Response to Dr. Shaykh Abdalqadir as-Sufi’s article “The Islamic Dinar – A Way-Stage Passed”

By the Dinar and Dirham Technical Group

The above article appeared in the Shaykh’s website, posted February 14, 2014, in which the Shaykh declared, near the end of the article, that he now is dis-associating himself from all activities involving the Islamic gold dinar and silver dirham (hereinafter DnD).

His disappointment seemed rooted in the fact that after decades of hard work and planting the ‘tree’ to push the DnD as an instrument of Taken Zakat had not come to fruition.  In his words, a Taken Zakat must fulfill the following:

  1. An appointed Amir
  2. That Amir’s appointment of Zakat Collectors
  3. This resulting in a collected and assessed amount of Zakat
  4. The gathering of the Zakat in a Bayt al-Maal
  5. The immediate distribution of the Zakat to the legally worthy recipients

And that the DnD initiatives so far did not achieve these.  Hence the Shaykh writes:

“a newer and wider method must be adopted on a global scale PRIOR to the return of a local Halal functioning community which restores Islam by the door of Zakat….I call on an end to its [DnD] new institutions and productivity. The defence mechanisms of today’s late capitalism and its crisis management surrounding the buying, moving and minting of gold have surrounded it with prohibitive pricing and taxation. It is time to move beyond it. This is capitalism’s pyrrhic victory. Ahead lies vast expansion for the post-terrorist and post-political stage of Muslim growth.”

The Dinar and Dirham Technical Group (DDTG) is not a part of the Shaykh’s Murabbitun sufi order.  Nonetheless, we viewed ourselves as part of a larger group that strives to bring back the DnD as part of the Islamic socio-economic order.  This because we have reasoned and determined that the present fiat money system is nothing but embodies profound riba and prevents the attainment of a true Islamic socio-economic order, i.e. the maqasid al-Sharia are not attainable in this present system.

What the DDTG strives for is not so much bringing back physical gold dinars and silver dirhams into society as medium of exchange, even though this is a desirable event.  But rather its true struggle is to bring back gold and silver as measure of value in economic exchanges and transactions.  These are very much two different things.  Trade and commerce ultimately involves the exchange of goods and services.  What is missing in the present global monetary system is a real measure of value that can promote exchange justice, stability and sustainability.  Fiat money is a virtual measure of value and carries with it the Ribawi gene.  On the other hand, gold and silver is in line with what great scholars of past like al-Ghazzali and ibn Khaldun remarked in their works, i.e. God created the two precious metals as measure of value, i.e. against which the value of all other goods and services are measured.  The Holy Qur’an describes these two metals as of having precious value not only in this world but also in the Hereafter, i.e. Jannah.

While the DDTG recognizes the DnD as the ultimate measures of value, it also recognizes that other measures of value are also possible.  They simply need to have the characteristics needed to play the role of measure of value.  The following hadith of the prophet (saw) itself gives four other such items.

Abu Said al-Khudri reported Allah’s Messenger (s.a.w.) as saying:  Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates and salt by salt, like for like, payment being made on the spot.  If anyone gives more or asks more he has dealt in riba.  The receiver and giver are equally guilty.Sahih Muslim

Hence what the DDTG strives for is to establish real measures of value.  These necessarily must be commodities or services having their own intrinsic value.  Symbolic money is acceptable so long it is redeemable for some real commodity or service.  The DDTG would like to see not only dinar and dirham instituted but also other real money concepts – like commercial barter exchanges, complementary currencies, etc. – to coexist so as to increase the strength and resilience of the whole monetary and economic system.

Hence the DDTG recognizes that the fact, Shari’a principles of muamalat, zakat, mahr, hudud etc. are based on gold and silver as monetary standard has hikmah behind it.

Nonetheless, in this regard the DDTG recognized that it is virtually impossible to revive back the gold dinar and silver dirham their monetary role so long the legal tender law is not ‘loosened’ a bit.  This is because, in the presence of legal tender law, Gresham’s Law would kick-in, i.e. inferior money would drive out good money.  Hence paper money and other fiat money would drive the gold dinar and silver dirham out of circulation.  This is exactly what happened in Kelantan.  Only in the absence of legal tender law or with some ‘loosening’ of the law that the dinar and dirham has some chance of succeeding.

When the gold dinar and silver dirham of Kelantan were first introduced in 20 September 2006 I was invited to give the keynote address.  At that time Umar Vadillo was not even in the picture yet, and I stressed the point that the DnD can be introduced mainly as an inflation hedge only and not as money, i.e. as means to protect one’s savings from being eroded by inflation.   Nonetheless, Kelantan later relaunched its ‘first’ dinar again on 12 August 2010 as though the 2006 event did not take place.  This time the launch was through a company, the Kelantan Gold Trade, led by Umar Vadillo.

As expected, the venture failed as per our discussion above.

But nonetheless, we at DDTG are confident of the true role of the Islamic gold dinar and silver dirham; and what is needed to achieve the objective.  The task ahead is not an easy one because money and financial systems are tricky and intertwined with global power play.  We are talking about complementing paradigms or even complete paradigm shifts.  Hence, this will take time.  But, we are confident that by the Grace of Allah SWT the gold dinar and silver dirham will ultimately resurface, and contribute to socio-economic justice, peace and abundant prosperity for all – Muslims and non-Muslims alike;   in the near future.  We just need to be focused, steadfast and patient.  Truth, honesty and willing to listen to other opinions are other quality traits one should develop in one’s self to contribute to this success.

The path to Glorious Islam again is not through fighting armies but rather through eradicating RIBA in all its forms in society.  We hope Shaykh Abdalqadir would reconsider his statement as gold, silver and commodities with intrinsic value are sunnah money.  The struggle against RIBA is a multifaceted one and the ummah’s strive to re-establish the gold dinar and silver dirham is warranted and a legitimate right action.

The Dinar and Dirham Technical Group

[1] The Dinar and Dirham Technical Group is an informal group of academicians, sharia scholars, lawyers, practitioners, businessmen, college students etc. from the Nusantara, led by Dr Ahamed Kameel Mydin Meera, a professor and Dean at the International Islamic University Malaysia.  The group occasionally meets basically to discuss the DnD intellectually, to determine the DnD standards and their historical role, to describe the true role of DnD in Islamic economics and discuss strategies to actualize the implementation of DnD given the current local and global socio-political and legal conditions.

The Story of the Sukus and the Tukus

There were once two neighbouring islands far away in the oceans. One was called Aya and the other Baya. A certain people called the Sukus lived on the island of Aya . It was a fertile island with lush vegetation and tropical fruits. There were numerous waterfalls and rivers that provided the people with clean water and places for family retreats and recreation. The surrounding seas were unpolluted, with abundant fish and other seafood. The island also had gold and the Sukus, particularly the womenfolk, loved gold, They used pieces of gold as money since everyone treasured gold. Their tribal leadership led by a man named Saka, minted the gold coins. They lived a simple cooperative life and there were no interest charges for lending and borrowings among themselves. Occasionally, some tidal waves and strong winds destroy some property, particularly homes, but the community would immediately help themselves to rebuild or repair the damaged property. Other than that, it was a peaceful community of people who went about their life gracefully.

The Story of Sukus and Tukus

The Story of Sukus and Tukus

The island of Baya , on the other hand, was inhabited by a people called the Tukus. Their leader was an elderly man named Taka. The island of Baya was fertile too and the Tukus were mostly farmers who worked rice fields or kept cows, sheep and poultry. Some of them were good at handiwork and produced a variety of household items. They too lived a very peaceful and cooperative life, mutually helping each other for survival. The Tukus were, however, not so sophisticated as the Sukus, in that they merely did barter trade. The Tukus realized that the Sukus were much wealthier, healthier and had towns that were much more sophisticated than their own. They had always thought that the Sukus were more gifted and superior beings than themselves. Even though they barter traded their goods occasionally with the Sukus they never got the idea of money. However, their women-folk too loved gold, particularly the gold jewellery that the Sukus made.

