Challenging Dinarism: The Inefficiencies and Limitations of a Gold-Based Monetary System

Uncover the untold truth behind the debate between Gold and Money in Islam. Discover the compelling case against the Dinarist Movement in this interesting research paper titled "Gold vis-à-vis money in Islam: the case against Dinarist Movement" by Azhar Mohamad and Imtiaz Mohammad Sifat, published in the International Journal of Law and Management. Explore the rich history and cultural significance of the Dinar and the Dirham and delve into the reasons why the Dinarist Movement might not be the answer for a modern Islamic economy. Get ready to be informed and amazed!

The Introduction of Dinarism

The introduction section of the research paper focuses on the topic of dinarism, which is the idea of implementing the gold dinar and silver dirham as a means to stabilize free-float fiat currencies and reduce the frequency of economic crises. The movement has been propagated by various leaders and economists, particularly in Muslim-majority economies, and has been the subject of research from various disciplines such as economics, law, and politics. The paper aims to challenge the notion of the gold dinar and silver dirham being the only Islamically acceptable currency and argues that it is not only economically inefficient but also unrealistic in implementation prospects. The paper uses a combination of literature review, historical analysis, and macroeconomic theories to defend its thesis against dinarism. The paper will discuss the origins of money, the gold standard, and the failure of the gold standard, and then defend the argument against dinarism before offering suggestions for future research.

The Evolution of Money: From Barter to Digital Transactions

The history of money is a story of human ingenuity and evolution from simple barter to digital transactions. The concept of money has been discussed based on either what it is (substance) or what it does (function). The functional approach, which is also the common-sense approach, considers money as a medium of exchange, measure and store of value, and unit of account. This makes trade easier by overcoming the drawbacks of barter, such as the double coincidence of wants. In Islamic tradition, money concept can be divided into two narratives: organic descriptions of historical monetary practice by Muslims and legal discourse on the parameters of money. The legal discourse is dominant in shaping modern Islamic monetary economics. The value of money is considered less important than its function as a go-between in exchanges. Money has undergone various conceptualizations throughout history and its value has fluctuated based on its numeraire function, which is its ability to measure goods and services. The value of money increased as it became a store of value and was made of or tied to precious metals. The 19th century saw the development of fiat money, where money's value was not tied to a precious metal but to the government's promise to accept it as a medium of exchange.

Arguments against Dinarsim

The idea of using dinars and dirhams as a currency is rejected for several reasons in this section. These reasons include debunking common arguments made by Dinarists, challenging the legitimacy of using dinars as an Islamic currency, and arguing against using a specific currency based on Islamic scripture. The arguments range from economic to legal, but most focus on the idea of riba, or interest, which is prohibited in Islam.

Riba and Zero Interest Rate

Zero Interest Rate The issue of riba is central to Islamic economics. To have an Islamic economy, avoiding riba is necessary. This means having a zero interest rate, which metallic coinage has not achieved, while paper money has reached it under certain circumstances. The use of paper money as currency is accepted by Islamic scholars, including Ahmad ibn Hanbal, Ibn Qayyim, and Mufti Taqi Uthmani, who believe that gold and silver are not the only acceptable forms of currency and that there is no explicit scriptural support for limiting currency to metals.

The High Cost of Producing Dinars and Interest Rates

The cost of producing the dinar can result in a high-interest rate. The cost of production includes the cost of physical gold, the cost of transforming raw metal into official coins, and the seigniorage demanded by the state. This makes the effective rate of interest for dinars far higher than that of paper-based fiat money. This systemic flaw inherent in the gold or silver-based coinage system runs the risk of increasing interest rates, which is prohibited in Islamic finance, and could drive good money out of the market. Additionally, the OIC nations switching to dinar and dirham systems also run the risk of wading into gharar, a corollary to the prohibition of usury, which is considered strictly proscribed in Islamic jurisprudence.

