The Official Blog of Dr. Ahamed Kameel Mydin Meera

I refer to the letter “Gold dinar impractical” (The Star, July 6) where Goh Hoe Hoe of Penang argued that the gold dinar initiative by the Kelantan government as impractical.  From an economic reasoning this would be true so long the legal tender law stands.  The paper notes would drive the gold and silver coins out of circulation, known as Gresham’s Law in economics.  However given the current global monetary and economic crisis faced by the world, significantly due to the effects of the dollar and euro crises, it is worthwhile to give the gold dinar idea some consideration.  The matter is not of the concept but rather how to implement it.

Many are of the understanding that the gold dinar initiative calls for every transaction to be carried out using gold or silver coins.  This, of course, is impractical.  However, this can be easily overcome if, as some point out, gold and silver are correctly used as measures of value in economic and business transactions.  Hence the electronic media and the internet should be heavily used in the gold-silver system in order to minimize the use of physical coins.  It is more of a netting process, very much as in the bilateral and multilateral payment arrangements.

The implementation of the gold-silver money should go simultaneously with the fiat money system so that the public is given a choice.  People should be given the freedom to choose their money without any one being forced to accept one kind of money over others.

It’s a kind of barter trade as Mr Goh puts it, but it would not face problems normally associated with barter because the precious metals would play the role of money.  Rather the system would be fair because it exchanges value for value.  The problem with fiat money is that it gives unfair benefit to its first user – a strong reason for the criminality of counterfeiting notes or coins.  Notwithstanding this, commercial banks, that are mostly privately owned, are given the right to create money out of thin air through the fractional reserve banking system.

With electronic payment systems of today, the divisibility problem would not arise.  It is possible to transfer even 0.001gm of gold or silver between accounts, which are about 16 sen and 0.003 sen respectively.  In the classical system, the copper coins, i.e. the fulus, played the role for such small transactions.  The stability of the value of gold and silver over long periods of time and as hedge against inflation has been much proven in academic research.

At the international level, such gold-linking would bring about a just, stable and sustainable monetary and economic system.  Even foreign exchange risk would disappear.  Indeed many economists are of the view that it’s the removal of the gold link in 1971 that brought about the demise of the Bretton Woods, as the root cause of the present dollar and euro crisis that is threatening the world with hyperinflation and serious recession.

Accordingly, in 2010 the former President of the World Bank, Robert Zoellick, called for major world economies to consider adopting a global reserve currency based on gold as part of structural reforms to the world’s foreign exchange regime.   Indeed, much earlier in 1997, Nobel Laureate Robert A. Mundell predicted gold’s return as international monetary unit in this century.  Nonetheless, it is important to note that gold money is not in the interest of the banking system and some political quarters, because it denies them the right to create money out of thin air as they enjoy it now.
Accounting and tax issues are a matter of modifying existing rules and regulations.  After all even today central banks do sometimes settle among themselves in gold.

Hence the impracticality argument for gold dinar is not of concept but rather of will and method of its implementation.

Dr Ahamed Kameel Mydin Meera
Dean, Institute of Islamic Banking & Finance
International Islamic University Malaysia
205A, Jalan Damansara
50480 KUALA LUMPUR

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Abstract

Lately, there have been questions on what the standards for gold dinar and silver dirham are.  Since the dinar and dirham indeed formed the Shari’ah monetary standards from the time of the Prophet pbuh, our work can, therefore, only involve in the rediscovery of that classical standard.  Henceforth no parties or organizations can come up with their own standards. Since the Islamic gold dinar did not come into existence until after about 50 years of the Prophet’s pbuh demise, it is obvious from history that the solidus of the Eastern Roman Byzantine Empire was the monetary basis for the Shari’ah.  Hence the best way to determine the standard is to look at the definition given by its issuer, the Byzantine Empire.  Coins unearthed by archeologist cannot be relied upon for this purpose because such coins generally suffer from wear and possible tempering like clipping etc.  It was found that the actual historical standard for the dinar to be 4.5gm of pure gold and the dirham to be 3.15gm of pure silver.  However, since the role of dinar is simply as a measure of value that depends on the gold-content and if zakat is based upon 1-year’s provision of foodstuff, then the 4.25gm dinar of pure gold and 2.975gm dirham of pure silver, as those circulated during the Prophet’s pbuh era, is also a standard.

Introduction

Undoubtedly, the interest in gold dinar among the public, academics, business community and even governments has increased lately.  The turmoil in the US and Europe and the ongoing global economic and monetary crisis has added to this interest.  Capitalism based on interest-based fiat monetary system is indeed collapsing and the world is on the lookout for possible solutions to the crisis.  Returning back to gold as the international monetary standard has been one suggestion from some quarters.  In the case of Islamic economics, the call is to go back to the Islamic gold dinar that was the monetary standard of Shari’ah throughout Islamic history till the fall of the Ottoman Caliphate in 1924.  The gold dinar is generally agreed upon as a 4.25gm gold coin, based upon the Roman solidus that circulated during the times of the Prophet pbuh.  The gold dinar forms the monetary standard for the Shari’ah rulings on muamalat, zakat, hudud and mahr.  Nonetheless, there is difference is opinion among the proponents of the gold dinar on the purity and weight of the coin – should it be made of 22K gold or 24K fine gold? Should it be 4.25gm or more than that?.  Twenty four karat (24K) gold is fine gold, by today’s standard it is 99.99 percent pure.  The 22K accordingly contains 91.66% gold, hence known as 916 gold.  Due to the rounding, some gold dealers make it to be 917, which means that in one thousand parts, 917 parts is gold while the rest is some other metals, normally silver or copper.

The question whether the gold dinar is of fine gold or not is important because it is the Shari’ah standard and even the zakat, the fifth pillar of Islam, is based on it.  The nisab for money is 20 dinars.  One who had twenty dinar in one’s possession for one year will have to pay a 2½ %  zakat on it, i.e. half-dinar.

The objective of this paper is to determine using historical facts the standards for the dinar and dirham.

