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Persian Gulf
states, including Kuwait, Qatar, and the United
Arab Emirates, are talking about dropping their
currencies' pegs to the US dollar. Inflation in
these states is spinning out of control, as the
peg causes their currencies to follow the dollar
lower.
They have been somewhat hesitant
about this, not least because of concern over a
viable alternative. They could peg to another
currency, such as the euro, or even the yen, but
pegging to either of these could at some point
create the same difficulties that
the
dollar peg is creating now. It
was not that long ago that the euro was trading at
US$0.87.
Another option is some sort of
currency basket, as is used by Singapore. This is
not a bad solution, as it provides some
diversification among central bankers' errors.
However, in the sort of dollar-led worldwide
inflation that is happening today, typically all
currencies sink together.
Of course, these
countries could try to go it alone, with an
independent currency. But there is hardly any
guarantee that the home-grown central bankers
would be better than those at the US Federal
Reserve or European Central Bank. Smaller
countries have a history of regular currency
crises.
The problem with all these
alternatives is that, at their base, they rely on
some personage like US Federal Reserve head Ben
Bernanke to manage the currency properly. There is
little evidence that this ever happens. Central
bankers always screw up, eventually.
There
is one - and only one - monetary system that has a
history of not screwing up. That, of course, is
gold. One of the most common currencies in the
Gulf region was the gold dinar. Ibn Khaldun, the
14th century Arab genius, wrote that the dinar had
the weight in gold of 50.4 grains of barley, or
4.25 grams. Today, gold dinar coins are still
being produced, in Malaysia. They contain 4.25
grams of gold. The first standardized gold dinar
coins date from AD 698. They contain 4.25 grams of
gold.
Why did people use these coins for
over 1,000 years? Because, when using the coins,
they never ran into problems, like those
governments face today, that would cause them to
adopt another system. These regions are no
strangers to fiat paper currencies. The king of
Persia issued a fiat paper currency in the year
1294, the first paper currency outside of China.
These systems didn't last. You can imagine why.
Faith and superstition could never persist
for 1,000 years. Gold makes good money because it
has the most desirable characteristic of money: it
is stable in value. "And God created the two
precious metals, gold and silver, to serve as the
measure of value of all commodities," Ibn Khaldun
wrote in the 14th century. "For other goods are
subject to the fluctuations of the market, from
which they [gold and silver] are immune."
Five hundred years later, the great steel
baron Andrew Carnegie wrote, "The one essential
quality that is needed in the article which we use
as a basis for exchanging all other articles is
fixity of value. The race has instinctively always
sought for the one article in the world which most
resembles the North Star among the other stars in
the heavens, and used it as 'money'."
Gold's monetary value is stable. When you
see the "price of gold" soaring today, you are
witnessing the decline in value of currencies
worldwide. A currency pegged to gold, even if it
is made of paper, is also stable in value. Paper
currencies are pegged to gold in a fashion that is
very much like an automatic currency board. In
effect, there is a currency board linked to gold.
There are probably too many people in the
world for everyone to use gold coins. That is one
reason paper currencies, linked to gold, were
invented. However, for a smaller region like the
Persian Gulf states, it would be possible to use
gold coins in daily transactions. The 4.25 gram
gold dinar is worth a little over $100 today.
Wouldn't it be interesting to pay a Dubai hotel
bill with gold coins? Token silver coins,
redeemable for gold dinars on demand, could be
used for smaller transactions. Bank transactions
would remain electronic, but bank reserves could
be redeemed for gold bullion on demand. Paper
money would cease to exist in the Gulf states.
The Gulf states are uniquely suited for
this change because their main export is oil. They
don't have to worry as much about the "competitive
disadvantage" that results when the US dollar or
other major currencies are devalued. Governments'
desire to avoid this "competitive disadvantage" is
why major currencies typically decline together,
causing inflation everywhere. Of course, the Gulf
states would be paid for their oil in dinars -
dinars linked to gold.
In 2003,
then-Malaysian prime minister Mahathir Mohamad
proposed a pan-Islamic gold dinar currency. It's
time to revive that idea. If the Islamic states
form a currency bloc based on gold, and stick with
it, before too long the gold dinar would become
the world's most popular currency.
Nathan Lewis is
the author of Gold: the Once and Future Money,
(2007), now available in five languages.
Formerly an economist serving institutional
investors, he runs an investment fund in New York.
His website is: www.newworldeconomics.com.
(Copyright 2008 Asia Times Online Ltd. All
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Speaking
Freely is an Asia Times Online feature that allows
guest writers to have their say.
Please click
hereif you are interested in
contributing.
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