Imad-ad-Dean Ahmad
Minaret of Freedom Institute
delivered to the American Muslim Social Scientists in Chicago on Oct. 30, 1998


Economic arguments are marshaled to support the gold standard which was the practice of the Prophet (saws), all of Islamic society during its first four hundred years, and most of civilized society throughout history.
Several years ago I made a presentation before Muslim economists meeting at the World Bank at which I presented arguments for what I considered to be the correct Islamic position on a number of fundamental economic issues. Referring to my call for a return to the gold standard, one of the economists asked me why I was for ijtihâd on every issue except that one. He didn't understand that ijtihâd means to struggle for a correct opinion on an issue. It does not necessarily mean rejecting an ancient tradition. In this particular case the ancient tradition happens to be correct. Far from being a "barbaric relic" (as John Maynard Keynes characterized it, gold is the natural monetary commodity which Allah has provided us for an equitable monetary policy free from the arbitrary or self-serving manipulations of central banks and politicians.

In this paper I shall outline the economic arguments as to why the dinar is indispensable for an Islamic monetary regime. My goal is only to emphasize the importance of the issue, not to make an exhaustive treatment. Thus, I shall not address important related issues like financial intermediation, forward transactions or interest. (See, however, Ahmad 1996.) Finally I shall make a suggestion on how a transition may be possible and timely.

Indonesia and Malaysia had thriving economies, but suffered from external deficits and a fragile financial sector. Analysts trace the origins to the crisis in Asia to the Chinese and Japanese currency de-valuations. The Mexican currency crisis was the final trigger in confidence problems. The disagreement between Prime Minister Mahathir Mohamad and former Deputy Prime Minister Anwar Ibrahim over whether to deal with the crisis in Malaysia with currency controls or free markets has since taken an extremely ugly turn (see Johnson 1998). It is not the currency speculators who are responsible for the Malaysian crisis. They merely sought to cash in on the unsound, and, as I shall argue, harâm monetary policy that made the ringgit an unreliable currency. A government which blames speculators for the consequences of its unsound monetray policy is like a rancher who, having slaughtered his cows on the open plains, blames the vultures for descending on their carcasses.

The monetary problems in both Malaysia and Indonesia have led to political problems. Various solutions proposed are partial solutions. One must attack the fundamental issue. If we go back to fundamentals we can see that the only complete solution is an Islamic monetary system, that is, hard money. The otherwise strong economies of Malaysia and Indonesia, combined with the low price of gold at this time, put them in an unusually good position to make a transition if they can muster the political will, or failing that the religious enthusiasm, to do what our religion mandates anyway.

Let us begin by reminding ourselves of the origin of money. Primitive societies engage in barter. Depending on the particular society, certain commodities eventually become accepted in trade by people who have no immediate need for them because they become aware that others who need them will accept them in trade. The fact that such commodities possess certain "monetary" qualities: a high store of value, divisibility, recognizability, etc., increases their market value because their monetary utility augments the value arising from their other social uses. They never suffer from a crisis of confidence because people know that even if they lost their utility as a kind of promissory note, they would still have some value in themselves.

In the time of the Prophet, gold, silver, hard wheat, and a few other commodities served a monetary function. Gold and silver were the best of these and in the early centuries of Islam they were the bimetallic standard of the Islamic world. Because the exchange rate between them was stable there was no problem abiding by this standard for 400 years. Then, the exchange rate between them departed from parity providing an opportunity for the mint to issue debased currencies. Ashtor (1976, p.257) describes how the vizier of the Ilkhan Gaikhatu's experiment to fund deficit spending in 1294 by issuing "paper money, modeled on the Chinese paper currency ... was a complete failure, as the people refused to accept the bank notes. Economic activities came to a standstill, and the Persian historian Rashid ud-din speaks even of 'the ruin of Basra' which ensued upon the emission of the new money."

The door to debasement opened in the next century when the silver to gold exchange rate suffered its first serious change since the rise of Islam. In the early centuries of Islam the rate had always been around 20:1. In the thirteenth century changes in the market led scholars to speculate that the rate had changed to 10:1, but the official rate remained fixed at 20:1. "The stocks of silver in the mints decreased progressively from about 1380.... Whereas the exchange rate of the dirham had for 130 years been 1/20 dinar, that of the debased dirham was 1/25 and later 1/30 dinar" (Ashtor 1976, p. 305). The "main reason was the increased demand in Italy, where the value of silver had risen considerably at the end of the fourteenth century.... At the beginning of the fifteenth century the striking of silver dirhams was discontinued altogether" (Ibid.) Al-Mikrizi blames a high court dignitary who tried to "enrich himself by the striking of copper coins" (Ibid.). The monetary crisis was accompanied by famine and a lengthy civil war. High taxes were levied to equip the armies against repeated revolts.