The Purity of the Islamic Gold Dinar:  22K or 24K?

This question should not be difficult to answer because the gold dinar had been a historical standard among Muslims for centuries.  It is not a modern innovation or theoretical construction.  Hence to answer the above question, one simply has to go back to history, particularly the time of the Prophet Muhammad peace be upon him.

The Prophet pbuh is reported to have said:  The system of weights and measures is the system of the people of Medina (Sahih Bukhari).

History of the Gold Dinar During the Prophet’s Era in Medina

At the time of the Prophet pbuh the Muslims did not mint the gold dinars yet.  The Prophet pbuh accepted the Roman Byzantine gold solidus, also known as the bezant, as the monetary standard for Muslims.  In this is wisdom.  It was this coin that circulated among the Arabs for decades before the Muslims minted their own coins.  The Prophet would have not accepted it if it were not Islamic in nature, i.e. it promotes the maqasid al Shari’ah.  It also has to be a standard that is just and stable; and facilitate trade and  business even among Muslims and non-Muslims.  In fact the first Islamic gold dinars were not minted until about half century after the demise of the Prophet pbuh, by the fifth Umayyad caliph Abd al-Malik ibn Marwan in the year 75H (697CE).

Since the gold coin of the Eastern Roman Byzantine Empire, the solidus, was the coin accepted by the Prophet pbuh and was circulating among the Muslims, it is this coin we need to research and understand.  Surely the Islamic gold dinars minted by the later Muslim rulers would follow this standard.  Before we go to this, let’s look at the purpose and functions of the gold dinar.

Function of the Gold Dinar

The gold dinar played the role of money in Islam.  Hence it eliminated problems generally associated with barter trades, like double coincidence of wants and the problem of divisibility.  However, as money, it also enabled people to specialize in whatever they do best and hence increased productivity, output and trade; and thereby increased the standard of living of the people.  Hence among the most important function of the gold dinar as money was as a stable measure of value.  By this, people are able to exchange goods and services in a just manner and able to save for future consumption and investments, transact in credit and repay debt in future.  Al Ghazzali and Ibn Khaldun rightly asserted that Allah SWT created gold and silver as measure of value.  Hence gold and silver are the standards by which the values of all things are measured.

Indeed, the current global monetary system that is based on fiat money has this stable measure of value missing since the collapse of the Bretton Woods in 1971.  Hence it is void of a numeraire or an anchor that links the monetary sector to the real economy.  I would assert this as the fundamental reason for the current collapsing of capitalism.

When anything is taken as a standard or measure, it has to be ‘pure’ and simple so that people can easily relate to it.  Length is measured by kilometer for example.  A kilometer is defined as the distance travelled by light in vacuum in ¹⁄_299 792.458 second.  The kilogram on the other hand is defined as the base unit of mass in the International System of Units and is defined as being equal to the mass of the International Prototype Kilogram (IPK), which is almost exactly equal to the mass of one liter of water[1].  Since international trade and business involves exchange of goods and services, what the world needs today is a stable measure of value against which the value of all things can be measured,

The Roman Aureus and Solidus

The Roman gold coin, the aureus, was among the earliest Roman gold coins, issued from the 1st century BC to the beginning of the 4th century.  The aureus of Julius Caesar was struck 40 to the Roman libra pound.  The libra pound is about 327.4gm.  Hence, the coin weighed about 8gm.  Later, the emperor Nero reduced the weight of the aureus by minting it 45 to the pound, i.e. about 7.3gm.  The aureus was then replaced by the solidus that was first introduced by Diocletian around 301 AD, struck at 60 to the Roman pound of pure gold, weighing about 5.5gm each. Due to its limited quantity its economic effects were minimal.  Hence, the solidus was reintroduced by Constantine I in 312 AD, permanently replacing the aureus as the official gold coin of the Roman Empire. The solidus of Constantine was struck at a rate of 72 to a Roman Byzantine pound of pure gold which equals 324gm, each coin weighing twenty-four Greco-Roman carats, or about 4.5 grams of gold per coin.  Analysis of the Roman aureus and solidus, regardless of the size or weight, shows the purity level to be near 24 carat gold in excess of 99%. [Cite]  Whenever the coin was taken in by the treasury, it was melted down and reissued. This maintained the evenness of the weight of the circulating solidi[2].

Hence it is obvious that the gold dinars of the Roman solidus that circulated among the Arabs during the advent of the Prophet pbuh were of fine gold, exceeding 99 percent purity.  However, since the solidi circulating outside the Roman empire including the Arab world, were not used to pay taxes to the emperor they did not get reminted, and hence the soft pure-gold coins became quickly worn[3].  The average weight of the coins in the Arab world was about 4.25gm, from the original weight of 4.5gm.  Regarding this Bernstein said the following:

Less than fifty years after the death of Prophet Muhammad (peace be upon him), the Arabs emulated the great rulers of the past with the debut of their own gold coinage – the dinar -  issued by the Caliph Abd al-Malik at Damascus in 75H.  These coins, 97 percent pure gold and minted in great quantity gradually displaced the bezant as the major international currency, circulating throughout the Arab domains and everywhere in Christian Europe as well[4].

Coins of the time of Abd al-Malik ibn Marwan, unearthed by archeologists, have the weight of the dinar at about 4.25grammes[5], matching the weight of the worn solidi that circulated in those areas.  One could attribute this slightly lower purity of the first Islamic gold dinar compared to the Roman coin to the fact this was the first attempts of Muslims to mint their own coins and hence their relative inexperience in the refining and minting technology compared to the Romans who had been doing this for centuries.  However, undoubtedly the intention was to get a coin as pure gold as possible.

However, as the Islamic empire expanded and trade flourished, it must have become apparent that the gold dinar was less in weight compared to the Roman solidus[6].  The Caliph Umar ibn Abd al-Aziz alerted that the dirhams of Abd al-Malik ibn Marwan were at 7:10.5 to the mithqal instead of the standard at 7:10.  Hence he corrected the matter and issued, in 99H/717CE[7], silver dirhams and gold dinars of weight 3.15gm[8] and 4.5gm respectively, i.e. similar weigh to the Roman solidus, i.e. 4.5gm[9]. Historical evidences show that by the time of the Fatimid Dynasty in Egypt, dinars of fine gold were already in circulation[10].

