03 ©NorizanEsa2002

 

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