$5.5 Trillion Reasons for the “Gold” Standard
Earlier this month, US President Biden signed a $1.9 trillion COVID relief bill. In December, outgoing US President Trump had signed $1.4 trillion government funding deal.
If we include the $2.2. trillion CARES Act that was passed in March 2020, the total amount of these spending bills will be $5.5 Trillion. How are they able to spend so much?
As we will, in sha Allah, discuss, it is because the US abandoned gold backed currency in 1971.
Currencies and American Control
In the past, a country’s currency would be based on the amount of gold it had in its reserves. Whenever countries would trade with each other, they would transfer gold as a method of payment.
In this way, the country’s currency would increase or decrease depending on how much gold remained in its reserve.
In 1944, the Bretton Woods conference changed the way currencies would be valued. Rather than have each currency matched against their gold reserves, they would be matched against the US dollar.
In 1971 under the Nixon administration, America completely severed the link between its dollar and gold. John Connally Jr. (Nixon’s Treasury Secretary) told (in 1971) a group of European finance ministers: The dollar is “our currency, but your problem.”
And it is indeed a problem: with gold no longer backing the US dollar, currencies no longer had intrinsic value but only a legally imposed one. In other words, it would only be a piece of paper with no worth unless its citizens and other countries agreed to hold value to it.
The fiat currency (i.e.: currency made legal tender by sanction and neither backed by, nor necessarily convertible into, gold or silver) has a major part to play in the financial crisis we see today.
This currency is open to government manipulation in the pursuit of the national interest. With no limit on the amount of dollars being printed, the US government can essentially pay its way out of debt with money created out of thin air.
As with any commodity, too much supply in the market will decrease the value of the currency leading to inflationary prices. With so many currencies pegged to the US dollar it is impossible for this to remain an isolated event.
The Hukm Regarding Currency
When it comes to exchanging a commodity with a specific monetary unit, Islam has guided us to the gold and silver standard. It has restricted the Islamic State to using this standard when engaging in transactions.
This specification could be deduced from several matters:
When Islam prohibited the hoarding of wealth, it was specifically related to the hoarding of gold and silver despite the fact that wealth includes any property that can be owned.
The prohibition in the verse refers to the hoarding of money, since it acts as the generally accepted medium of exchange, and because the hoarding of money is the issue that causes the target of the prohibition i.e., restricting circulation. The verse has specified the money which Allah (swt) has prohibited us to hoard which is gold and silver, and only these two commodities.
Allah (swt) says:
“And those who hoard gold and silver and do not spend them in the way of Allah, let them know that a severe punishment is awaiting them” [TMQ 9:34]
Therefore, the prohibition is focused on the monetary medium of exchange, which makes the hoarding of gold and silver forbidden, whether it was minted or not.
Islam has linked gold and silver to a set of fixed rules. For instance, when it imposed the Diyyah (blood money), it specified a fixed amount of gold. Also, when it decreed the penalty of cutting the hand of the thief, it specified the minimum value of gold that is stolen and would entail the cutting of the hand.
In his letter to the people of Yemen, the Prophet (saw) was reported by An-Nisai to have said:
“The blood money for one soul would be 100 camels…and for those who deal in gold it would be 1000 dinars.”
Bukhari also reported on the authority of Aisha (ra) that the Prophet (saw) also said:
“The hand is cut for the theft of one-quarter dinar and upward.”
Therefore, the fact that Islam has linked the Shari’ah rules to gold and silver by text, when these rules are related to money, serves as evidence that the currency is solely restricted to gold and silver.
The Prophet (saw) has determined that gold and silver be used as money, and exclusively made them the monetary measure to evaluate goods and services.
He (saw) ensured that all transactions were conducted with them as their basis. All trade and marriage transactions were conducted in gold and silver, in their quality as money, and this has been established in the Sahih Ahadith.
When Allah (swt) decreed the Zakat on money, He (swt) made it obligatory in gold and silver, and He (swt) determined a Nisab (amount) for the Zakat in gold and silver. Therefore, to consider the Zakat on money as being in gold and silver would establish that currency is gold and silver.
Is There Enough Gold in the World?
The gold existing in the world is enough to return the global economy to the “gold” standard.