The Standard Weight of the Islamic Gold Dinar

Determining the standard weight should be easy but rather challenging.  Easy because we are dealing with something that had existed historically, and not developing a theoretical one.  One cannot totally rely on coins unearthed by archeologist in this regard because unearthed coins generally would have experienced some tear and wear depending on how long they had been in circulation and also due to some variance in the weight of individual coins themselves.  Some could have been tempered through clipping and so forth.  Hence it is best we resort to the definition of the coins as determined by the issuing authorities, like in this case the Byzantine Empire.

It is obvious that the Islamic gold dinar is based on Constantine’s Roman solidus which was struck 72 to the Roman Byzantine pound (litra) used for gold measurement.  The litra pound is recorded to be 324 gm, which gives an ounce to be 27gm[11].  Hence the weight of the solidus is 4.5 gm as recorded, equals one mithqal, equals 24 Greco-Roman carats[12].   This coin was frequently melted down and reminted to preserve the weight.  However, as mentioned earlier, the coin circulated among the Arabs with an average weight about 4.25 gm due to tear and wear.  Therefore the actual mithqal or dinar should weigh 4.5gm of pure gold.  Indeed this was corrected by Caliph Umar ibn Abd al-Aziz during his reign, by changing the weight from 4.25gm to 4.5gm.

It was reported on the authority of Jabir that the Prophet pbuh said, “The weight of the dinar is 24 qirats[13]”.  Also Ibn Khaldun asserted the following in al-Muqaddimah:

Know that there is consensus since the beginning of Islam and the age of the Companions and the Followers that the dirham of the shari’ah is that of which ten weigh seven mithqals weight of the dinar of gold… The weight of a mithqal of gold is seventy-two grains of barley, so that the dirham which is seven-tenths of it is fifty and two-fifths grains. All these measurements are firmly established by consensus.

From the above hadith and historical facts, it can be established that the Islamic dinar is of pure gold which equals one mithqal or 24 qirats or 72 grains of barley, that equals 4.5gm in modern weight.  Accordingly, a barley grain weighs 0.0625gm (4.5gm ÷ 72)[14], i.e. 62.5mg.  See Table 1 below.  Also well-known is the fact that 7 mithqals equal in weight to 10 dirhams.  Therefore, this also implies that the silver dirham is of pure silver, weighing 3.15gm (0.7 x 4.5gm) that equals 50 2/5  grains (3.15 ÷ 0.0625  or  0.7 x 72) as mentioned by Ibn Khaldun.

Inscriptions on the Islamic Gold Dinar

Generally, the Islamic gold dinar does not depict pictures of caliphs, rulers, animals or other living things in accordance with Shariah that discourages such practice.  The first Islamic gold dinar, i.e. that of Abd al-Malik ibn Marwan, had inscription based on Quranic verses.  One could notice that the earliest coins never had full Qur’anic verses on them.  Perhaps this is because the early learned scholars could have opined that it is highly possible for people to bring coins into impure places like toilets and so forth; and also possible to lose them to the ground.  Also because coins pass from hand to hand in circulation, one cannot afford to make a mistake in Qur’anic verses inscribed on the coins.  Once circulated it would be extremely difficult to call them back, in case of mistakes.

For example the dinar and dirham of Abd al-Malik ibn Marwan had the following inscriptions:  The obverse of the coin has as its central legend the Kalima Shahada, i.e. “There is no god except Allah alone, there is no partner with Him’. Around it is the mint date formula reading “In the Name of Allah. This dirham was struck in the year 79 AH”. The reverse of the coin has the central inscription based on Surah 112 of the Quran: “Allahu Ahad, Allahu-Samad, Lam Yalid wa lam Yulad wa lam Yakul-lahu Kufu-an Ahad”‘. The marginal legend is based on Surah 9, Taubah Verse 33.  It states: “Muhammad is the Messenger of Allah, he was sent with guidance and the religion of truth to make it prevail over every other religion.”  Note that these are not full Qur’anic verses.

Softness of 24K Gold Dinars and the Issue of Tear and Wear

The original gold dinar and silver dirham were made from pure gold and pure silver respectively.  In the pure form they are soft and therefore get worn in the process of circulation.  Nonetheless, gold and silver have the highest ductility and malleability among all metals[15].  The atoms of these metals are strongly bonded among them but however can move easily around them.  Therefore even though the gold and silver coins can become worn in the process of circulation, the process is not easy though and rather is slow.

To address this issue of tear and wear, the Roman empire, as mentioned earlier, would melt down and remint the coins it receives as tax in order to maintain the standard weight of 4.5 grams.

Some quarters assert that the dinar should not be of pure gold since it would easily get worn out.  They say that in about 3 years the coins may lose enough gold to be rejected as dinar.  However, the Roman solidus that was circulating, for decades, outside the Roman empire had a weight of about 4.25 grams, with some going as low as 4 grams[16] and people did accept them as dinars.  It is our contention that the Islamic government, as the Roman empire, should continuously remint the coins to preserve the weight of the coins.

Zakat on the Dinar and Dirham

It is important to note that the basis for the Prophet pbuh fixing the nisab for silver at 200 dirhams and the nisab for gold at 20 dinars was that either of these two sums represented, in his day, the market price of 5 camel-loads of grain or, in other words, of one year’s provision of essential food-stuffs for an average family.  Accordingly, the value of one dinar during the prophet’s time was equal to 10 dirhams.  Hence the basis for the nisab was not the physical count of the dinar but rather the purchasing power of the money. [Roy Jastram]

Hence it may not matter whether the dinar is 22K or 24K because the value of each will be based on their respective gold content.  Henceforth, the nisab for silver and gold must be established on the same basis as practiced by the prophet pbuh, i.e. on the proportionate value of the year’s provision of essential foodstuffs in relation thereto, as dictated by the prevailing market price.  Therefore, nisab for gold and silver must vary from year to year in conformity with the price fluctuations of essential foodgrain[17].