One day, two smartly dressed men arrived in a ship on the shores of the island of Aya . Their names were Gago and Sago. The Sukus being a very hospitable people welcomed their new guests. Gago and Sago impressed the Sukus with the stories of their extensive traveling. They showed them some gold coins from other parts of the world and also some printed papers that were apparently used by some far-away people as money.

The Sukus had never seen paper before. The paper money even had pictures of bananas on it – their favourite fruit. The two strangers also showed them a machine that prints such money. Wow! That got the Sukus’ attention. There were awed because they had never seen anything like that before. The islanders loved Gago and Sago and invited both to live with them on the island.

Gago and Sago convinced the people that an institution called a bank would benefit the people immensely. They explained that a bank would provide a place for keeping their gold money safe while uplifting their economic conditions by making the savings available to others for productive use, which otherwise would remain idle. The Sukus, being a people who loved to help others, thought that was a great idea. Gago and Sago then built a small building structure with a vault in it and started operating the first bank on the island of Aya .

They celebrated the occasion by giving the islanders a great feast along with a colourful festival of events. The people thronged to deposit their gold coins with the bank. Depositors were given a piece of printed paper for every gold coin they deposited, with the assurance that they could redeem a gold coin for every paper they turned in. The people were excited with the paper “money” they got because it even had a picture of their leader Saka beside a banana tree. No doubt Saka was very pleased too!

The people deposited all their gold coins, a total of 100,000 pieces and hence an equivalent number of pieces of paper were given out. Now the people used the paper as money and found that it was much more convenient than the heavier gold coins that they used before. The paper money printed by Gago and Sago, therefore, became the dominant currency of the island. Nobody used the fold coins anymore. The people were pleased with the ease with which they were able go about doing their businesses. They trusted Gago and Sago very much because each time they brought in a piece of paper for redemption their request was indeed honoured. Gago and Sago became very respected and honoured in their society.

The Tukus who heard about the whole thing became excited and pleaded with Gago and Sago to help them out too. Gago and Sago smile to each other and told the Tukus that they would indeed be very pleased to do so. They then set up a similar building in Baya, and Sago was placed there as the manager. The difference between Aya and Baya was that in Baya the Tukus had no gold coins to deposit. Sago told them that was alright. He would however, give 1,000 paper notes to each family to use as money. Since they were a hundred families in Baya, so 100,000 paper notes were given out. However, Sago reminded them that at the end of the year each family must return 1,100 paper notes, the 10 per cent extra being a charge for the services he was providing. The Tukus found the paper money truly to be like magic. It made their business dealings so much easier compared to their previous barter trade. People spent much less time looking for counter parties to trade with. Now they were able to specialize in jobs they were good at. Their economy began to grow rapidly. Now Gago and Sago decided that the time was ripe for them to do their “trick”.

Gago noticed that in Aya, on average only 10 per cent of the fold deposits were redeemed by the Sukus at any particular time. The other 90 per cent remained in the vaults. Noticing that their printed papers were circulating as money, Gago printed an extra 900,000 certificates to be circulated as money too! Gago had calculated that with the extra papers, a total of 1,000,000 pieces of paper would be outstanding and if the people came to redeem their normal 10 per cent, then the 100,000 original deposit of gold coins would be readily available for redemption.[1] Gago loaned out this extra 900,000 paper money to some “needy” Sukus at an interest charge of 15 per cent.

The Sukus suddenly found that the prices of things were rising. This baffled them and no one could figure out why.[2] Some of them who had borrowed money form Gago were not able to pay back their debt even though they worked very hard trying to earn that extra money.[3] Business became increasingly competitive and the society became less compassionate and less caring towards others than previously.[4]

The Tukus too found similar things happening to them. Initially, they did not notice any price increase but they noticed some behavioural change in their people. They became very competitive in their attitude and less caring towards their fellows. Even with hard work and such competitive behaviour, some of the Tukus still defaulted on their loans. They were not able to acquire enough money to pay back their total debt.[5] Now Sago began to confiscate real wealth from the loan defaulters –like land, cows, sheep, etc. Their elderly leader Taka was among those who defaulted. But Sago gave him and some other Tukus additional paper notes as a rescheduling of their loans. This increased further their indebtedness. Later Taka defaulted again and had his loan rescheduled again. Now Taka began to avoid meetings with Sago. He felt ashamed and found his former power, pride, courage and dignity falling.[6]

On the contrary, he found that Sago was slowly becoming very wealthy by acquiring the people’s assets. In fact, he found that the power, pride, courage and dignity that he lost were now enthroned on Sago.

After a number of years, Gago and Sago who once arrived on the shores of the island of Aya with only a printing machine, were now the owners of most of the land and property in both Aya and Baya. The people were reduced to mere workers, some of them now living in poverty. Many worked long hours just to make ends meet. They now had less time for family, friends or for religious activities. Social problems were widespread.

People cared less for other. It goes without saying that with poverty, other social ills like crime, prostitution, etc. began to thrive. Their cultures were gradually replaced because Gago and Sago introduce a new “superior” culture of a “superior” people to which they belonged. This was the end of the caring and loving people of the two islands Aya and Baya, who had earlier lived a peaceful yet graceful life before Gago and Sago arrived with a printing machine.

Gago and Sago did not stop there. They continued to spread their wings to other peoples and societies. Their ultimate dream is to become the Global Supreme Rulers by establishing a single global bank with single global money.

We postulate here that in the current global monetary system, developing nations would go through somewhat similar events as pictured above.

___________________________________

[1] This is how money is created in the current banking system in aggregate. If the reserve requirements is 10 per cent, then for a deposit of 100,000 a total loan that can be created is given by 100,000/0.10 = 1,000,000

[2] This is easy to see with the help of the equation of exchange, MV = PY. In this example, with the sudden increase in the money supply M, without a corresponding increase in real output of goods and services Y, the prices levels, i.e. P thus tend to increase ( the velocity of circulation, V, is assumed unchanged and constant).

[3] The loan (principle plus interest) is not repayable in aggregate because the interest portion does not exist in the form of money. Notice that the interest of 15% on the 900,000 principal equals 135,000. Therefore the total amount repayable is 1,035,000 but nonetheless, only 1,000,000 exist in total as money in the whole system. Accordingly, some defaults on the loans are sure to take place.

[4] Since interest charge do not exist in the form of money, competition for money therefore ensues, reflected in increase business competition.

[5] Again, this is because there is not enough money in the system as a whole such that debt is not repayable in aggregate.

[6] Imagine that you borrowed RM10,000 from a friend. Do you think your behaviour toward the friend would change, say when you meet the friend in the street? Particularly when the stipulated time for the return of the loan had expired?

Fiat Money and Economic Degradation of the Malays

Abstract

This article argues that the wealth of the Malays in Peninsula Malaysia has been systematically plundered away from them through the interest-based fiat money banking system. This is also true for other Bumiputras that includes the indigenous people of the peninsula and East Malaysia and the early Arab and Indian Muslim trader-settlers. The process has been going on since the first private banks were established in Penang since 1860’s up till now. This has serious socio-economic-political effects for the Malay race, Islam and the country as a whole. Accordingly, the article calls upon the government, NGOs and concerned public to put a stop to this plundering process and thereafter take proactive and affirmative actions to reverse the process in order to establish socio-economic justice by promoting peace and prosperity in the country through an equitable distribution of national wealth among all races.

Fiat Money and Economic Degradation of the Malays

1.0 Introduction

This article demonstrates one aspect of many aspects of fiat money, i.e. how the indigenous people of a nation can lose considerably in the fiat monetary system. A number of nations can be taken as examples to show this. We take the case of Malaysia for this article.

