FCN 1/06/98
Perspectives
toward
an
Islamic Gold Standard
by Cedric Muhammad
-Guest Columnist-
What is a Gold Standard? A gold standard is a fixed definition of the value of one unit of currency in terms of a certain weight of gold. For example, the U.S. gold standard in 1934 was that one dollar was equal to 1/35 of an ounce of gold. In other words, $35 equaled one ounce of gold.
A dollar is an example of a unit of currency and since dollars are used for counting purposes, the dollar is a unit of account. Every economy must have a stable and reliable unit of account, if people are to enter into contracts with one another. It is particularly important to have a stable unit of account or currency if the contracts that people are entering into are over long periods of time. This is true because if people don't know what the value of their own currency will be 10 years from now, they will be discouraged from entering into contracts that will take place over a 10-year period. Unstable currencies hurt real-estate purchases in particular because most mortgages are over long periods of time.
The maintenance of a unit of account is the most important aspect to a gold standard because it generates trust. By giving a legal definition of what a dollar is, the government proves that it does not intend to cheat the people. Well, from 1717 to 1914, the Bank of England maintained a gold standard; from 1914 to 1971 the United States maintained a gold standard. When England and the U.S. went off the gold standard it marked the first time in thousands of years that the world did not have its major countries linked to gold or silver or both.
From 1971 to the present, the world has witnessed the worst-ever fluctuations in the value of its currencies. These fluctuations are called inflation when the value of the currency diminishes in terms of gold and deflation when the value of the currency increases in terms of gold. The arena in which the disastrous effects of inflation-deflation are most clearly manifested is in the banking arena where loans are made. If you had taken a loan out when one ounce of gold cost $600 and paid back the loan when one ounce of gold cost only $300, then you paid your loan back in dollars that are much more valuable than the ones you borrowed. You have just become the victim of deflation.
If, on the other hand, you took out a loan when one ounce of gold cost $300 and paid it back when one ounce of gold cost $600, you paid back the loan in dollars that are much less valuable than the ones you borrowed. Your bank has just become the victim of inflation. If the value of one ounce of gold had been fixed at $400 dollars during that same time period, you would not have had to worry about inflation or deflation, because the dollars you used to pay back the loan would be the same value as the dollars that you borrowed.
Unfortunately, the above scenario is not fiction, it actually occurred in the early 1980s when gold went from $600 an ounce to $300 an ounce. It was the banks that profited from this period of deflation. No matter who the debtor was attempting to pay off, the result was the same-they were crushed by the fluctuating value of the U.S. dollar. It is important to remember that since every currency in the world is tied to the dollar, these disastrous effects spread around the world.
For years many have called for the U.S. to return to the gold standard. Ronald Reagan considered it but never signed an executive order that would have instantly re-linked the dollar to gold. Many believe that it will take another financial panic to get America and the world back on the gold standard. Some believe that even a stock market crash wouldn't do it. But with the year 2000 approaching and the European Economic Community uniting all of Europe under one currency, the Euro, and with the Asians openly discussing the need to unite and possibly form an economic bloc, the call for stable currencies is being made again. Surprisingly, it is not the Christian West making the most recent attempts to pull the world into currency stability. It is from the world's one billion-member Islamic Community where the loudest cries are being heard.
In 1997 when the Muslim nation of Malaysia's currency, the ringgit, fell, Prime Minister Mahathir Bin Mohammed publicly blamed George Soros, one of the world's largest currency speculators for causing the fall of his country's currency. (A currency speculator is a wealthy investor who places large bets on which direction, up or down, the value of a country's currency is headed. Sometimes the bets are so large that they, in and of themselves, force the currency's value to go down or up). He also blamed the practice of currency trading, calling it "unnecessary, unproductive and immoral." He added, "It should be stopped, it should be illegal."
In addition to Malaysia, the Muslim nation of Indonesia also suffered an enormous fall in the value of its currency due to currency speculation and trading. These currency fluctuations have caused billions of dollars and many jobs to be lost. But, is it possible to end currency trading, as Prime Minister Mahathir Mohammed has suggested? Yes, according to economist Jude Wanniski of Polyconomics, Inc.
Mr. Wanniski, a current advisor to 1996 Republican Party vice-presidential nominee Jack Kemp, told The Final Call, "It is possible to end currency trading, but only if the whole world is on a gold standard. If the whole world is on a gold standard, you essentially have one currency. Karl Marx said it best when he said that, when the world is on a gold standard then each currency is like a different suit of clothes on the same body. If we could get all the currencies of the world linked up to each other then there would be no need for currency trading.
Mr. Wanniski's point stresses the main strength of the gold standard-its stability. In the gold standard there are no major fluctuations that can be exploited by the speculating activities of men like Mr. Soros as well as the big industrial and financial interests of this world. It is this concept of stable money that is being called for throughout the Islamic world.
Dr. Muhammad Umer Chapra, economic adviser to the Saudi Arabian Monetary Agency, wrote of the importance of stable currency values in his book , "Towards a Just Monetary System."
"Stability in the value of money should be an indispensable goal in the Islamic frame of reference because of the unequivocal stress of Islam on honesty and fairness in all human dealings. The Qur'an unequivocally stresses honesty and justice in all measures of value. � These measures apply not only to individuals but also to society and the state and need not be confined to conventional weights and measures. They should encompass all measures of value. Money also being a measure of value, any continuous and significant erosion in its real value may be interpreted in the light of the Qur'an to be tantamount to corrupting the world because of the adverse effect this erosion has on social justice and general welfare."
Chapra also notes the role of money as a unit of account and warns of the dangers of inflation: "Inflation implies that money is not able to serve as a just unit of account. It makes money an inequitable standard of � payments and an untrustworthy store of value." In fact Prophet Muhammad (peace be upon him) himself warned of the dangers of this type of inflation or instability in commodity values nearly 1,400 years ago.
Inflation-deflation is known as Riba al-Fadl in the Islamic world and it is prohibited. By establishing an economic bloc under a gold standard, the Islamic nations of the earth could eliminate currency fluctuations and establish the interest-free banking system that the Qur'an mandates.
(Cedric Muhammad is a New Jersey-based writer and a frequent contributor to the Final Call.)
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