Currency of the Caliphate
The Caliphate’s currency is based on the gold and silver standards where the coins and notes in circulation are 100% backed by gold and silver. Islam did not leave any question unanswered, especially questions concerning the complexities of economic life. The Shari’ah has therefore defined the Islamic currency as gold dinars and silver dirhams along with their corresponding weights in gold or silver. The Shari’ah rules related to money such as zakat, blood money (diyah) and hoarding all specify values in gold and silver.[1]
Unlike the paper standard operating in the world today, the Bait ul-Mal (State Treasury) is not allowed to print any money unless it has the corresponding amounts of gold and silver in its reserves. This means the persistent inflation found in the world today would not exist in the Caliphate as the currency always keeps its value.
To illustrate this point when the UK operated the gold standard in the 19th and early 20th century its price level in 1914 was the same as in 1816.[2] However, after abolishing the gold standard and operating a purely paper currency, the UK faced persistent inflation with a yearly increase in the price level. Over a fifty year period from 1948 to 1998 the price level was 19 times higher in 1998 than in 1948.[3]
Nowadays, it’s impractical to actually use gold and silver coins for transactions as happened historically, so paper banknotes and copper, nickel and zinc coins would be used for day to day purchases. However, these paper notes and metal coins must be 100% redeemable at any time in to their corresponding amounts of gold and silver, with a small administrative charge to cover the minting process.
The Caliphate operates a bi-metallic standard with gold and silver currency circulating within the economy at the same time. This means the Caliphate is in fact operating two separate currencies.
At the time of the Messenger (saw) and the Khulufa’a Rashideen (Rightly guided Caliph’s) the Muslims traded with gold and silver by weight. They did not mint a distinct currency for the state and instead used gold and silver in many forms. They used Byzantine Dinars and Persian Dirhams as well as gold dust, ingots and jewellery. The traders would weigh the gold and silver, and value it accordingly. This continued until the time of Caliph Abdul-Malik ibn Marwan in 77AH, when he began minting Islamic dinars and dirhams in their Shari’ah weights of gold and silver.
When the future Caliphate is established it will take some time before the old currency notes and coins in circulation e.g. Pakistani PKR’s or Indonesian IDR’s, can be completely abolished and replaced with minted dinars and dirhams. This is not a problem as long as the Caliphate from day one makes the PKR or IDR 100% backed by gold or silver.
A simplified example of how this would work is as follows. The Caliphate calculates the total value of its gold and silver reserves and then fixes their value to the total amount of PKR’s or IDR’s in circulation as best it can. Depending on its reserves it may decide to link the existing currency in circulation to silver and then issue a separate currency for gold or vice-versa.
The current market rate for silver is $18.12.[4] A silver dirham is 2.975g in weight. An Islamic dirham is therefore worth approx. $1.90, PKR 132.57 or IDR 17,511.70.
The current market rate for gold is $934.00.[5] A gold dinar is 4.25g in weight. An Islamic dinar is therefore worth approx. $140.02, PKR 9,762.19 or IDR 1,289,493.11.
Therefore silver is a better choice for small to medium transactions whereas gold is more suited for medium to high transactions, especially in the short term before the Caliphate mints a new currency that formally replaces PKR’s or IDR’s in circulation.
Since Allah (swt) has blessed the Muslim Ummah with an abundance of wealth and natural resources increasing the gold and silver reserves of the state is not a problem. The Caliphate will immediately price all sales of oil, gas and other resources in gold and silver and therefore break the link between these resources and the dollar. The international money markets would be forced to deal in gold dinars and silver dirhams since the west’s addiction to oil will continue for many years to come. Interestingly at the time of writing the oil price is $144.18 and a gold dinar is worth $140.02. A barrel of oil therefore equals roughly 1 dinar.
As regards the practicalities of minting notes and coins, what monetary units should be produced and designs etc., these are all styles and up to the Caliph to adopt as he deems best for the economy.
The gold dinar (4.25g) is the monetary unit of the Islamic State's gold currency. The dinar can be sub-divided in to 1000 fulus. Historically fils (p. fulus) was the name given to copper coins. Today the name fils will mean gold coins that are divisions of a dinar.
The silver dinar (2.975.g) is the monetary unit of the Islamic State’s silver currency. The dirham was historically divided into 100 piastres in the Ottoman State. Piastres are therefore silver coins that are divisions of a dirham.
The following tables show examples of how gold dinars and silver dirhams can be minted by the Caliphate for use in everyday transactions. It also shows the current levels of the Zakat Nisab (limit over which zakat must be paid). The fils and piastre are small enough for purchasing everyday items such as bread and milk. The table uses four currencies for illustrative purposes: US dollars, UK Pounds, Pakistan Rupees (PKR) and Indonesian Rupiah (IDR).