If we notice over the years, Malaysia has transformed tremendously with respect to its socio-economic-political aspects. The Malays who basically owned most, if not all, of Peninsula initially are now very much economically disadvantaged. On the other hand, the Chinese community in particular has been growing in economic affluence relative to other races. The statistics of billionaires in Malaysia attest to this fact. This economic disparity has, in turn, brought about a number of socio-economic problems to emerge within the Malay society – economic distress, poverty, low self-esteem, low academic performance, drug addiction, mat rempit, teen problems etc. Accordingly the government had tried some affirmative actions including the New Economic Plans to address the issue. These brought about some limited benefits but nevertheless the problems are still present and seem ever growing. For the Chinese however, their economic affluence has also gradually been enthroning on them more political representation[1].

This article argues that the above socio-economic-political dynamics as observed in Malaysia are very much rooted in the interest-based fiat money system. It argues that the money and banking system in Malaysia has been much unfair to the Malays and has assisted in the plundering of the wealth of the Malays, that has been going on for about 15 decades now. Basically it argues that the banking system in Malaysia has indeed caused significant socio-economic disadvantages to Malays[2] over the years since the first private banks were established in Penang, in the 1860’s.

1.1 The Objective

This article is based on historical facts and observation of Malaysia over the decades. It is intended to stimulate some thought process, with no malicious objectives like creating racial disharmony. On the contrary, it is hoped that this article contributes towards realizing racial harmony, equitable distribution of national wealth, lower levels of corruption and much reduced levels of socio-economic related problems.

In Section 2 the article reasons why the banking system in Malaysia has brought about significant socio-economic disadvantages to the Malays. Section 3 discusses the soicio-economic-political effects of fiat money system. Section 4 provides some measures the government can take to halt the plundering and reverse the process. The last section concludes the paper.

2.0 Interest-based Fiat Money Banking and the Malays – The History

Malaya was originally inhabited by the orang asli, the indigenous people, and by the Malays[3]. With sultanates scattered all over Malaya, they essentially ‘owned’ Malaya. The orang asli basically lived in the tropical jungles while the Malays lived in kampongs. They lived a simple but gracious communal life, with agriculture and fishing as their main livelihood.

Malaya was a land of ‘milk and honey’. It attracted the early Arab and Indian Muslim traders to this country. Arab traders are known to have come to the Malay Archipelago even since the early 7th century. They are known to have reached Sumatra in 674CE, i.e. just few decades after the advent of Prophet Muhammad (peace be upon him) in Arabia. Indian Muslim traders on the other hand are known to have come to the Peninsula Malaya, particularly to Kedah, since the 12th century. Their influence in the court of the Malacca sultanate is also well documented. Parameswara, the founder of Malacca embraced Islam in 1411. The local Malay community was predominantly agri-based and the business acumen of the Arab and Indian Muslim traders complemented this. Accordingly, the early Indian Muslim and Arab traders had vibrant businesses in Malaya and were much welcomed by the local people due to their common religion, Islam.

The religion of Islam was therefore the guiding and uniting factor. In accordance with Islamic principles, the money used in trade and commerce were real monies – mainly tin ingots, gold and silver coins[4]. Under such real money systems every commercial exchange involved the exchange of a real thing for another real thing, i.e. goods or services, of equal value. Hence this constituted a just and fair exchange system. The precious metals played the role as measures of value in trade and contracts.

Malaya being a peninsula rich in natural resources also attracted colonialists and later Chinese and Indian immigrants. The Portuguese, Dutch, Japanese and English were here at certain times in history, however, the influence of the English was the greatest. The British East India Company first established a British Settlement in Penang, in 1786. Later, Penang, Singapore and Malacca were amalgamated as the Straits Settlements in 1826, with Penang as its capital[5]. They brought in the Indians to work in the rubber plantations while the Chinese mainly for the tin mines, the two main economic activities of that time. Immigration to Malaya was easy because the Malays were simple, tolerant, religious people with high moral values. In real economics, the coming of all immigrants including the Arab and Indian Muslim traders is good since their immigration increased the economic activity and the distribution of the economic pie, all of which increased the economic wellbeing of all.

However, things started to change with the introduction of first private banks in Penang. The Mercantile Bank, which later became a subsidiary of the Hong Kong Bank (now HSBC), set up its business in the 1860’s and Chartered Bank (now Standard Chartered) in 1875. These first private banks issued their own private banknotes. The government had no official banknote issues yet. Only in 1897, when the Board of Commissioners of Currency was established, the Government of Straits Settlements was authorized to issue currency notes. But the notes issued by the two private banks, i.e. the Chartered Bank and Hong Kong Bank, also circulated among the government-issued notes. However the rights to issue notes by these banks were terminated in 1921. In 1938 the Board of Commissioners of Currency Malaya was established with the sole power to issue currency for the whole region. In 1952 the board became Board of Commissioners of Currency Malaya and British Borneo which continued to issue currency even after Malaysia’s independence in 1957. The board was officially closed only in late 1979. Since then currency was issued solely by Bank Negara Malaysia; but however, most money was actually created by the commercial banks through the fractional reserve banking system.

All the above, i.e. the issuance of private bank notes, the Board of Commissioners of Currency and the Bank Negara Malaysia with its fractional reserve banking were all based on interest-based fiat money system and were all detrimental to the economy of the Malays. We argue this in the next section.

2.1 A Principle of Fiat Money – Losing through Seigniorage

One of the principles of fiat money is that the seigniorage of fiat money benefits the first user of the money. Since fiat money is not backed by gold, or anything of value for that matter, it is cheap to produce but carries with it purchasing power created out of thin air. It is this cheaply produced purchasing power that is sought after by counterfeiters of money. However, when banks issue their own currencies, they get this seigniorage. Their issuance of fiat money carries with it purchasing power created by taxing the whole economy through inflation. Not understood by many is the fact that the right to create fiat money effectively places the ownership of national resources and assets, in the hands of the banks. We have argued in Meera (2005) that creation of fiat money itself is riba and that it goes against the maqasid al-Shari’ah. Hence countries can lose through seigniorage if they allow the fiat money of another nation or notes issued by private institutions to be used as money in their land[6].

Secondly, the banks give out the freely created fiat money as loans – to individuals, businesses and government – that carry compound interest charges. And interest is strongly condemned in Islam.

Therefore, when the first banks in the peninsula were established and issued their own private banknotes at interest, most if not all Malays, Arab and Indian Muslim traders[7] did not want to have anything to do with it. However, neither they nor the Muslim leaders put a stop to this activity in their land. In our opinion, this is the biggest mistake made by the Malay Muslim leaders of the time with regard to Islamic monetary principles, the effects of which are so apparent in the current socio-economic-political conditions of the Malays.

2.2 Financial Exclusion and Continuously Reduced Relative Financial Inclusion

The issuance of fiat money at interest by the early banks and authorities totally excluded the early Muslims – Malays, Indian and Arab traders – from dealing with the banks. This was a systemic financial exclusion of the Muslims. Accordingly, we also note that in that period, i.e. late 19th and early 20th century saw an influx of Chinese immigrants into Malaya who were comfortable with the interest-based fiat money banking. Hence, most newly created fiat money went to this group. This phenomenon systematically yet continuously increased the financial inclusion of the Chinese traders while continuously decreasing the relative financial inclusion of the Muslim group. This phenomenon is further accentuated by the fact that the Chinese community has the tendency to circulate money within its own community.

Hence the interest-based fiat money system had, over the decades, decreased the financial inclusion of the Malays, Indian Muslim and Arab traders while at the same time increasing that of the Chinese community. This phenomenon has been taking place exponentially since interest-based fiat money grows exponentially. Hence simply by the structure of the monetary system, relative money and wealth of the Malays, Indian Muslim and Arab traders must have reduced exponentially, while that of the Chinese community increased. Of course, with increased wealth and money, the Chinese community could further expand their business, explore new ventures, send their children for prestige higher education overseas etc. Indeed, most Malays did not even have a bank savings account even until into the 1970’s[8]. This shows the long duration of relative financial exclusion the Malays, Indian Muslim and Arab traders endured.