The Modern Implementation of the Islamic Gold Dinar

When the gold dinar gets implemented in the modern world, it would surely rely heavily on the internet.  Gold-based interest-free electronic credit is the most desirable form of  money (using cards, internet, mobile phones, computers etc).  Here, the gold dinar would predominantly play the role as measure of value that involves only the recordings of credit transactions that are periodically net-off.  Such system is not akin to fractional reserve banking because this system does not create new money and does not involve the transfer of credits for payment purposes.  Therefore, in this system the need for physical dinars will be much minimized.  The periodic settlements can be done even using gold bars and not necessarily using gold dinar coins.  Also the system permits real-time electronic audits.

Such electronic interest-free money is desirable because it fully takes advantage of the concept of money as a measure of value, as a means for keeping score.  Hence practically there will be no situations of shortage of money that can plunge an economy into recession and thereby give hoarders of money the advantage to charge interest on borrowings.  Since the system does not create new money, it will not create inflation.

Conclusion

Islam as inherited by Muslims from the Prophet pbuh is a complete religion.  As the following verse from the Holy Qur’an asserts.

This day have I perfected your religion for you, completed My favour upon you, and have chosen for you Islam as your religion

Being a religion that is complete without defects or shortcomings, it needed no human efforts to perfect it, solve or rectify any shortcomings.

As far as monetary standards in Islam are concerned, the words dinar and dirham are mentioned in the Qur’an.  These precious metals are to play the role of measure of value for just economic and business transations.  As Islam is pure, its measures of value must be pure too.  Pure makes it easier for standardization for all nations and people, without ambiguity, forex risk; simply a pure reference point, an anchor, a numeraire.

But as for all who lay up treasures of gold and silver and do not spend them for the sake of Gods  - give them the tiding of grievous suffering [in the life to come]:

With simple deductions using historical facts, we ascertained that the standard for dinar and dirham are 4.5gm of pure gold and 3.15gm of pure silver.  Hence, the correction of weight from 4.25gm to 4.5gm by Umar ibn Abd Aziz.  In the present time, we cannot mint a coin inferior to that of Abd al Malik ibn Marwan.  Hence the WIM standard of 4.25gm of 917 gold and 2.975gm of fine silver for dinar and dirham respectively are erroneous because the coins would have about 13.4% less gold and 5.6% less silver respectively than the historical standards.

The use of 22K would lower the nisab and if people were to pay zakat on it, I guess they would not be punished for lowering the hurdle, but nonetheless 24K is the standard   The value of the 22K will be based on the pure gold content of the coin, anyway.

Hence it may be trivial to argue whether the gold dinar is 22K or 24K since the gold content will determine their respective value, play the role of measure of value, and form the basis for payment of zakat based on one-years provision of food-stuff.  However since the Prophet pbuh said that the system of measure is the system of Medina, I contend that it should be perfectly alright to mint the Islamic gold dinar according to that of the time of the Prophet pbuh i.e. a 24K gold coin of 4.25 grams in weight.  Also since modern electronic payment systems are likely to be the way forward, the 24K fine gold should be the basis of a standard measure.

Reference

Bernstein, Peter L., The Power of Gold – The history of an obsession, John Wiley, 2000

Porteous, John (1969). “The Imperial Foundations”. Coins in history : a survey of coinage from the reform of Diocletian to the Latin Monetary Union.. Weidenfeld and Nicolson. pp. 14–33

Subhi

Kitab Adh-Dharaib fi as Sawad

Hunwick, John, Islamic Financial Institutions: Theoretical Structures and Aspects fo the Application in Sub-Saharan Africa, in Credit, Currencies and Culture – African Finanical Institutions in Historical Garrard Perspaectiv, Ed. Endre Stiansen and Jane I. Guyer, Elanders Gotab, Sweden, 1999. P86

Timothy, Akan, Weights and the Gold Trade, London 1980,

• Islam is complete.
• Qur’anic verse on gold and silver  – Allah must be referring to gold and gold mixed with other metals
• If dirham is fine silver, why dinar is not fine gold?
• Roy Jastram
• Rome was attacked 476AD, thereafter Eastern Byzantine empire existed.
• Byzantine emperor was Justinian who governed with his wife Theodora from 527 to 565.
• 9 May 2004 – On this day in A.D. 330, Constantine founded the city of Constantinople

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[1] The IPK is made of a platinum–iridium alloy and is stored in a vault at the International Bureau of Weights and Measures in Sèvres, France.  However, the weight of this alloy has been changing over time, and hence the call for a redefinition of the kilogram.

[2] Wikipedia

[3] Porteous, John (1969). “The Imperial Foundations”. Coins in history : a survey of coinage from the reform of Diocletian to the Latin Monetary Union.. Weidenfeld and Nicolson. pp. 14–33

[4] Bernstein, The Power of Gold – The history of an obsession, p67.

[5] Subhiì, 1976: p427

[6] The Roman Byzantine Empire lasted till 1416 CE.  However, the Persian Sassanid Dynasty that was responsible for the silver dirham that circulated among the Arab, ended much earlier around 644CE.

[7] Kitab Adh-Dharaib fi as Sawad, p65 as referenced in http://islamhariini.wordpress.com

[8] Abd al-Malik’s dirham was close to 3gm, but the Roman solidus weighed 4.5gm.  Hence Umar ibn Abd Aziz’s remark of the ratio 7:10.5, i.e.

[9] Archeological gold dinars of this period weighed in the range 4.4gm to 4.6gm.  To what weight he corrected the dirham and the dinars depends on what standard dinar he was comparing the dirhams to.  We contend it must be the Roman solidus, that weighed 4.5gm.

[10] All dinars are indeed of pure gold but constrained by mining and refining technologies of the time.  By the Fatimid period Muslims seem to have perfected the technology; something the Romans had known much earlier.

