E-Letter To Sonia Kolesnikov and United Press International (UPI) Re: "Gold dinar could soon be reality"
Your article, "Gold dinar could soon be reality," is just one of several recent signs of an economic evolution that has been underway for sometime - one that I have been watching closely for nearly a decade.
That members of the global Islamic community - the ummah - are looking to the precious metal gold, as a means of stability and definition in economic transactions should come as no surprise to students of history. The idea of a fiat currency, or a paper currency backed by nothing is anathema to Islam. In the time of Prophet Muhammad (Peace Be Upon Him), 1,400 years ago, the Islamic world was actually on a bi-metallic standard of gold and silver - established at a "par" of 15 units of silver to one unit of gold.
The United States and Britain were on the very same standard, until the 19th century, and by default, so was the entire world. The ratio was eventually moved to 16:1 prior to silver's eventual demonetization. And when both countries, in sporadic fashion, in the 19th and 20th centuries left the bi-metallic and gold standard, the world (with the qualified exception of China which continued to use silver), which had tied, pegged or fixed its various currencies to these two great economic powers, moved away from the use of precious metals as a unit of account. That was a mistake or error depending upon whose opinion you trust.
In the mid to late 1960s, around the time that the London gold pool disintegrated, Nation Of Islam leader, the Honorable Elijah Muhammad wrote the following about that fateful decision:
...The English pound and the American dollar have been the power and beckoning light of these two great powers. But when the world went off the gold and silver standard, the financial doom of England and America was sealed.
The pound has lost 50 per cent of its value. America's dollar has lost everything now as power backing for her currency, which was once backed by gold for every $5.00 note and up. All of her currency was backed by silver from a $1.00 note and up.
Today, the currency of America is not backed by any sound value, silver or gold. The note today is something that the government declares it will give you the value in return but does not name that value. They definitely are not backing their currency with silver or gold.
That is the number one fall, and it is very clear that the loss of power of the American dollar means the loss of the financial power of America. What will happen, since there is no sound backing for her notes, We do not know.
What should we expect even in the next 12 months under the fall of the power of America's dollar? This means that we have 100 per cent inflation. What could happen under 100 per cent inflation? Your guess is as good as mine. The power of gold and silver was once abundant in America. But the touch of the finger of God against the power of so mighty a nation has now caused the crumbling and fall of America.
Any Muslim and student of economic history could recognize the Honorable Elijah Muhammad's spirit and prescience on this subject. His words exemplify the guidance of Muhammad of 1,400 years ago, and embody sound economic principles and a forecast that absolutely has been proven to be true.
Muhammad of 1,400 years ago warned Muslims against currency speculation and inequality in barter stating, "...Gold for gold, silver for silver but only if it is like for like." The Prophet of Islam warned against defining money according to one standard at the onset of a transaction and then devaluing that standard at a later point in trade. When the United States and Britain left the gold and silver standard that is exactly what they did. As an example, the same ounce of gold that cost $42 in the early 1970s cost $416 at the end of 1996. And only from the time period from 1971 to 1974 the price of an ounce of gold quadrupled, and with it, the price of oil. This time period also saw the fulfillment of the accurate prediction of the Honorable Elijah Muhammad of 100% inflation.
But the problems since the gold and silver standard ended have not just been with inflation. Monetary deflation has also been a problem as a result of the rapid decrease in the price of gold over very short periods of time. In fact, the most steep monetary deflation just occurred from 1996 through 1999 as the price of gold fell from over $400 per ounce to near $250 per ounce. This means that if a person borrowed dollars in 1996 they had to pay them back with more valuable dollars than the ones they borrowed, relative to gold. This means that debtors lose as creditors win. This rapid fall in the price of gold is also a signal that dollar liquidity is becoming more and more scarce and that the price of other commodities around the world will also be falling. True to form, the world has witnessed, since 1996, the worse fall in the price of commodities like cotton, copper, cocoa and sugar, in history. This of course hurts the poor and economically developing nations in Africa, Asia, and Central and South America, who literally depend upon trade from the riches of the earth for sustenance.