3.0 The Socio-Economic-Political Effects of the Prolonged Financial Exclusion

Fiat money takes away the wealth of the original indigenous people, in our example the wealth of the Malays, by creating inflation in the system. Accordingly, now after about 150 years since the establishment of the first banks in Malaya, considerable wealth, particularly land, has been transferred away from the Malays. The Malays are now very much economically disadvantaged, with most of them occupying the lower rung of the economy, many even falling into the poverty category. Accordingly, as expected from this, socio-economic problems like unemployment, crime levels, drug addiction, mat rempit, lower academic achievements and other social problems are relatively high among this group. There is a huge gap in relative income and wealth distribution between the Malays, Chinese and others, with the Chinese community enjoying a much higher and disproportionate share of the economic pie. The Chinese community is undoubtedly a hard-working business community but it dominates most commerce and trade very much assisted by the structure of the banking and financial system with only little due to differences in skills, labour productivity or business acumen. Basically, huge wealth transfers have been taking place up till now, simply financed through inflation.

Figure 1 below provides the estimated money supply in Malaysia created by the commercial banks in the form of loans, for the period 1973 to 2011. Note the exponential growth depicted by the graph.

Fiat Money and Economic Degradation of the Malays

The Bank Negara Malaysia data show that the amount of Broad Money, M3, in year 2011 was RM1.24 trillion. Out of this RM53.49 billion was currency in circulation. The difference, RM1.19 trillion is estimated as the amount of existing money created by commercial banks out of thin air, through the fractional reserve banking. In 1973 this amount was only RM6.6 billion, implying an average growth rate of money creation by the commercial banks as being 14.7 percent per annum. The issue here is who were the beneficiaries of all these humongous amounts of money created by the commercial banks? Were the amounts equitably distributed among all races? The manner in which the total money supply is distributed among all the races in the country could indicate to us the level of financial inclusion of each race. The Bank Negara Malaysia perhaps could shed some light on this.

The economic dominance of the Chinese community is also bringing about a gradual increase in their political representation in the country.

3.1 Involvement of Malays and Muslims in Interest-based Financial Transactions

The continuous disadvantage of the interest-based fiat money system to the Malays, Indian Muslim and Arab traders had caused this group to finally be involved in interest-based financial transactions. To be continuously involved in trade, for example, Muslim businessmen still had to deposit and keep their accounts with the banks. Under the fractional reserve banking system, this allowed the banks to give out interest-based loans many times the original deposit amounts to others.

Due to the non-Islamicity of the banks, the ownership and management of banks were naturally dominated by the non-Muslims. Hence Muslims in general, traders or otherwise, became only ‘victims’ of such system. Creation of fiat money cause inflation in the economy, that is borne by everyone irrespective of whether one had any dealings with the banks or not. Therefore, the Malay and Muslim traders while faced with gradual economic exclusion had to, at the same time, bear the burden of inflation. Nevertheless, such prolonged economic exclusion gradually forced the Malays and other Muslim traders to be involved in interest-bearing financial transactions for economic survival purposes. Many started to take loans for housing, vehicle purchase and business financing. Many also started to get employment in banks. In the current banking system, some of the chairmen or chief operating officers of the conventional banks are Malays. They began to basically ‘ignore’ something that is strongly prohibited in their religion.

Expectedly, the Muslims were therefore excited when the first Islamic bank, i.e. Bank Islam, was established in 1983. Nonetheless, not many understood the mechanism of the fractional reserve banking system under which Islamic banking works and how it still continued to be the linchpin for the relatively very low financial inclusion of the Malays, Muslims and the indigenous people.

3.2 The Loan Office – The Kingmaker of the Fractional Reserve Banking System

While the central bank controls the fractional reserve requirement for the commercial banks, it’s indeed the loan office of a bank where money is created out of thin air and distributed to whomever it deems fit. Hence, one can see the politics in banks for the control of the loan office. The authority to create money out of thin air is a supreme power enjoyed by the loan officers; a power that is not even directly vested with the Prime Minister.

As mentioned earlier, some of the top management positions in the conventional banks are held by Malays. However, this or even the ownership of the bank does not matter much. What matters most is who gets the newly created money and this is under the direct control of the loan officers. They are indeed the kingmakers of the fractional reserve banking system.

Accordingly, due to the significant socio-economic-political effects of fiat money, the racial composition of the loan approving officers is of utmost important, even though we may assume that they would act professionally in their job. However, from the earlier days, the number of Malay loan officers would have been very low for Malays and Muslims due to the interest-based nature of banking.

Hence the control of loan office, the tendency to circulate money within the community and the limited liability law, we contend that the Chinese business community got the lion’s share of this freely created money and hence their ever increasing relative financial inclusion. This was indeed the real force behind the rise of the Chinese community relative to other communities and its ultimate economic dominance in the country. However, note that the Chinese community attained this all through legal means.

3.3 Shrinking Economic Pie for the Malays and Others

While the wealth of the Chinese was rising largely assisted by the financial system, the economic pie for the Malays and other races was, accordingly, shrinking. The graph in Figure 1 shows that the trend of this is exponential. This gross inequality in wealth distribution among the races has indeed caused a series of socio-economic-political problems to emerge. We attribute this gap to the occurrence of May 13, 1969 ethnic riot. Even though the Malays maintained their political grip after the event, the inequality in wealth distribution continued to grow under the maintained banking status quo. Indeed most cities and urban areas are now ‘owned’ by the Chinese community. Take Penang for example, while once it entirely belonged to the Malays, now the whole island is practically gone from them. Indeed many Malay public servants, like teachers, are requesting that they be transferred to the mainland because they could no longer afford a decent home on the island. This indeed is a systematic push executed through the banking and financial system. Similar are the stories for Johor Bahru, Kuala Lumpur, Ipoh, and other cities and towns. Note the skyrocketing price of real estates in these urban areas. This phenomenon not only pushes out the Malays and indigenous people away from the urban areas but also erects an unseen barrier of entry; and of course all these have political implications.

3.4 Rise of Corruption among Malay Government Officers

Over the last few decades we also notice complaints from the public regarding rising corruption among government officers who are mainly Malays. We attribute this, also to the imbalance in wealth distribution among the races. This is because while the Malays commanded political power and authority, others had the upper hand in business and wealth – a ripe recipe for bribe giving and bribe taking. The power-welding but economically lesser Malay officer is likely to be tempted to take bribe to match the economic wellbeing of his wealthier counterpart. We are not condoning bribery here. Bribery is indeed an act of betrayal to the nation, where for every bribe-taker there is a bribe giver, both of whom are wrong of the act. It is sad to note that the disparity in wealth ownership had even changed the nature of Malays who once sported high religious and ethical values.

3.5 Affirmative Actions to Counter Imbalance in Wealth and Income

The former Prime Minister, Dr Mahathir Mohamad is well-known to have taken some affirmative measures to counter the economic imbalance between the races, particularly in favour of the Bumiputras. Among which, he sent large numbers of Malay students overseas under the New Economic Plan, under the banner of uplifting the socio-economic status of Bumiputras, with the hope that they would return back with improved educational and socio-economic skills. Indeed this policy paid off and created a respectable pool of middle-income and high-income Bumiputras. Also, he privatized some government entities with the hope of creating some top Malay businessmen who could match and be at par with counterparts from other races, particularly the Chinese, even if not to match them in number.

However, the continuously shrinking economic pie for the Malays and other Bumiputras made the government unable to sustain those affirmative policies. Some Malays and other Bumiputras had to be left out. This appears to have also created some self-centered Malay politicians and rich businessmen who seem to have forgotten their own kind, amassing wealth and economic power for themselves.