[11] 27gm was the old Roman-Byzantine ounce from which the original solidus standard had been derived.  See Timothy Garrard, Akan Weights and the Gold Trade, London 1980, p215.

[12] Traditionally, 1carat (the mass of a carob seed) equaled the weight of 3 barley grains or 4 wheat grains.

[13] Qirat is carat.  In today’s jargon, 24K is also used to denominate pure gold.

[14] This weight of a barley grain is computed based on the above statement by Ibn Khaldun.  Barley grains do vary in weight, that is subject to change due to moisture content etc.  The International Systems of Units set the barley grain as equal to 0.06479891 gm

[15] Ductility is a solid material’s ability to deform under tensile stress, i.e. the material’s ability to be stretched into a wire. Malleability is a material’s ability to deform under compressive stress, i.e. the material’s ability to form a thin sheet by hammering or rolling. Both of these mechanical properties are aspects of plasticity, the extent to which a solid material can be plastically deformed without fracture [Wikipedia].

[16] That is, a loss of about 5.5% to 11.1%, but we are not sure for how long the coins circulate before losing that much.

[17] Zayas, Farishta G. de, The Law and Institution of Zakat, The Other Press, 2003, p74.

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Undoubtedly, the world is currently observing some powerful mega trends taking place, particularly of climate change, economy and politics.  The world accordingly seems poised for some mega historical changes – technology, finance, economy, social and political.  Global awakenings are happening almost in every part of the world.  Monarchies and kingdoms have felled in the Middle East and the trend is continuing with what is termed as the Arab Spring and the economies of major developed countries like the US, Europe and Japan are facing serious problems – debt crisis with persistent recession, unemployment, homelessness, nuclear crisis etc.  Prices, particularly of commodities are skyrocketing.  Accordingly people have taken to the streets to protest against what they regard as crippling wealth and income inequality, corporate greed and government policies that seem bias towards the elites.  This protest that started on September 17, 2011 as Occupy Wall Street (OWS) in New York City’s Wall Street financial district has now spread to over hundreds of cities worldwide.  Interestingly many world leaders have voiced support for the protests.  India’s Prime Minister Manmohan Singh, for example, stated, “There are reasons why people are protesting. People are protesting in Wall Street, in Europe about the fat salaries that the bankers are getting when people are being asked to tighten their belts. There is problem of growing unemployment in the United States. There is also worry in Europe. So there are problems which the system must have credible answers to take them on board.”  Truly, the debt crisis in Europe is threatening the euro as a single currency and might even rip apart the European Union.  On the climate front, one just has to look at the latest devastating flood in Thailand.    

There may be many reasons for the above observations, but strange as it may sound, I have always asserted that the one most important factor that is contributing to all the above is the structure of our global monetary system based on fiat money and compound interest.   I will focus on compound interest in this article.    

Compound interest means interest over interest.  For example if one were to deposit RM1,000 at a compound interest of 10 percent per annum, one would have RM1100 at the end of the year, i.e. RM1,000 principal and RM100 as the interest.  In the following year, this balance would grow to RM1,210, i.e. 10 percent of RM1,100 is RM110, added to the beginning balance of RM1,100.  A simple formula relates this ending balance known as Future Value (FV) to the initial amount known as the Present Value (PV), i.e. FV = PV (1 + i)n  where i is the interest rate and n is the number of years.  Accordingly, the second-year balance can be obtained as FV = 1000 (1 + 0.10)2 = 1,210.  The tenth-year balance, for example, would then be FV = 1000 (1 + 0.10)10 = 2,593.74.  Note that since the formula has a power n in it, it is exponential in nature.  In fifty years, the balance is RM117,390.85 while in a hundred years it is RM13,780,612.34!  This computation is well-known to many of us, but what most of us are not aware is that it has serious implications for society, economy and the environment.    

The reason why we postulate that the compound interest is at the root of the global chaos of today is that under the present fiat monetary system, most money is created through mere accounting entries by commercial banks in the form of loans, that carry compound interest with it.  Due to this reason, both money and debt grow exponentially in almost all economies.  But the real productive economy, i.e. the economy that produces goods and services does not and cannot match the exponential growth of money and debt.  This is where the problem lies.    

    

As a consequence, money and debt overshoots the real economy, the difference of which shows up in the form of inflation and bubbles; stock market bubble, housing bubble etc.  See diagram.  But in the process, individuals, businesses and governments become increasingly indebted (See table below).  When the average debt level reaches a point that is unbearable for the weaker sections of the economy it then ‘bursts’, causing an avalanche of foreclosures of properties and the destruction of money in the process, which in turn brings about recession, unemployment and so forth.  If individuals, businesses and governments all become indebted then one wonders who the creditors within the system are.  Of course the creditors are indeed the banks to whom the system has given the legal right to create money out of thin air and lend it out to others at compound interest.  Hence during times of crisis if one were to take a helicopter-view of the economy below, one would see things seem so normal down there but what really happens is that huge transfer of wealth taking place, from those who are distressed by the debt-situation to a small section of the economy, i.e. the banks. 

 

The world after being under this pure fiat money system for the past few decades has been brought to the precarious position we are currently observing.  There is now a global debt crisis, a situation significantly brought about by compound interest, but compounded further by the fact loans themselves are created out of thin air.  This is the reason why a great productive nation like Japan, a nation of very hardworking and intelligent people, has fallen into a receding economy since almost two decades ago.  In the real economy, one would expect such people to be able to produce abundantly and lend to others any extra they might save.  And yet, in a compound interest-based system, Japan has become the country with the largest total debt as a percentage of GDP, i.e. more than 450%, with the government debt alone accounting for almost 200% of GDP.  Government debt is indeed debt of the people.  This can, therefore, ultimately wipe-off the national savings of the people, thereby transferring the saved wealth of the people to the government.    

