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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
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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