3.6 Political Effects

All the above socio-economic effects of fiat money in turn have effects for politics. We assert here that it’s this continued gradual economic deprivation of Malays that has caused many to resort to the opposition political parties, very apparent in the last election, with the hope that these parties would help them overcome their economic woes. But with the current banking structure in place, the opposition parties too would not be able to solve their problems either. The Chinese, on the other hand, went all out for the opposition, not due to economic deprivation but rather it was their one-time life chance to assume more political control that could take them well on their way to achieve political dominance in the country as well.

4.0 Addressing the Root Cause with Proactive and Affirmative Policies

For all the above observations, particularly the socio-economic downfall of the Malays in Malaysia, we would point our finger at the banking sector as the root cause – for creating huge gaps in income and wealth distribution among the races through its unequitable distribution of large amounts of freely created fiat money. Fiat money creation by the banking sector is indeed a humongous ‘give-away’, particularly when given under the limited liability law (please read our article Fiat Money and Interest Groups that appeared in the EDGE, 1 April 2013, p56), compared to the warranted government give-aways to the Bumiputras, that are meant to assist them wade through the tribulations and pressures caused by their economic destitution[9].

It is now time for the government to halt and reverse this trend of gross inequality in national wealth distribution among the races, caused by the banking sector for about a century and half now. The government should take stock of this inequality using data obtainable from Bank Negara Malaysia or otherwise and thereafter take proactive measures. Among the immediate policies we have always recommended is to nationalize all commercial banks in order to immediately halt this destructive trend. Nationalizing banks can also help overcome the government’s budget deficit because money created out of thin air would now be publicly-owned rather than privately owned as is the case in the present setup. This is of highest priority and of paramount importance. This was also the main resolution of the 3rd Annual World Conference on Riba, 2012. In the US, this initiative is being championed by the Public Banking Institute under the leadership of Ellen Brown[10]. North Dakota has public banking and hence is the only state in the US that is not financially distressed in the current economic turmoil in the US.

As to reverse the process, policies could include, for example, officially gazette the use of the government’s oil and gas revenue for assisting the economically-deprived of all races. This would expectedly include a good chunk of Malays, other Bumiputras, Indians and also some deprived Chinese.

We believe that through such policies, the national wealth could be more equitably distributed among all races. This in turn would promote a more stable and vibrant economy, bring back Malay unity, forge racial harmony, significantly reduce bribery, crime levels and thereby promote peace and prosperity for all.  Only when we solve these and accordingly level the economic playground could we then talk about meritocracy and so forth; otherwise with the present dynamics of things, the Malays and the indigenous people would likely be reduced to ‘slaves’ in their own country.

The Malays allowed themselves to be economically dominated even though they have the political power simply because they are highly tolerant people, molded by their religious beliefs. Consider we reversed the roles, i.e. say the country was initially inhabited by another race, and the Malays were immigrants who later assumed economic dominance, would the other race have tolerated that as the Malays have?

In short therefore, the government needs to take proactive actions to ascertain that the wealth of this land of ‘milk and honey’ is more equitably distributed by increasing the financial inclusion of the Malays and other affected ones in order to take this country forward towards achieving its developed-nation status in 2020.

5.0 Conclusion

In summary, the establishment of private banks beginning 1860’s, and later the Board of Commissioners of Currency Malaya, and thereafter the Bank Negara Malaysia with its fractional-reserve-based commercial banking, all of which could issue money out of thin air, started a built-in process of economic ‘ruin’ of the Malays, the indigenous people and the Muslim traders. The introduction of fiat bank notes by the early banks under the interest-based system neither favoured the Malays nor Muslim traders. This is because interest taking and giving are forbidden in the religion of Islam. In earlier days, Muslims did not even want to work in the banks. Accordingly, the banking structure favoured the non-Muslims, particularly the Chinese who comprised a large business community. This tremendously increased the economic affluence and educational levels of the Chinese way above the Malays and other races.

Therefore, the mere creation of fiat money by the above entities caused a systematic shrinkage in the relative financial inclusion of the Malays, the indigenous people and the Muslim traders. Interest-based loans further caused a financial exclusion. This has caused huge wealth transfers away from the Malays financed through inflation, and their economic deprivation up till now. In turn, this has brought about the socio-economic-political effects as we see it in Malaysia today.

It’s now up to the government, NGOs and the people to take the necessary steps to correct the situation.


[1] Indeed, all indications show that in the Chinese expectation the GE13 was to have overthrown the BN government and institute a new government, which would reward the Chinese with a higher political representation taking them towards more political dominance as well.

[2] The arguments presented are also true for other indigenous peoples of Malaysia and the early Indian Muslim and Arab traders who settled in Peninsula Malaya.

[3] The Malays comprised of local people of the Malay Archipelago, who had also intermixed with Arabs, Indians and other races, particularly during the long rulings of Hindu kingdoms in this part of the world. The Sri Vijaya Empire ruled Indonesia, Malaysia and other parts of Southeast Asia for more than 2000 years. However, almost all of them converted to Islam after the advent of Islam to this part of the world, with some pockets remaining Hindu like in Bali.

[4] Coins made of tin, silver and gold were used as medium exchange in trade and commerce in the peninsula. Since tin was a local natural resource, early money was tin ingots, used both domestically and for international trade. The first coins of tin were issued by the Malacca sultanate around 1445 CE. Kelantan had also issued gold coins, also from the 15th century known as Kupang. The kijang gold coins of Kelantan had the motif of the kijang deer embossed on it, which now represents the logo of Bank Negara Malaysia.  Johor too had gold coinage from the 16th century. Kedah had Egyptian gold dinars, Spanish silver coins and Chinese copper coins even as early as the 15th century. Domestically they produced coins of tin, used for smaller denominations. From 17th century Kedah minted its own gold and silver coins. After capturing Malacca in 1511, the Portuguese issued coins of gold, silver and tin-lead alloys. The Dutch too issued silver coins in Malacca. The British East India Company issued coins of copper (1/2 cent and 1 cent) and silver (1/4 dollar and ½ dollar) as mediums of exchange. Hence in summary real money was the norm then in the peninsula.

[5] The Straits Settlements was placed under direct British control as a crown colony in 1867.

[6] Examples include dollarization and the use of Singapore dollar in Pulau Batam or Brunei.

[7] These earlier Muslims were relatively highly religious peoples.

[8] Government officers used to receive cash pay-cheques because they generally did not have bank savings accounts. Only after the government ‘convinced’ them, that there is no riba in it, that they first started to open accounts in large numbers with the Bank Simpanan Nasional (BSN), a government-owned financial institution established in 1974 after taking over the Post Office Savings Bank. The BSN is a development financial institution that does not create money out of thin air through the fractional reserve banking system.

[9] We attribute this fact as one of the reasons for not so effectiveness of the NEP.

[10] The author of the book “The Web of Debt”.

Fiat Money and Interest Groups

The domain of political economy is the struggle for wealth and power.  These two normally go hand in hand; if one has power one can command wealth and wealth can also lead to power.  In time immemorial, mankind has fought countless wars and battles with the intent of gaining wealth and power, i.e. authority over people and control over resources.  If one wins a battle, these two domains are what one basically obtains.

In the present world context, nonetheless, one need not go for wars and battles to get hold of these two domains of political economy.  There is another way though, that is the control or authority over the credit creation of an economy.  This is because in the present global system, money is mostly created out of thin air, in the form of loans.  This new money takes the form of mere accounting entries in the books of commercial banks, and is loaned out to borrowers at interest.  Since this involves the creation of new purchasing power, the loan officer of the bank is indeed being entrusted with a very responsible function within the economy, i.e. to allocate resources of the nation in the most productive, just and efficient manner.  Misrepresentation or abuse of this power would surely end in misallocation of resources, with potentially disastrous consequences in the long run.  This can be very costly considering the fact that allocation of resources in a fiat monetary system is attained by creating inflation in the economy.  Consequences of misallocation can, therefore, be very damaging to the economy, society and the political structure.