Unlike the paper standard operating in the world today, the Bait ul-Mal (State Treasury) is not allowed to print any money unless it has the corresponding amounts of gold and silver in its reserves. This means the persistent inflation found in the world today would not exist in the Caliphate as the currency always keeps its value.
To illustrate this point when the UK operated the gold standard in the 19th and early 20th century its price level in 1914 was the same as in 1816.[2] However, after abolishing the gold standard and operating a purely paper currency, the UK faced persistent inflation with a yearly increase in the price level. Over a fifty year period from 1948 to 1998 the price level was 19 times higher in 1998 than in 1948.[3]
Nowadays, it’s impractical to actually use gold and silver coins for transactions as happened historically, so paper banknotes and copper, nickel and zinc coins would be used for day to day purchases. However, these paper notes and metal coins must be 100% redeemable at any time in to their corresponding amounts of gold and silver, with a small administrative charge to cover the minting process.
The Caliphate operates a bi-metallic standard with gold and silver currency circulating within the economy at the same time. This means the Caliphate is in fact operating two separate currencies.
At the time of the Messenger (saw) and the Khulufa’a Rashideen (Rightly guided Caliph’s) the Muslims traded with gold and silver by weight. They did not mint a distinct currency for the state and instead used gold and silver in many forms. They used Byzantine Dinars and Persian Dirhams as well as gold dust, ingots and jewellery. The traders would weigh the gold and silver, and value it accordingly. This continued until the time of Caliph Abdul-Malik ibn Marwan in 77AH, when he began minting Islamic dinars and dirhams in their Shari’ah weights of gold and silver.
When the future Caliphate is established it will take some time before the old currency notes and coins in circulation e.g. Pakistani PKR’s or Indonesian IDR’s, can be completely abolished and replaced with minted dinars and dirhams. This is not a problem as long as the Caliphate from day one makes the PKR or IDR 100% backed by gold or silver.
A simplified example of how this would work is as follows. The Caliphate calculates the total value of its gold and silver reserves and then fixes their value to the total amount of PKR’s or IDR’s in circulation as best it can. Depending on its reserves it may decide to link the existing currency in circulation to silver and then issue a separate currency for gold or vice-versa.
The current market rate for silver is $18.12.[4] A silver dirham is 2.975g in weight. An Islamic dirham is therefore worth approx. $1.90, PKR 132.57 or IDR 17,511.70.
The current market rate for gold is $934.00.[5] A gold dinar is 4.25g in weight. An Islamic dinar is therefore worth approx. $140.02, PKR 9,762.19 or IDR 1,289,493.11.
Therefore silver is a better choice for small to medium transactions whereas gold is more suited for medium to high transactions, especially in the short term before the Caliphate mints a new currency that formally replaces PKR’s or IDR’s in circulation.
Since Allah (swt) has blessed the Muslim Ummah with an abundance of wealth and natural resources increasing the gold and silver reserves of the state is not a problem. The Caliphate will immediately price all sales of oil, gas and other resources in gold and silver and therefore break the link between these resources and the dollar. The international money markets would be forced to deal in gold dinars and silver dirhams since the west’s addiction to oil will continue for many years to come. Interestingly at the time of writing the oil price is $144.18 and a gold dinar is worth $140.02. A barrel of oil therefore equals roughly 1 dinar.
As regards the practicalities of minting notes and coins, what monetary units should be produced and designs etc., these are all styles and up to the Caliph to adopt as he deems best for the economy.
The gold dinar (4.25g) is the monetary unit of the Islamic State's gold currency. The dinar can be sub-divided in to 1000 fulus. Historically fils (p. fulus) was the name given to copper coins. Today the name fils will mean gold coins that are divisions of a dinar.
The silver dinar (2.975.g) is the monetary unit of the Islamic State’s silver currency. The dirham was historically divided into 100 piastres in the Ottoman State. Piastres are therefore silver coins that are divisions of a dirham.
The following tables show examples of how gold dinars and silver dirhams can be minted by the Caliphate for use in everyday transactions. It also shows the current levels of the Zakat Nisab (limit over which zakat must be paid). The fils and piastre are small enough for purchasing everyday items such as bread and milk. The table uses four currencies for illustrative purposes: US dollars, UK Pounds, Pakistan Rupees (PKR) and Indonesian Rupiah (IDR).
Gold Dinars
A visual representation of the Caliphate's gold dinars is available here.
1ounce gold = $934.00
1g gold = $32.95
Source: NY Gold Market. http://www.kitco.com/ 4th July 2008
Please note gold prices change on a daily basis.
Silver Dirhams
A visual representation of the Caliphate's silver dirhams is available here.