Gold has sufficient flexibility to produce the money required to cover trade and other economic needs in the world for the following reasons:
Throughout human history, no metal has ever enjoyed an interest similar to gold. All that has been mined in the past centuries continues to be used today, as it does not perish with time.
Rather, all that occurs is its exchange in the form of currency or jewellery, or in some other form of manufacturing or re-melting.
Gold in all previous times, up to the end of the 19th century, was sufficient for all trade activities as it covered all of the world’s economic needs. Throughout the 19th century, the world witnessed a great economic growth and a great reduction of prices and increase in wages without any shortages in the quantity of gold currency available for use, despite the increased volume of goods.
Whenever goods and services increase while the quantity of circulating currency remains steady, it enables the currency unit of buying a greater quantity of goods and services.
The opposite is also true i.e. if the quantity of goods and services decreases while the quantity of a currency remains steady, the currency unit’s purchasing ability i.e. its ability to buy goods and services decreases.
Whatever the case, the circulating currency may be sufficient for currency exchange, no matter how much of it is in circulation.
What appears to be a visible shortage of gold is only due to the prevailing global inflation. If the world were to return to the gold standard, gold would no longer be used for trade speculation.
Rather, the use of gold would be restricted to trading transactions and economic needs. As a result, stability and discipline would return to currency prices.
This is because currency prices and their relation to each other will be determined by gold, thus making all currencies in the world virtually one currency which will lead to the inability of speculation with it and reduce the profits of trading with gold. This will lead to an abundance in gold thereby its shortage will disappear.
Advantages of the Gold Standard
When a state adopts the gold standard, it uses the gold currency in its foreign and domestic transactions. It uses the gold standard, even if it used paper currency as long as the paper currency can be exchanged for gold and this exchange is fixed i.e. a specific unit of paper currency can be exchanged for a specific amount of gold.
This would bring stability to the exchange rates between countries, as gold cannot be manipulated like the fiat currency. This will increase international trade and reduce trade barriers.
Businesses which are dependent on imported commodities do not have to fear that these commodities will become too expensive as a result of their currency devaluing.
Businesses which export their products do not fear their commodities becoming too expensive for the destined countries as a result of the increase in value of their currency.
It would remove the problem of inflation, as gold is a scarce commodity. The money supply cannot be increased at the will or whim of a government. The prices of goods and services may still increase as a result of gold coming into the state due to a high level of exports.
This will lead to economic growth, which would mean more locally produced goods and services being available, which would counterbalance the extra gold coming into the state. As long as the state allows the free circulation of gold (i.e., import and export) then there will be financial and economic stability.
Today, international trade is hindered because of the lack of hard currencies. Many of the currencies are considered too weak and volatile for international trade.
Globally, most transactions are carried out in US dollars. However, even in times of war the dollar is not stable, since it is only a fiat currency having no intrinsic value.
It is only gold (and silver) that is a truly stable currency. It is only through the bimetallic standard that these barriers to international trade can be removed.
It is only the Khilafah state, carrying the ideology of Islam that will adopt such a standard. Moreover, the Shariah has made it an obligation to implement the gold (or silver) standard.
When the Khilafah state returns it will adopt the gold and silver standard, thus transforming the current international money markets and prevent any single country from imposing its will on the monetary markets.
Our Deen Has Been Perfected
As Muslims, we need to not only inform ourselves but to teach others of this Deen that Allah (swt) has perfected for us since it is not only a mercy for the Muslims but for all of mankind. Allah (swt) says:
“This day, I have perfected your Deen for you, completed My favour upon you, and have chosen for you Islam as your Deen.” [TMQ 5:3]
In Ibn Kathir’s tasfir he explains:
“This, indeed, is the biggest favor from Allah to this Ummah, for He has completed their religion for them, and they, thus, do not need any other religion or any other Prophet except Muhammad. This is why Allah made Muhammad the Final Prophet and sent him to all humans and Jinn.”
Therefore, Islam is a complete system and Allah (swt) has provided guidance and solutions and for all of man’s problems. Only with Islam which is from the infinite knowledge of The Creator – Al Alim – can man implement a system that will take care of all his affairs in a comprehensive and just manner.