In 1997, the deflationary process took a turn for the worse for Asia when Thailand's currency, the baht, could no longer maintain its peg to the U.S. dollar. This event caused a chain reaction, in Southeast Asia in particular, that saw the currencies of Indonesia, Korea and Malaysia dramatically fall in value, relative to the U.S. dollar. The debacle involving Malaysia's currency, the ringgit, was initially the most controversial (eventually surpassed by Indonesia) because Prime Minister Mahathir Mohammed charged that currency speculators like George Soros were responsible for the fall of his country's currency. In any event, Asia got the message loud and clear, that instability in the currency - a country's unit of account, medium of exchange and store of value - is a recipe for disaster. They also learned at that time, that the close to 30-year tradition of blindly tying a developing country's currency to the United States dollar, in a post-gold standard environment, had reached the point of diminishing returns.
Therefore it should come as no surprise, as your article notes, that it would be Prime Minister Mahathir who would be spearheading this effort to gradually bring gold back into the international trade picture among Muslim nations. The Prime Minister has also advocated the same for the countries of Asia, who also have an affinity for the use of gold.
While I think your well-written article properly frames the gold dinar initiative as an idea that is in a very humble development stage, being discussed primarily by two Islamic nations - Malaysia and Iran - I do think that you should consider that all over the Muslim world, there is a growing recognition that the misfortunes of the ummah are as much a byproduct of its deviation from the economic guidance and principles contained within the Holy Qur'an and the words of Prophet Muhammad (PBUH), as it is of imperialism, colonialism and "capitalism." I have especially noticed this increasing admission in the last 5 years.
The key insight in this process, in my view, is the Muslim world's recognition that currency fluctuations and the world of fiat currencies and floating exchange regimes are a form of usury. The Muslim world, Islamic bankers and economists and many other people in the world, regardless of religion, commonly understand usury to be a fixed sum of interest tacked onto a principal amount of a loan, that must be paid back regardless to the economic return or nature of the use of the borrowed money. Laws abound throughout the world that center around this definition. In Islam this form of usury is called Riba al-Nasi'ah.
But there is another form of usury in Islam, that of interest in the barter, exchange, or selling of commodities of the same kind, in a transaction that occurs over time. Money, as non-Muslims like Aristotle and Karl Marx have accurately noted, has commodity properties as well as those that are purely financial in nature. When money is changed - bought and sold; when currencies are traded in foreign exchange markets and derivatives markets; and when speculation occurs on the future value of a monetary unit; money is behaving and being used like a commodity. This places money out of the category of usury in the context of a loan, and into the second definition that Prophet Muhammad gave of usury that pertains to barter. That definition of interest is referred to as Riba al-Fadl. Once the Muslim world broadens its view of usury and connects it with that of currency manipulation and mismanagement, it will have the insight necessary to move toward an Islamic gold standard.
That insight, I believe, will come from the region of the world that has only most recently received Islam - the Western hemisphere.
In February of 1998, Minister Louis Farrakhan, carrying the mantle of his teacher, raised the idea and possibility of an Islamic gold standard - whereby all of the nations of the Islamic world would tie their currencies together in a monetary union establishing one currency backed by gold. As far as I can document, through audio, videotape and written statement, since the departure of the Honorable Elijah Muhammad in 1975, Minister Farrakhan has been the most prominent and consistent advocate in the Muslim world, for a return to a stable unit of account. The Minister has periodically, publicly and very beautifully articulated the benefits of a gold standard that would accrue to the entire world, through either the return to such by the United States of America or, through the establishment of a gold-backed currency in the Muslim world. I have one videotape of a younger Minister Farrakhan doing so, relative to the United States Of America, in 1979!
In the winter of 1999 I had a three-hour dinner conversation with Nobel Prize economist, Robert Mundell, who in the late 1960s, only a couple of years after the Honorable Elijah Muhammad, essentially predicted the same negative effects concerning the United States' departure from the gold standard. In our dinner which took place in Florida, we covered the gamut of Islamic monetary history from 1,400 years ago to the present. I won't go into all of the details of the conversation, at this time, other than to say that I can assure you that there is considerable respect for what Minister Farrakhan has advocated among eminent economists; and enormous interest and excitement over what the Islamic world could establish and represent if it accepted a responsible economic leadership role and returned, in principle, to the monetary standard that was established by the Prophet 1,400 years ago.
I hope that you will continue to follow this developing story and include the perspectives of economists and Islamic leaders in the United States.
For your next article why not seek to interview Minister Farrakhan and Robert Mundell?
You may be surprised by what you learn.
Keep up the good work.
Thursday, November 21, 2002