This is a very interesting idea for currency exchange rate stability.
The Gulf's currency solution
By Nathan Lewis
May 9, 2008
http://www.atimes.com/atimes/Middle_East/JE09Ak01.html
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
Singa****e. 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 fa****on
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
ex****t 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
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