The US is also somewhat in a similar situation albeit it is not a nation with high savings rate like Japan.  Compound interest has brought its economy practically to a halt, as shown by employment data.  In capitalism, the compound interest-based monetary system strengthens a small section of the economy at the expense of the system itself.  Hence compound interest is a seed of the capitalism’s own destruction.  While strengthening a small group of people, it causes outright calamity on the rest of the people – economic deprivation, inflation, social disparity, high crime levels, erosion of moral values, collapse of the institution of family, erosion of feelings of love and compassion for others etc.   Hence one is not surprised by the Occupy Wall Street movement, with its reverberations worldwide.  In a recent interview by Bloomberg, George Soros mentioned that the turmoil in the US and Europe reminded him of the Soviet collapse.  On how to fix the European debt problem, his amusing answer was “There is a lot of confusion and I am also confused.”    

The compound interest monetary system has also brought the whole world to an interesting historical juncture.  Almost every nation would be facing political upheavals and challenges due to this precarious position the world is currently in.  At this juncture, we are reminded that the ongoing Arab unrest in the Middle East was triggered by one individual’s self immolation as a reaction to serious economic deprivation.  The debt crisis is threatening even the very existence of the European Monetary Union, particularly with the latest crisis faced by Greece.  Italy, Spain and others might follow soon.  It’s crucial to note that Italy’s debt is larger than that of Greece, Spain and Portugal combined.    

As mentioned earlier, the compound interest system in a fiat monetary system causes individuals, businesses and governments to become continuously and increasingly burdened with debt.  Government debt, being the debt of the people, would have to be paid through collection of tax and other revenues from the people.  This is the reason why in the case of Greece, for example, draconian austerity measures were required on its citizens.  All these would but add extra burden on the people.    Accordingly one could see why the anger against banking system worldwide – it is highly lucrative and relatively risk-free.  In good times banks collect interest while in bad times, i.e. default-period times, they collect real assets placed as collaterals.    

The political implications of the compound interest system are already obvious in many countries.  In Malaysia I think it will be apparent by next year.  In such times radical forces would make headways.  Even the political challenges faced during the last election by PAP, the ruling party in Singapore, I would attribute it to the economic distress felt by many of its citizens, particularly the younger generation.    

In Malaysia too, I believe that in the coming general election Barisan National would face among the strongest challenges it has faced, particularly caused by this socio-economic distress factor caused by the global monetary order.  People would attempt to seek solace by going to the opposition, thinking that the opposition might be able to help them out of their predicament.  But, nonetheless, even the opposition would not be able to help them on this unless it can effectively address the debt-burden faced by the people.  Since compound interest is time-based, the challenge would only grow stronger as time elapses.    

Therefore the solution to all these lies in giving the entire economic system a debt relieve – i.e. writing-off the interest portion of loans and demanding repayment of the principal amount alone.  Indeed this is also what the whole world actually needs today – both the developing and developed nations.  But unfortunately I do not see any political will towards this end anywhere in the world.  The Barisan National government can hence become the hero and darling of the people if it can do this.  It can lead and show the world the right path to recovery.    

The collapsing global compound interest monetary system is currently taking the world into a runaway global hyperinflation mode.  The low returns from equity and bond markets coupled with cheap money from the Quantitative Easings are fuelling a commodity bubble.  Any bailouts in the European Union would add to this.  Hence the prices of commodities, particularly grains like wheat and rice, are expected to skyrocket and potentially devastate millions of people.  Malaysia would not be spared. In the case of rice, the problem is further exacerbated by the flooding in Thailand that has wiped out millions of acres of rice fields.  Accordingly, the Malaysian government must take proactive actions now to control the prices of basic food items from seriously affecting the people.  Otherwise things can get very bad particularly by next year.  The authorities must also take measures to prevent food items from being smuggled out of the country, so as to contain prices and keep inflation to its minimum.    

There are a lot of talks of transforming Malaysia into becoming a high-income nation by 2020.  This on the outset looks something commendable, but nonetheless we must be wary of such simple macroeconomic statistics.  Pushing national average income into the high income bracket may not mean much if there is wide disparity in income and wealth distribution.  Averages alone do not tell the true picture.  Accordingly some additional measures of income dispersion among individuals and even among the races may be necessary if we are to develop the nation as a whole into a high-income nation that enjoys not only prosperity but also peace among its people.  Economic deprivation among groups of people or races can lead to tensions, crime and chaos.    

Going back to the global scenario, what worries me most is that, judging from history, in situations as we are in now, mankind tend to resort to devastating wars to ‘solve’ such problems.  The last ‘stronghold’ in this global political game, as I see it, is Iran.  An attack on it seems imminent.  I hope I’m wrong on this because the effects of a World War III, with many countries having nuclear capabilities, are unthinkable.    

In conclusion, I have no doubt that the precarious global socio-economic-politico-environmental situation we are currently in is rooted in fiat money compound-interest monetary system.  It is hence not surprising that Albert Einstein had apparently once remarked that the most powerful force in the universe is compound interest.  We are at a juncture of human history where mankind has to boldly and urgently confront this manmade ‘virtual force’ if it must save itself from its own utter destruction.    

Prof Dr Ahamed Kameel Mydin Meera
Head, Department of Finance
Kulliyyah of Economics and Management Sciences
International Islamic University Malaysia    

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On the 28th February, 2011 the Chief Minister of Perak, Dato’ Seri Dr. Zambry Abdul Kadir, launched the state of Perak’s own gold dinars and silver dirhams.  The state of Kelantan had earlier launched its gold dinars and silver dirhams on the 20th of September 2006 in Kota Bahru where I was invited to address an excited crowd.  Kelantan issued a newer design for its coins in August 2010.  The issuance of gold dinars by the states attracted comments from many quarters, with the Deputy Minister of Finance, Datuk Dr. Awang Adek Hussin highlighting the fact that the gold dinar is not a legal tender in Malaysia.  Also, many people queried the difference between the coins issued by Perak vis-a-vis the coins issued by Kelantan.