Fiat Money and Interest Groups

Keeping in mind that wealth and power are interlinked, this article shows how it is possible to manipulate the fiat money system in order to attain the two domains of political economy, i.e. wealth and power.

In most of human history, money had always been linked to something real, and therefore had intrinsic value of its own.  Gold and silver were the preferred precious metals, against which the values of all other things were measured and exchanged.  Money, as we know it, were simply standard units of these measures of value.  For example, in the near past, 1/32th ounce of gold was made equivalent to one US dollar under the Bretton Woods system; a gold dinar in the Islamic monetary history was equivalent to 4.25 grams of gold and the silver dirham equivalent to about 3grams of silver, and so forth.

Mankind’s linking of money to valuable commodities like gold and silver is a consequence of a learned behavior, i.e. one that ensures fairness and justice in economic exchanges of goods and services, among all people and nations.  In this way, even though money was used in economic transactions, the transactions were essentially barter, i.e. exchange of value for equivalent value, as shown in Diagram 1.

Fiat Money and Interest-Groups Diagram 1

After the demise of the Bretton Woods system in 1971, the entire global monetary system is now on a fiat money regime, i.e. money that is no longer linked to gold or silver.  Fiat money is, therefore, not redeemable any longer for gold or silver from the central bank or the authority that issued it.  Since then, in the current system, paper money (and now electronic money) that practically has no intrinsic value is now being exchanged for real goods and services in the economy (Diagram 2).  People and businesses accept fiat money because, for one, it is made legal tender by the authorities, and two, they know they can exchange it back for other things in the economy.  The problem with fiat money lies, however, with the first use of the money, i.e. the attached seigniorage.  Seigniorage is the benefit obtained from the first use of the fiat money, which is also the benefit derived by those who counterfeit money.  Seigniorage of fiat money is the name of the grand political game that is being played on a global scale.  It has tremendous implications for the economy, society, environment and political power.  Fiat Money and Interest-Groups Diagram 2I will restrict myself to the discussion of only one important implication of this seigniorage of fiat money, i.e. its implications for wealth and power.  We mentioned earlier that loan officers of banks are entrusted with the ultimate power to create money out of thin air and loan it out to those who, in their opinion, would bring about the most desirable allocation of resources.  In this, rests a considerable yet subtle power to control the wealth of a nation.

It is a known fact that every nation has different competing interest-groups, divided along different political affiliations, religious beliefs, ideologies, races or even social classes.  These different interest-groups can indeed use the fiat money system as a tool to attain an upper hand in their struggle for the control over a nation’s wealth and political power.

Amschel Bauer Mayer Rothschild (1838) is reported to have said: “Let me issue and control a nation’s money and I care not who makes its laws”.  This statement underscores how ultimate political power rests within the power to create money.

Accordingly, in the current fiat money system, the ultimate game is which interest-group gets to borrow most money within the limited liability framework; and keep circulating the money within the group, as much as possible.  In this way, therefore, if defaults happen, then the borrower is protected through the limited liability law.  But the money, however, by then would have been pushed into the interest-group and kept circling within it.  Indeed, it is even in the interest of the group to systematically declare bankruptcies.  Hence, over time, significant national wealth would ultimately accumulate within this group, i.e. the group that wins the game of who can borrow the most fiat money from the financial system under limited liability (See Diagram 3).

 Fiat Money and Interest-Groups Diagram 3

An informed interest-group may strategize itself in order to win this game; like even strategically placing its people in decision-making positions within bank loan offices.  Groups that lack strategy or ignorant of this game at all, are bound to lose their wealth and power to the winning group.

Do such games actually take place in the countries of the world?  Is it happening in Malaysia?  Judging from humanity’s struggle for wealth and power throughout history, in my opinion, it would be naïve to believe otherwise.  I tell people, show me the distribution of loan advancements and I will show you the wealth distribution in the nation.  And with wealth comes power.  Hence the interest-group that wins this game would, over time, also accumulate political power.  This can push some groups towards economic and political deprivation, creating inequality including poverty.  This is how, in my opinion, in some countries the wealth of the indigenous people, especially in colonized countries, had been plundered away.  Central banks and authorities who have the data can research on this wealth distribution effect.

Nobel Laureate, Joseph E. Stiglitz, in his latest book The Price of Inequality, argued how such inequality endangers the future of societies.  The seigniorage game discussed earlier is none other than a powerful means for rent-seeking that brings about continuous gross inequality within the subjects and interest-groups within the economy.

Hence it is important, in my opinion, that fiat money be fairly distributed among the different interest-groups in an economy, if equitable wealth distribution and social harmony are desired.  In today’s situation, difference in labour productivity alone cannot explain the wide gap that exists in income and wealth distribution among subjects and also different interest-groups in most countries. Wealth and power, the two domains of political economy, are indeed being transferred unjustly through the inherent ‘flaws’ of the current fiat money system, which enables systematic rent-seeking to take place.

Accordingly, prolonged effects from past decades of the fiat money system have caused serious inequalities to exist in most countries of the world, both developed and developing.  Therefore, a planned correction of wealth distribution is necessary in all these countries.  Few brave leaders of past have done it before.  Napoleon Bonaparte is reported to have pointed out, “Terrorism, war and bankruptcy are caused by the privatization of money, issued as a debt and compounded by interest “.  Accordingly, he cancelled all debt and interest in France, but then had to face the Battle of Waterloo (1815).  Much earlier in history, Joseph (Prophet Yusuf, peace be upon him), as adviser to the king of Egypt, also cancelled all debt in the nation and redistributed wealth among his people.  Jesus Christ (peace be upon him) too is reported to have claimed that he had come to cancel all debt and free all slaves, i.e. to proclaim the Jubilee Year of the Jewish tradition.  But cancelling debt and redistributing wealth is a humungous political task that is easier said than done.

When one analyzes the whole thing, one cannot but conclude that the cause of inequalities that exists in much of today’s societies is rooted in the fact that fiat money, which is a virtual wealth is equated to real wealth.  The world needs to put an end to this; and institute a measure of value and money that is based on something that is real.  Gold and silver can prevent such ‘looting’ of the economy.  Hence linking money back to gold and silver is inevitable to establish a just, stable and sustainable economic system, with equitable distribution of income, wealth and power among the people.  And yes, as Stiglitz puts it, inequality is not inevitable.

 

Malaysia Domestic Debt Issue

Lately some local media, particularly on-line ones, claimed that Malaysia’s domestic debt has risen to potentially dangerous levels that can, in the near future, put the country in a major debt crisis. Here’s one by Ida Lim that was posted in the Malaysian Insider, 24 December 2012.

Economists warn that a rise in domestic debt that has been keeping Asia’s economy strong could place the region, which includes Malaysia, at risk of a major crisis, the Wall Street Journal (WSJ) reported.

Malaysia Domestic Debt Issue

House of Paper Money

Truly indeed, in the present monetary system, both public and private debts do pose problems for any country for both are inherently destabilizing.  This is because most of these debts are created by the banking sector out of thin air that bear compounded interest charges.  Such debt that grows exponentially due to the compound nature of interest is a major cause of inflation in any economy. The article further quotes:

Frederic Neumann, co-head of Asian economic research at HSBC, warned that Asia could be at the brink of a major debt crisis, saying: “I believe we are at the beginning of a major debt cycle in Asia. We are certainly seeing the early symptoms of a debt bubble emerging, and I think it’s worth keeping a close eye on,”

Indeed, this warning is worth taken seriously because it warns of monetary dynamics similar to those experienced by the more advanced economies in recent decades.  Japan, the US and the Europe are all basically in a debt crisis within a liquidity trap.  Others are gradually getting into similar situations, a consequence of having similar fiat money interest-based monetary systems.  Undoubtedly, a massive global monetary meltdown is currently in process.  In our opinion, this is due to a distinct structural flaw rooted within the current global monetary system, i.e. firstly the nature of fiat money itself and secondly the compound interest charge imposed on that fiat money.  Hence, many economists including the author blame the monetary sector, particularly the central banks, commercial banks and investment banks for what is currently happening to the world economies.  Alan Greenspan, the former chairman of the US Federal Reserve had this to say about the flaw:

I had been going for 40 years with considerable evidence that it was working very well.  The whole intellectual edifice, however, collapsed in the summer of last year.