The Risk of Coin Debasement in a Dinar System

Coin debasement has historically been a common reason for war financing or in response to external threats. European monarchs and Ottomans were guilty of debasing coin value to finance their courts and personal expenses, leading to the Kopernik's Law conundrum. Kopernik's Law, also known as Gresham's Law, states that "bad money drives out good money." This means that people will hoard the currency that has a higher intrinsic value and spend the currency that has a lower intrinsic value. If a currency has a face value that is greater than its intrinsic value, it can circulate without any problems. However, if the global price of gold increases, the intrinsic value of the currency also increases, providing people with an incentive to hoard the currency and extract the pure gold portion of it to sell on the market. This would result in a decrease in the supply of money and a shift in the interest rate, which would negatively impact investment, increase unemployment, raise the risk of deflation and hinder economic growth.

In an Islamic economy, the implementation of gold coinage is intended to create a zero-interest rate environment, but if Kopernik's Law is invoked, the interest rate will increase and the purpose of instituting gold coinage would be defeated. To avoid these negative impacts, governments might resort to debasing the currency, reducing the metallic content or purity of the coins, but this would further exacerbate the problem.

The Limitations and Challenges of Gold-Based Monetary Systems

The authors discuss the limitations and challenges of gold-based monetary systems. They argue that the independence of central banks in such systems is limited and that monetary policy can be subject to government influence. They also highlight that a gold-based monetary system can result in a decrease in the industrial usage of gold and silver, as a large portion of the GDP may be consumed by the production of coins.

In regard to Islam, the authors discuss the debate among Islamic scholars on what constitutes money. They argue that while some believe gold and silver have an exclusive right to be treated as money, others believe that anything can be money as long as it is accepted by society. The authors also highlight that commodities such as seashells, ivory, fish bones, tea, rice, and even cigarettes have been used as money in the past, but gold and silver rose in popularity due to their physical durability and standardization through government intervention.

The authors of the paper are critical of the notion that central banks are fully autonomous. Despite recent trends towards greater transparency and independence, the authors argue that governments have the final say in monetary policy. They point out that central bank governors are appointed by governments, which makes it unsurprising that monetary policy is often blamed for the failures of fiscal policies. The authors argue that in a gold standard regime, the central bank has limited tools to combat business cycle downturns, stimulate growth, or save for a rainy day. They assert that constant government oversight of the central bank results in the central bank being unable to take decisive action to combat economic challenges.

Defending the Argument Against Dinarism

The authors also argue that a gold standard regime can have negative effects on industrial usage. The coins minted in a gold standard regime can absorb a significant portion of the GDP, which would otherwise be used for industrial purposes. This reduction in the supply of gold and silver for industrial usage could affect a wide range of industries that use gold and silver, including electronics, aerospace engineering, medicine, and glassmaking.

The authors also examine the concept of money in Islam, particularly the belief that gold and silver are the only legitimate forms of money. The authors note that, compared to conventional economics, which has a long history of monetary development, Islamic discourse on money is limited. They suggest that this may be because paper money was not known to classical Muslim jurists when they were codifying major schools of Islamic jurisprudence. The authors then go on to discuss the various approaches to defining money in Islamic fiqh and legal traditions.

The authors argue that, contrary to popular belief, gold and silver do not have an exclusive and divine right to be considered money in Islam. They point out that throughout history, various commodities have been used as money, including seashells, ivory, tea, and even cigarettes. The authors explain that the rise of gold and silver as money was due to their standardization and widespread acceptance, but that this was facilitated by government intervention to regulate their production. The authors also note that some Islamic economics experts and theologians argue that the use of gold and silver as money is not based on divine or religious principles, but rather on social customs and habits.

A Fresh Perspective on Money in Islam

The article argues against the movement to adopt a gold standard in Islamic countries, known as dinarism. It suggests that the primary texts of Islam do not have a definitive theory of money and that classical and modern scholars have varying views on the subject. The paper suggests that a better approach would be to integrate principles from behavioral economics and Maqasid theory in order to address the issues of greed, corruption, and mistreatment in the financial system. The paper also acknowledges that money can exist without being backed by gold or silver and that modern economic realities necessitate a new approach to incorporate paper money within the framework of Islamic jurisprudence. However, the paper also warns against relying on legal loopholes and highlights the political realities that impact the decisions made by Islamic jurists. Finally, the paper argues that the adoption of a gold standard is not practical due to the dependency of Muslim nations on non-Muslim nations in international trade and the absence of a gold standard in international trade.

Don't miss out on this interesting paper. Read it here.

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