To start with, the gold dinar and the silver dirhams are generally understood as the Islamic monetary units, i.e. Shari’ah money.  These being the dominant money and measures of value during the entire history of Muslim empires that stretched from Morocco in the west to India in the east, covering a time-span from the 7th century to the first quarter of the 20th century when the Ottoman caliphate was defeated.  Nonetheless, in reality the gold dinar and silver dirham were not of Islamic origin, rather owe their origin to the Roman gold coin called denarius and the Persian silver coin called drachma.  The prophet of Islam, Muhammad peace be upon him, accepted the two coins as the monetary standard for Islamic trade, business and financial transactions.  They also form the monetary basis for Shar’iah laws of business transactions muamalat, capital punishments hudud, marriage dowry mahr and the compulsory religious alms zakat.  Hence the gold dinar and silver dirhams lost their monetary role officially with the collapse of the Ottoman caliphate in 1924.  Nevertheless, gold continued to play a role in the international monetary system until the Bretton Woods was ended in 1971.  In the Bretton Woods system, only the dollar was redeemable for gold, i.e. 1/35 oz of gold for each dollar.  The rest of the world currencies were not required to be gold-backed as the dollar was, but only needed to keep their exchange rates with the dollar stable.

With the current global monetary and economic crisis continuing, people have begun to look towards precious metals like gold and silver as safe havens for their savings.  Firstly the price of precious metals are expected to rise further, making gold and silver as excellent investment choice while at the same time these metals can also protect savings from the hyperinflation that is being predicted in the current global economic scenario.  Inflation, of course, eats into the purchasing power of savings and future returns.  The current rush for gold in the country is evident from the frequent advertisements and articles on gold that appear in the news media.  Now let me highlight the difference between the dinar of Perak and the dinar of Kelantan.

The gold dinar weights 4.25 grams but historically there have been differences in the purity of the coins depending on where, when and who issued the coins.  The first Islamic gold dinars were issued by the fifth Umayyad caliph Abd al-Malek ibn Marwan in the year 75 Hijra which coincides with the Gregorian year 697 CE.  We call it ‘Islamic’ simply because the caliph replaced the Roman pagan inscriptions on the coin with those based on Qur’anic verses.  The fact that the first Islamic gold dinars were issued only after about half a century from the prophet’s demise indicates that what matters most is not the inscriptions on the coin but rather the gold content of the coins; and Abd al-Malek’s coins were 97 percent of purity, constrained by the mining and refining technology of the time.  Historically Muslims had always striven to improve the quality of the coins.  Some coins from the Fatimid Dynasty period in the 11th century Egypt, were of pure gold.  Abd al-Malek minted the coins in large quantities, imposed strict quality control and severe punishment for any kind of tempering of the coins.  These caused the coins to circulate wider and even replaced the Roman bezant as the dominant coin in Christian Europe.  This is clear evidence that when there is freedom of monetary choice, good money would drive out bad money.

Such being the legacy of the gold dinar, the Perak and Kelantan gold dinars are also of 4.25 grams but with the purities of 99.9 and 91.7 respectively.  This means the Perak gold dinars are made from pure gold, also known as 24 Karat gold, whereas the Kelantan gold dinars are made from an alloy of 91.7 percent gold, 8.3 percent of it being other metals, normally copper or silver.  This is also known as 22 Karat gold (note that 22 divided by 24 gives 91.7%).  So indeed the Kelantan gold dinar is inferior to even the first ever gold dinar, that was 97 percent pure.

Kelantan initially launched the gold dinars and silver dirhams claiming them to be alternative money to the national currency, ringgit.  It also claimed that about a thousand businesses were ready to accept them as money.  This, of course, attracted the attention of the authorities, particularly the Ministry of Finance and the Bank Negara.  As mentioned earlier, the Deputy Finance Minister, Datuk Dr. Awang Adek Hussin responded by saying that the gold dinar is not a legal tender.  The Deputy Finance Minister challenged the state government of Kelantan to prove that the gold dinar monetary system can work and succeed.

Indeed, given the present laws of the country, the gold dinar as money is unlikely to succeed. The legal tender law would prevent it from circulating as money.  With the legal tender law in place, i.e. when monetary freedom is curtailed, bad money would drive out good money from circulation, contrary to when there is no such law as was the case when Islamic gold dinars became the dominant coins even in Europe. Therefore, in this case the ringgit which is a fiat paper currency would drive out the gold dinars from circulation.  In economics, this is known as Gresham’s Law. This law seems to explain the apparent silence of Bank Negara regarding the gold dinar because they know with legal tender law, gold will not circulate as money.  Kelantan’s actions would be mere futile unless the people intentionally defy the law.  Hence, the success of the gold dinar not only lies in the general acceptance of it as money but also simultaneously lies with the freedom of people to reject inferior money, like fiat currencies.  Without this freedom bad money would drive out good money from circulation.

Realizing the above fact, the state government of Perak did not issue its gold dinars and silver dirhams as alternative money but rather as excellent items for investing in precious metals or for hedging against inflation. The state, therefore, does not intend to break any Federal law.  On the contrary, it is engaging with the authorities to form a coalition of the willing regarding the gold dinar.  With the global financial-economic-political crisis continuing unabated, hyperinflation is predicted to set in and the price of precious metals like gold and silver are expected to continue to rise to high levels.  The graph below shows the gold price for the period 2000 to present.

Notice the exponential growth of the gold price.  The table below provides the annual return for gold investment based on average annual gold price in dollars per ounce.

Notice that the average annual return for the nine-year period is 18.24 percent while the holding period return for 2001 to 2010 is a whopping 351.79 percent.  The increasing vulnerability of the dollar, the quantitative easings of the US, the political chaos in the Middle East, the earthquake-tsunami followed by the ongoing nuclear crisis in Japan, global climatic changes etc. are all putting severe stress on the global monetary and economic condition.  Hence my prediction is that gold will continue to make strides at least till the end of 2012.

The state of Perak also stressed other uses for its dinars and dirhams, i.e the coins make good choice as gifts for many occasions; like mahar or marriage dowry, wedding anniversaries, new births, birthdays and so on.  They also make good corporate gifts – golden handshakes, medals, awards for recognizing achievements etc.