Interest rates rose from 4-8% during the crusades to 18-25% in the fifteenth century (Ibid., p. 324). Although "the supply of gold from the Western Sudan was never interrupted," Sultan Barsbay in 1425 devalued the dinar "for the first time in the history of the Muslim Near East" (Ibid.). Until then the dinar had always been a gold coin of approximately 4.25 grams. With the devaluation a 3.45 gram dinar called al-Ashrafi "remained the gold coin of Egypt until the end of Mamluk rule" (Ibid.). This was the weight of the European ducat, evidence for the swing in monetary standards away from the Muslim world to the rising Christian West. (Ahmad 1996.)

The stability of hard currency is not appreciated by the general populace. People look at the inflation which has hit even the dollar to varying degrees thorughout this century and forget that a high quality suit of clothes which cost ten dinars a century ago still costs ten dinars today.

People have come to think of "currency" as "money" though they are extremely different. Historically, currency may be actual money (coins) or tokens redeemable in coin. Very recently, currencies have been issued not redeemable in anything. For example, the Federal Reserve Notes most of us have in our wallets have for some decades been payable not in gold or silver coin, but in Federal Reserve Notes of other denominations.

Under Allen Greenspan the Federal Reserve Board has pursued a tight money policy that has succeeded in easing down America's serious inflation problem, but not without cost. Greenspan's usually prudent judgement has been coupled with fortuitous good luck that will last only as long as God wills. All-too-human manipulation is evident, for example in the Long Term Capital Management debacle bailout. An artificial "sound money policy" is no substitute for natural, I would say divine, monetary regime manifested in a hard money subject to market forces.

Money supply sometimes needs to expand or contract according to the exigencies of the times. The supply of gold money can expanded naturally through additional mining or the meltdown of jewelry. It can contract through the diversion of coins into jewelry or other products. The difficulty involved in money supply adjustment is natural and controlled by God. Soft currencies (tokens, paper) are all too subject to the manipulations of governments seeking to engage in deficit spending or bankers seeking to increase their interest revenues through fractional reserve banking.

Some Muslim economists, for example M.A. Choudhury (1997) have noted the superiority of hard currency but only as an element in their campaign against interest. The absence of hard currency is a detriment to the long-term stability of an economy apart from its complicity in the manipulation of interest rates. (Note that soft money permits manipulation of interest rates down as well as up.) Historically interest rates have tended to be much lower when and where the gold standard was adopted than otherwise. The sixty percent interest rate in Malaysia is not unusual given the weakness of the currency. The six percent mortgage rates which American perceive to be "low" today (compared with the double-digit rates in the 1980's) is actually very high compared to the previous century when the gold standard ruled.

Some economists have accepted the demonetization of gold despite their opposition to interest. Chapra (1985) writes: "Although inflation has been a continuing phenomenon, gold prices have fluctuated in a volatile manner after its demonetization due to international speculative forces and gyrations in the rates of interest. Silver prices have suffered the same fate. Both these precious metals cannot hence serve as units of account." Chapra has accepted the circular reasoning that because gold is not used as a unit of account it cannot be used as a unit of account. In fact the opposite is the case. If the one billion Muslims of the world would use gold as their unit of account the volatility (after an initial surge due to the shock of so many people readopting the monetary commodity) would stabilize.

Muslims cannot escape the fact that gold is our money. Even if we pretend that it is not, we continue to use it in calculating the nisâb. Instead of fighting the will of Allah, I propose that we embrace it. The fact that gold prices are currently so low is not a reason to avoid it, but rather an unprecedented opportunity to adopt it since we can buy it while the price is low.

Unless one uses a hard currency as a unit of account, it is only a matter of time until a disaster strikes the economy. Usually the villain is inflation as the money supply exceeds the demand. The expansion of the money supply by the government or the banks constitutes a form of fraud. It is akin to counterfeiting for it uses an increase in the overall price levels to subsidize the purchases of the creators of the excess currency. The distortions introduced into the system hit hard at the recipients of fixed incomes. They also tend to subsidize holders of the higher orders of production (e.g., land) the values of which rise faster than the mean of other price levels. Occasionally the money supply may contract too quickly leading to depression.