Alan Greenspan, Financial Times, 24 October 2008, p1.

However, most governments, including ministries of finances, are powerless with regard to the international banking operations.  They simply execute policies drafted by higher international banking ‘authorities’, like the BAFIA and so forth.

However ironically, when monetary crises hit, it is the governments who very often get the blame.  Of course the fault is not entirely theirs but perhaps the blame is somewhat justified since most governments do embrace the present monetary system, knowing or oblivious to the system’s shortcomings and flaws.

In the Malaysian case, some quarters have taken the opportunity of the present crisis to criticize the debt levels in the country, particularly the government debt levels.  By the end of 2011, the total government debt level stood at RM456 bil, equivalent to 53% of the nation’s Gross Domestic Product (GDP).  A significant portion of this debt, i.e. RM438 bil is domestic debt (51% of GDP), which are loans obtained from domestic sources.  Only RM18 bil is debt from external sources, which comprises only 2% of the GDP.  Table 1 below provides the breakdown of Malaysia’s total debt for the year 2011.

Government domestic debt is debt of the people, by people, for people; and since in the present fiat money system governments do have the right to print their own money, technically therefore, governments cannot default on their own domestic debts.  Nonetheless, it is important to note that government domestic debts, in the long run, would transfer real wealth from the people to the government, also creating inflation in the process.

Table 1: Malaysia Total Debt 2011 (RM billion)

(Figures in parentheses are percent of Gross Domestic Product)

Domestic

External

Total

Government

438 (51%)

18 (2%)

456 (53%)

Non-Government

749* (87%)

239 (28%)

988 (115%)

Total

1,187* (138%)

257 (30%)

1,444 (168%)

Source:  Economic Report 2012/2013, p138-139. *Estimated using 2011 Broad Money (M3) less currency in circulation.  We used this to estimate total domestic debt since most money is created in the form of loans except currency and coins that are brought forth by the Central Bank.

What is most important to be cautious about, therefore, is the external debt.  This is because external debts are normally denominated in foreign currencies, particularly the dollar, and of course governments cannot print currencies of other countries.  In the case of Malaysia, the total external debt is RM257 bil which is about 30% of the GDP.  Most of this debt is denominated in dollars.  Of this amount, only RM18 bil represents the government’s external debt, which is 2% of GDP.  The rest, i.e. RM239 bil (28% of GDP) is mostly external debt liability of the private sector.  Malaysia’s debt problem is, therefore, rooted more in the private sector debt rather than the public sector debt.

Compare the above Malaysia debt statistics with those of selected countries provided in Table 2 below, presented as percents of GDP.  Note that the total debt of government of Japan, for example, is 226% of GDP while that of Malaysia is only 53%.  Indeed the government debts as percents of GDP for all the countries in the table are higher than that of Malaysia except for South Korea.  The Prime Minister of Malaysia, Dato’ Seri Najib Tun Razak, nevertheless, has iterated that the Malaysia government total debt level would not exceed 55% of GDP.

Table 2: Total Debt in Selected Countries around the World, as percent of GDP

 

Q2 2011

Government

Non-Government*

TOTAL

1

Japan

226

286

512

2

Greece

132

135

267

3

Italy (Q1 2011)

111

203

314

4

France

90

256

346

5

Ireland

85

578

663

6

Germany

83

195

278

7

United Kingdom

81

426

507

8

United States

80

199

279

9

Portugal

79

277

356

10

Spain

71

292

363

11

Canada

69

207

276

12

South Korea

33

281

314

Source:  Global Finance. www.gfmag.com

*Includes debts of nonfinancial business, households and financial institutions

Nevertheless, it is always best to reduce debt levels.  Compound interest charges on debts would ultimately destabilize any economy through loan defaults and monetary meltdowns that result in recessions and unemployment.  The subprime mortgage crisis in the US, the sovereign debt crisis in the euro region, the banking and business bankruptcies are all primarily caused by high debt levels brought about by the structural flaw mentioned.  Such high leveraging is also the major cause of inflation and bubbles in the economy, that is responsible for the growing disparity in wealth and income distribution.

What is more worrying in the Malaysian case, therefore, is not the government debt levels but rather the rising inflation that is sweeping across the globe due to the extraordinary monetary expansion taken by the crisis-stricken Western world, particularly the quantitative easings (QE’s) of the US, that threaten the world with global inflation, or even hyperinflation.

Nevertheless, the Malaysia government’s actions to cut down on debts within the country, by tightening the regulations for home mortgages and discouraging large credit card debts, are indeed commendable.  However, I would like to suggest here some additional measures that I strongly believe that can thwart Malaysia from the domino effects of the current global crisis and push Malaysia towards achieving its high-income-country status goal by 2020.

First of those measures is, nationalize all banks.  This may sound radical, but structural problems need structural solutions.  Today most money is created out of thin air by the commercial banks in the forms of loans.  The problem is, commercial banks of today are mostly privately owned.  Why should billions of freely created money be privately owned; and loaned out on compound interest?  It’s like legally allowing some parties in the country to counterfeit money and lend the money out.  Money created out of thin air should be publicly owned.  The present fiat money system should then be a source of funding for the people, and not regarded as a private right or property.  This measure is not a remote possibility.  It has been proven to work, for example, in North Dakota, where it is the only state in the US that is not faced with financial distress from the current depressing crisis.  In this regard, the Public Banking Institute is championing this cause in the US.  About 20 states are now considering legislating to institute public banking (please see www.publicbankinginstitute.org).

The second ‘radical’ measure is to write off the interest portions of existing loans and require borrowers to pay only the principal portions, back to the nationalized banks.  If the total amount that has already been paid exceeds the original principal amount, then the loan would be deemed to have been already settled.  Again, this may sound ‘terrorizing’ but very sound in principle because this would remove the unduly created debt burden off the economy and thereby get it out of the liquidity trap.  This measure is direly needed in the advanced Western economies that are currently in liquidity traps.  In the case of developing nations, it would be a proactive measure.

The third measure is to encourage electronic payment systems based on interest-free credits.  Such systems encourage trade with minimal cash balances and promote business and employment.  Sometimes called complementary currencies, these are highly effective ways to counter the negative effects of the global crisis and particularly stimulate regional economies.  I strongly recommend governments to consider this measure officially because such payment systems can significantly reduce the need for public and private borrowings while increasing business, employment, profits and tax revenue for the government.  The economies of countries like Brazil and Uruguay are thriving through such complementary currency initiatives.

The fourth measure is to institute a real measure of value.  The global monetary system lacks a stable measure of value.  In international trade and normal business, we exchange goods and services, i.e. exchange values.  However, since the collapse of the Bretton Woods in 1971, there is no reliable and stable measure of value in the global monetary system.  From history we have learned that gold and silver were the most reliable measures of value.  In other words all goods and services should be valued relative to these precious metals.  Most people find it difficult to see the point in this but being sound in principle it would bring about a just, equitable, stable, prosperous, peaceful and sustainable economic system.  It is a gold-and-silver-based monetary system that is most feared by the beneficiaries of the present flawed global fiat monetary system.