As for the design, the Kelantan gold dinar features the crest of the state of Kelantan on the obverse side of the coin with a modern calligraphy of the Muslim ‘shahadah’ and a full Qur’anic verse, i.e. verse Al-Mu’minun, 23:52,  on the reverse side.  The Perak gold dinar also depicts the ‘shahadah’ but not complete and full Qur’anic verses.  I am of the opinion that the original Islamic gold dinars never depicted full Qur’anic verses because of the possibilities that people might take them into impure places like the toilet or lose them to the ground.  Another grave danger of depicting full Qur’anic verses is, if the already minted and distributed coins were found to have errors in the verses.  This would be most unfortunate for the minting government because it would be extremely difficult to recall back such coins.  People would even tend to keep them because coins with errors tend to fetch higher prices in the market!

The Perak gold dinar design, on the other hand, depicts historical heritage and modernity.  On the obverse of the coin is the crest of the state of Perak, which depicts modernity, while the reverse of the coin replicates the design of the first original gold dinar, signifying historical heritage.  Accordingly, the Menteri Besar of Perak, Dato’ Seri Dr. Zambry Abdul Kadir was proud when he acclaimed, “It [the Perak gold dinar] is one of its kind and probably the first in the world, because it revives back the first Islamic gold dinar ever minted, that is the coin issued by the caliph Abd al-Malik ibn Marwan in the year 75 Hijrah, that coincides with the year 697C.E.   I am proud to revive the original Islamic gold dinar after 1,357 lunar years.”  The Perak gold dinars are minted by an experienced Perak-based local company whereas the Kelantan gold dinars are minted in Dubai.

The Perak gold dinar venture would also contribute towards some wakaf initiative as its social responsibility.  Wakf is a religious public endowment, usually given in the form of lasting assets like land, building etc., for the purposes of religious activities, education, healthcare etc.

The gold dinar project is expected to boost the economy of Perak in the long-run by promoting employment, creating new business ventures including investment in gold mining, designing, minting, assaying, hallmarking, gold dinar agency etc.  Spill-over effects are expected to provide additional business to existing business units.

To conclude, given the current global political and economic situation, it is my ardent hope that the government would give permission for or by its own put in place parallel gold-based monetary systems as soon as possible.  Such real-money systems are very much needed now considering the fact that the global economic system is currently showing serious vulnerability and threatens the world with serious recession, unemployment, inflation and possibly wars, the social implications of which are unimaginable.  The greatest advantage at present times of the gold dinar initiative is that it can protect the savings of the people from being eroded by inflation or even from possible monetary meltdowns while promising good returns.  The gold dinars and silver dirhams issued by both the states are, therefore, timely.

Prof. Dr. Ahamed Kameel Mydin Meera
Head, Department of Finance
Faculty of Economics and Management Sciences
International Islamic University Malaysia

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THE CHEMICAL SYMBOL of gold is AU from Aurum, the Latin word for gold. Chemically gold is an element, which means it cannot be broken down further. Interestingly, in the Periodic Table of Elements (below) gold occupies the same group, i.e. Group 11, as copper (Cu) and silver (Ag) that also played the role of money in the history of mankind.

Pure gold is yellow in colour. Nevertheless, the colour changes depending on the added alloy metals, as illustrated below:

Karat grade is used to express the purity of gold. It basically refers to the proportion of gold in an alloy. Pure gold (100 per cent) is 24 karat. The proportions in other karat are as in the table below.

Example: 22K means that 22 out of 24 portions are gold. This equals 91.66 per cent of gold, hence it is also known as 916 gold. Similarly 18K contains 75 per cent gold.

• As an element, gold cannot be further broken down by chemical means. Hence it is indestructible and permanent.
• Gold is also such an inactive metal that it is not affected by air and water, i.e. does not oxidize (tarnish, rust or corrode). Gold artefacts unearthed in the Egyptian pyramids still look new and bright.
• Gold is highly malleable (i.e. the ability to be pound into thin sheets) such that a single ounce of gold can be hammered into a 100 squarefoot sheet.
• Gold can be hammered so thin that sunlight can shine through it. A pile an inch high can contain more than 200,000 sheets!
• Gold reflects infrared rays while allowing sunlight to pass through, hence its use in astronaut helmets and window glass.
• Gold is most ductile (ability to draw out into wire) that a single ounce of it can be drawn out into a 50-mile long wire!
• Gold is so rare that only about 90,000 tons of it have been taken from the earth in recorded history
• South Africa is the largest gold producing country in the world. Other leading producers include Russia, Canada, and the United States.
• Gold is so heavy that one cubic foot of it weighs half a ton.
• All the gold in the world could be compressed into an 18-yard cube.
• Gold has been used by man for more than 6000 years.
• In 1933, President Franklin D. Roosevelt banned the private ownership of gold, which was then lifted on December 31, 1974.
• Gold is said to be a cure for rheumatoid arthritis. It is chemically liquefied and injected into the muscles of arthritic patients. It is said that the treatment is successful in seven out of ten cases.

Reference: www.goldgold.com/goldfacts.htm

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CURRENCY SPECULATORS AND arbitrageurs made huge profits during the 1997 East Asian Crisis. They took advantage of the flaws inherent in the global fiat monetary system. These speculators, that include international financial institutions and fund managers, are very knowledgeable about financial markets, economic cycles, etc. They use this knowledge to “attack” currencies, etc. to reap huge profits. The huge economic bubble that hovered over the East Asian countries, created by the fiat money credit bubble[1], lured these speculators to attack the currencies of these countries by shorting them. Their action popped the bubble that brought about the 1997 East Asian crisis. Collective action of speculators would amount to an attack on the currency. While the central bank may counter such attacks to keep exchange rates within reasonable levels, a continuous attack can be difficult for the central bank to match. While speculators can take on huge leveraged positions, the central bank would need large amounts of foreign reserves to counter this. Inability to match the speculators would cause the exchange rate to plunge as happened to the Asian currencies.

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