Apart from the political obstacles to adopting a gold standard (the unwillingness of banks and politicians to give up their ability to manipulate the supply of currency), there are several economic obstacles. One is the fear of volatility expressed by Chapra. This fear is ill founded for the reasons given above. Another is the argument that the Muslim countries do not possess much gold. This is certainly NOT the case for Lebanon and Saudi Arabia. But in any case, it is irrelevant. A country like Malaysia which doesn't possess a large store of gold but which has goods and services to offer can acquire gold through trade. Money is STANDARD. Ibn Khaldun pointed out a long time ago the fallacy in the notion that a society is wealthy because it possesses a large quantity of monetary commodities. He noted that the Sudan has more gold than the more prosperous countries of the east. Further, he argued that the prosperous eastern nations export much merchandise. "If they possessed ready property in abundance, they would not export their merchandise in search of money...." (Ibn Khaldun 1967). Ibn Khaldun understood that a surplus of money would result in a cash outflow, and correctly argued that a high level of (net) exports argues against this being the situation.

Again the essential point is that money is a standard. Currently, the American dollar is the standard. Although really an unbacked fiat currency, it is treated as hard currency because people have confidence. This confidence is not completely unjustified since although the United States makes no promise of redemption it has assets, both liquid and fixed behind it. The United States owns enough gold to buy back 21% of M2 (a measure of the total money supply). A 100% reserve in a monetary commodity is not necessary if one has ample total collateral to maintain confidence. Thus the Islamization of the money supply of a Muslim country can take place in stages. The first is simply to adopt the dinar as the MEASURE even before one has the backing in gold provided one does not distribute more promissory notes than one has in all types of backing. Further, one can use the current advantageous low price of gold to institute an initial spread in the buy and sell price of the dinar. For example, the official price of the ringgit is 26 cents, but the black market price is lower. Let us assume a true market value of the ringgit of 20 cents. One could replace it with a dinar, which could be minted for approximately $30. Ringgits would be retired over a period of six months to two years. During that period they would be bought at a rate of 150 per dinar or at the official price of gold at the official ringgit exchange rate, which ever is LESS. Over the retirement period the value of the ringgit would presumably drop against the dollar as holders seek to get rid of them while the price of gold may go up against the dollar as the adoption of a gold currency might fuel speculation of a return of the gold standard. This means that the new Malaysian currency (the dinar) would RISE in value against the retiring currency AND against the world standard of the dollar. Further, sales of the new coin could be marketed to numismatists and to Muslims around the world to generate dollar and other foreign currency income to aid the financial crisis. After the transition period the country would be forced into monetary and fiscal discipline not by the IMF, but by the God-given discipline of the dinar.

A more detailed and lengthy treatment of the transition mechanism beyond the suggestion offered here is needed, but is beyond the scope of this paper. Such a treatment would include a discussion of the monetization of other commodities (e.g., land, oil, rubber) and how one might effect such monetization while retaining the dinar as the unit of account. Such approaches would be of interest to those policymakers who understand the reasons why commodity currencies are an indispensable element for preventing fraud in banking and public policy, but fear that mandating convertibility into gold would somehow benefit gold-mining countries. Although Ibn Khaldun has shown that this fear is unjustified (it would, on the contrary, open up new trade between gold-mining countries and the countries adopting the gold standard), the existence of such concerns is a political fact of life that must be addressed. Nonetheless, the point of this paper stands that it is no accident that commodity currencies are successful in yielding "sustained macro-stability." I have never been keen on following tradition simply because it is tradition. The case for following our Islamic heritage on these matters is moral as well as utilitarian. The difficulties of finding an effective and sound monetary policy are obviated in Islam by the monetary regime of the Dinar.


Ahmad, Imad A. 1996, "Comprehensive Development of Muslim Countries: An Interdisciplinary Approach from an Islamic Perspective," Minaret of Freedom Institute preprint series #96-4.

Ashtor, E. 1976, A Social and Economic History of the Middle East (Berkeley: Univ. of California).

Chapra, M. Umer 1985, Towards a Just Monetary System (Riyadh: The Islamic Foundation).

Choudhury, M.A. 1997, Money in Islam: A Study in Islamic Political Economy (London: Routledge).

Ibn Khaldun, Wali ad-Din 1967, The Muqaddimah: An Introduction to History, Franz Rosenthal, trans. (Princeton: Princeton Univ. Press), p. 282.

Johnson, Ian 1998, "How Malaysia's Rulers Devoured Each Other and Much They Built," Wall Street Journal, v. 232 #87. 30 Oct. 1998: A1.