Case for Gold Dinar Idea

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.

Case for Gold

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.

Islamic Gold Dinar: The Historical Standard

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 1299 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].

Design of the Dinar and Dirham minted by Caliph Abd Malik ibn Marwan

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.

Surah AlMaidah, 5:3

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

[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.

Compound Interest & Mega Trends – Food for Thought

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.

Growth of Money Exceeds Growth of Real Economy 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.

Data for the Chart in Page 3 above

Data for the Chart in Page 3 above

Dinar Perak vs. Dinar Kelantan

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.

Dinar Perak vs Dinar Kelantan Dinar ObverseTo 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.

Dinar Perak vs Dinar Kelantan Dinar ReverseWith 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.

Gold London PM Fix 2000
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.

Average Annual Gold Investment ReturnNotice 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.

The Value of Peace

In the recent Kongress Profesor Negara held at PWTC, 6 July 2011 to 8 July 2011, Professor Datuk Dr. Shamsul Amri Baharuddin, a social anthropologist and the Founding Director of the Institute of Ethnic Studies (KITA), Universiti Kebangsaan Malaysia (UKM) made a presentation titled “Ilmu Mentransformasi Negara – Perspektif Sains Sosial” that touched on the value of peace.  His eloquence in presenting his arguments prompted me to write this article.  In his analysis of economics of peace in Malaysia he remarked that what exists in Malaysia is not social integration but rather social cohesion, i.e. Malaysians talk conflict but walk cohesion.  The learned professor suggested some kind of early warning system be placed to detect social discontentment and threats to social peace.

I cannot agree less with the professor that at current times we need to give some thought to economics of peace.  With peace, we can enjoy economic activities – both production and consumption. It is common for people to estimate costs of wars and conflicts but seldom do we measure the economic benefits of peace.

The Value of PeacePeace is the priceless characteristic of any society.  If we think deeply, we cannot but come to the conclusion that peace is the ultimate of life.  It is a combination of positive feelings of happiness, calmness, contentedness, love, compassion and harmony with nature, with the absence of negative ones like pain, conflict, hostility and imbalance with nature.  We may attain this peace when the inner self and the outer environment are in balance and harmony.  One who experiences peace would depict a healthy physical and mental state, which needs nourishment from inside and outside, i.e. spiritual and material needs.

The word Salam or the phrase Salam 1Malaysia are greetings that depict peace onto others.  Indeed the word Islam too has its roots in a word that means peace.  “Assalamu’alaikum” which means ‘peace unto you’ is also said to be the greetings of the people of the Paradise.

Ironically with all the rapid economic and technological progress around us, there is less peace and tranquility around the world.  There seem to be more inner and outer imbalance that is causing more pain, hostility, lack of welfare, environmental destruction and so forth.

The Institute for Economics and Peace (IEP), based in Sydney, releases an annual Global Peace Index (GPI), which is apparently the world’s leading measure of global peacefulness.  The index gauges the peace levels in 153 countries by taking into account 23 indicators that include levels of domestic and international conflict, perceived criminality in society, level of violent crime, violent demonstrations, threat of terrorist attacks and militarization.

The cost of absence of peace can be huge.  For example, to prevent just housebreaking we install burglar alarms, keep dogs, pay for security guards, keep lights on when we go for vacations etc.  All these involve cost.  Victims of burglary and violent crimes not only incur economic costs but also psychological costs.  There is also huge public cost incurred for the prevention of crime and maintenance of peace.  This includes costs of maintaining police force, both development and operational costs, costs of judiciary to try criminals in the courts and also costs of prisons that includes operational costs and maintaining the convicted inmates.  Hence criminals incur cost to the society whether they successfully carry out their crime or caught and convicted.

The table below provides the Global Peace Index ranking for selected countries.  Iceland ranked number 1 as the most peaceful country among the 153 countries ranked.  Somalia ranked last.  Interestingly Malaysia ranked 19, i.e. ranking top among the Southeast Asian countries, beating even Singapore that ranked 24.  It is indeed true that Malaysia is a highly tolerant and peaceful country.  This is what among others, attracted immigrants into this country, being blessed with economic prosperity and peace.  For some reason Brunei has not been ranked.  If it were, I believe it would have occupied a respectable rank too.

Selected List of 2011 Global Peace Index

According to the GPI Report, countries of the Arab Spring (not shown in the table) saw drastic drop in their rankings.  Libya (143) for example saw the most significant drop, i.e. falling 83 places while Bahrain (123) and Egypt (73) dropped 51 and 24 places respectively.

What we can learn from the Arab Spring is that “forced peace” cannot last.  Peace must come from within self.  For this to happen, I believe that the basic necessities of life must be guaranteed for the people– food, clothing, shelter, health, education, transportation and religious freedom.  If people enjoy the minimum of these I believe they will not revolt.

The GPI Report contends that for the period 2006-2010, a complete cessation of violence would have resulted in a whopping economic gain of US$37.58 trillion, i.e.  US$12.62 trillion of economic activity redirected from industries that generate or contain violence to other productive industries, and another US$24.96 trillion from additional economic activity generated.  To quote the report:

If the world had been 25% more peaceful over the past year the global economy would have reaped an additional economic benefit of just over US$2 trillion. This amount would pay for the 2% of global GDP per annum investment estimated by the Stern Review to avoid the worst effects of climate change, cover the cost of achieving the Millennium Development Goals, eliminate the public debt of Greece, Portugal and Ireland, and address the one-off rebuilding costs of the most expensive natural disaster in history – the 2011 Japanese earthquake and tsunami.

The Institute for Economics and Peace also reports a general fall in peace globally.  Hence there seems to be a lack of or fall in peace in almost every nation of the world.  There may be many reasons for this observation, but I contend that significantly the cause is rooted in the present-day global monetary system, characterized by fiat money and compound interest.  These characteristics are continuously transferring wealth from the middle and low income groups to the high income group, causing a huge wealth and income gap among the people.  These capitalistic features have now brought the world towards the danger of prolonged economic recession and social unrest.  It is these characteristics that are causing even the advanced nations of the world – like Japan, Europe and the US – to dwindle economically. The younger generation is particularly discontented and is rising up against the ruling powers.

Malaysia too has been observing widening disparity in income and wealth distribution among its people, both inter and intra racial.  I would not blame this on the strength of any one race or the weakness of another, but again significantly blame it on the prevailing monetary system.  As a consequence of colonial monetary policies where money is mostly created by the commercial banks out of thin air, together with the limited liability law, have transferred tremendous wealth away from the people, causing large wealth-ownership gap among the races.  Accordingly, the system has now caused many Malays, the pioneer people of the country, to become economically distressed and hence the apparent dissatisfaction of many Malays towards the ruling government.  Others are exploiting the situation for the political opportunity that comes with it.

In my opinion, this also why BERSIH 2.0 organized by the opposition parties seem to have garnered some support.  The support is not so much for its ideological stand but rather an expression of economic distress caused by the present-day monetary system.  Household debt including credit card debt is rising exponentially.  With continued global recession and threat of hyperinflation, this distress can only worsen.  Of course people must be given avenues to voice their opinions and dissatisfaction, but using street rallies for this purpose does not bring good to the people.  Not only it costs a lot of money to mobilize the police force etc. to contain such rallies, the country would lose a lot from reduced economic activity.  Normally such rallies would also end up in violence, destruction of public property and filthy streets.

To attain general peace, therefore, I contend that the government strives to make every individual to be at peace with his or her self by guaranteeing the basic necessities as mentioned earlier.  This would, of course, necessitates a gradual revamp of the monetary system and redistribution of national wealth to reduce inter and intra racial economic gap.  As a national policy, we may pursue social cohesion rather than social integration where each race respects the language, culture and religion of others, i.e. pursue unity in diversity.  In this way we may enjoy ‘peace in colour’ instead of a homogenous dull.