1oz silver = $18.12
1g silver = $0.64
Source: NY Silver Market. http://www.kitco.com/ 4th July 2008
Please note silver prices change on a daily basis.
[1] Abdul-Qadeem Zalloom, ‘Funds in the Caliphate State,’ translation of Al-Amwal fi Dowlat Al-Caliphate, Al-Caliphate Publications, 1988, p. 169
[2] Begg, Fischer, Dornbusch, ‘Economics,’ 8th Edition, Mcgraw Hill, 2005, p. 591
[3] Robert Twigger, ‘Inflation: the Value of the Pound 1750-1998,’ ECONOMIC POLICY AND STATISTICS SECTION, House of Commons Library,’ 1999
[4] NY Silver Market. http://www.kitco.com/ 4th July 2008
[5] NY Gold Market. http://www.kitco.com/ 4th July 2008
5 comments:
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Salaam,
Wouldn't the lack of gold decrease the distribution of wealth?
So is the gold currency's value based on the amount of people that use it.
For example, if there is total of 10 gold and 20 people, gold would be worth twice as much, but in contrast if there is 5 people, gold would be worth twice less.
Also, does this currency make it worse or better for stopping money laundering.
Because as you wrote, the money would have to represent the gold but if there is more paper money in the market, wouldn't it still decrease the value of the paper money?
For example, I'll go to the bank to convert my paper money into gold and I get my gold.
Some other person goes and gives illegally printed money and receives the gold.
I go again to get more gold but its not there! because it was given to the criminal. So i'm out of money while he is not >.<
AK says
In answer to your questions.
Q. Wouldn't the lack of gold decrease the distribution of wealth?
A. The lack of Gold or the decrease in the amount of Gold would not have a huge impact on wealth distribution but more on prices. Wealth distribution is decided more by the spending and consumption patterns of society as well as the rules any nation has on hoarding wealth etc.
An increase in Gold at a rate more then national production would lead to inflation, whilst a decrease in Gold would have the affect of reducing prices.
One of the key characteristics of the Gold standard is that gold has an intrinsic value internationally and is recognised by all peoples. Since the Caliphate will have most of the world resources then other countries will be forced to use gold. Over time more and more countries will adopt the gold standard. When comparing the prices of goods in gold over the past few hundred years the prices have remained relatively stable. Therefore gold's value is intrinsic and not based on the amount of people that use it, although supply and demand will influence the value to some extent but not as much as you mentioned.
Q. Because as you wrote, the money would have to represent the gold but if there is more paper money in the market, wouldn't it still decrease the value of the paper money?
A. The same technical measures the west uses in preventing money laundering will apply in the Caliphate. Domestically with the power of the Islamic value permeating society crime will be much lower than in the individualistic, athiestic west.
Abdussamad says
I remember seeing a show on the BBC that praised the non-inflationary nature of gold. It compared the amount you could buy with gold today and found it was the same as in Roman times.
However when I pointed it out to my father he told me that didn't that actually point to the decreasing value of gold because the world was a lot more productive today? He was right of course. The reason why gold was not as valuable as it should be is because people keep their wealth in fiat currencies.
So the point is that if gold is made the legal tender then you can buy a lot with it. But doesn't that mean that there is no longer an incentive to improve productivity?
Because if you can improve productivity and produce more with the same amount then you can earn more gold in the short term. But in the long term because the supply of gold is limited the value of gold will rise (while that of your goods will fall) and you will not really profit from becoming more efficient. So what is the incentive for a business to grow?
Adnan says
RE: Abdussamad
I think wealth is being confused here with money
money is a means to measure wealth, a unit of account, it is not wealth in itself
Wealth is created by the development of productive hard assets such as land, property, products etc, which are then sold for a profit. Wealth is increased by increasing production i.e. you produce more good and services and sell them for a profit. each time you exchange there needs to be currency (gold) so the transaction can happen.
I would argue is the world more productive, More financial services, entertainment, consultancy, insurance etc are produced today manufacturing and agriculture contribute much less to the world economy today than in the past.
In regards improving productivity, well every individual will want to increase their wealth, the amount of gold in circulation has no bearing on that, as long as the amount of gold in the economy circulates in an unristricted manner there will be no problem
Yousuf says
Without going into the rigmarole of money, wealth and all its implications, or wether it is practicle to switch to Gold and Silver standards, a million $ question arises:
Whether the Petro rich Sheikhs or the Islamic Dictators From Morroco to Indonesia will be willing to give Khilafat and its incurring benefits to Muslim masses a chance to regulate their lives according to Sharia against their own Onipotent Malik,Amir,and Sheikh and dictatorial egos in order dream of Righflly Guided governance can usher in Millat Islamia.