We ask its authors several questions.
1. Why a report about the Gold and Silver standard now?
The world financial markets are in crisis. Growth is declining, there are questions about whether the Eurozone will continue, and the US deficit and budget shortfall is at record levels. Markets have failed to recover from the 2008 crisis. In this environment western governments are resorting to money printing of fiat (paper) money as the only solution to keep the system afloat. This debauchery of their currencies is theft against the people via inflation of the currency. Solutions need to be presented and debated. We are attempting to show how the Islamic economic system provides practical solutions which economists and thinkers (from both the Muslim and secular worlds) can understand. We are also presenting 10 common arguments against the gold/silver standard which are most often presented and we are refuting these.
2. Surely economic development under the fiat money system has been stronger than with gold/silver during history?
This is a common misconception. However when one considers that the Industrial Revolution, a sustained period of unprecedented economic growth, took place between 1700 and 1850 during the implementation of the classic Gold Standard such an erroneous understanding is easily laid to rest.
3. One of the key arguments against the gold standard is its deflationary effect. How can this be overcome?
As our analysis in the report shows, deflation is not an inevitable consequence of implementing the Gold Standard. When the gold standard was implemented in the world economies in the sixteenth and seventeenth centuries there were as many periods of modest inflation as there were of modest deflation. Modest deflation of itself is not necessarily a bad thing as it raises the purchasing power of money, benefiting consumers and investors. Deflation raises international competitiveness of locally produced goods and services benefiting exports and discouraging imports. While companies may find it difficult to make profits through raising prices, deflationary periods encourage innovation, creativity and cost cutting, thereby boosting efficiency and productivity. In contrast, inflation has been significantly higher in periods of fiat paper money.
4. The history of gold and silver in the Muslim world is well known. Are you arguing for its return in the Islamic world only? What about the West?
It is worth noting that the gold and silver standards were implemented in the West previously and in fact were the dominant system of currency over many hundreds of years. We highlight this in the report and show that inflation and deflation rates during times of the gold standard were far lower and more stable than during times of fiat/paper money. Since the US took the world off the Bretton Woods system in 1971 – where all currencies were tied to gold via the US dollar – the price of gold expressed in US$ has grown massively from $35 per ounce to $1,600 per ounce this shows the extent to which the paper currencies are depreciating. It is organised theft of the wealth of the common man. There is no reason why it should not return globally, and after the current financial/banking crisis may well do so.
5. Is the gold standard really practical in today’s age with instant electronic money transfers and the huge numbers of financial transactions throughout the modern, sophisticated economy?
The electronic transfers and even electronic money is possible with the gold/silver standard, including all transactions that deal with real money. All that is required is that gold is the primary basis of the currency. Vaults, periodic clearance, and all other techniques to enhance trade and mobility are possible with the gold standard, just as it was practiced until recently.
6. How can the Muslim world implement the gold standard when the rest of the world is on the fiat standard?
The transition to the gold/silver standard could be effected through a phased approach. Where existing currency is benchmarked with gold and transactions continue with existing currency until minting is sufficient to roll out new currency as required. The important issue is that the currency is fully (100%) backed by gold and silver.
7. How can the government stimulate economic growth and jobs if, as with the gold standard, it cannot print money?
Governments resort to printing money when money is not circulating in an economy for invariably there tends to be sufficient wealth in any economy – but it happens to be in the hands of people who are unable or unwilling to spend it or invest it. The Islamic government encourages the circulation of gold and silver which will ensure that people spend or invest their wealth and savings while those who have the initiative to invest have ready access to funds. Islam categorically prohibits the hoarding of wealth and the taxing of unused wealth (zakat) acts as a strong incentive for investment and the circulation of wealth. It must be noted that Allah has put into man an innate drive to survive which means he/she will always strive to progress which is the key to economic growth and jobs.
8. Is there enough gold in the world to cover all the trade and services taking place
The answer is Yes. It is due to shortage that the gold standard was abandoned, but rather due to the discipline that the gold standard demanded. Gold in all previous times, up to the end of the 19th century, was sufficient for all trade activities and covering all world economic needs throughout all eras without the occurrence of economic or financial problems. Throughout the 19th century, the world witnessed a great increase in goods and services and a great reduction of prices and increase in wages without shortages in the quantity of gold currency. That which concerns people is not the real increase in currencies, but rather their purchasing ability. Whenever the goods and services existing in the market increase while the quantity of circulating currency remains steady, this leads to the currency unit capable of buying a greater quantity of goods and services. If the world were to return to the gold standard then currency prices and their relation to each other will be determined by gold, thus making all currencies in the world virtually one currency resulting in the inability of speculation with it. And since virtually all the gold that has been mined throughout history is available today, the shortage is not in question.
Sidepoint: As for the valuation of gold/silver in terms of dollars, this is speculative, and given the massive leverage, the price of gold is hugely undervalued. So evaluating whether or not gold covers current transactions is often misplaced, as what matters is its purchasing power in the real economy.
9. If the Islamic state does not have sufficient gold to cover its own business how would it deal with this issue (buying more gold is not always guaranteed in this situation as each state will keep its own)
Gold and Silver are commodities. As such they have a daily price and can be bought and sold on various markets every day. The reality will depend on which area of the Muslim world the Islamic state first returns to, but depending on existing reserves more reserves can be bought. The Muslim world has much wealth some of which is currently in gold and silver and much is in other commodities, like oil for example, which can be sold and gold bought with the proceeds.
10. Would other resources e.g. oil, gas and uranium be considered beside the gold, if yes then why insist on a gold standard, if no, how would you convince the world about it as oil and gas for example, are more useful for human beings.
There is a difference in Islam between property which can be owned by individuals and the notion of money (an official government medium of exchange). So although oil, gas and other minerals or precious metals can be owned by the public (but not mines) they do not meet the criteria as a medium of exchange. The Shara’ requires that the State manages the money of the state and there is ample evidence from the Quran and the Sunnah stipulating that the money in the State will be gold and silver. For example it is reported that the Prophet (peace and blessing be upon him) said: “The weight (gold/silver measurement) should be that of the people of Makkah”.
So while people can own and trade resources the official money of the state is gold/silver. As gold/silver has an intrinsic value at all times it can be used to purchase other useful assets like oil, food, clothing, etc. Oil, gas, and uranium although useful in industry are totally inappropriate as money because they are not fungible (divisible and easily exchangeable). Gold and silver is fungible and most importantly is stipulated by Islamic law.
Convincing the world about the gold standard is perhaps easier than convincing them about any other standard. Not surprisingly it has been the longest used and the most successful system. Our current inability to envision an alternative is mainly due to the positive misconceptions about the fiat standard.