Saturday, August 14, 2010

Kelantan Issues Gold Dinar: Is This Legal?

In yesterday’s news:

Kelantan launches gold dinar

KOTA BARU: Kelantan paved the way to become the first state to introduce the gold dinar and silver dirham currency.

Speaking when launching the Syariah currency Thursday, Mentri Besar Datuk Nik Abdul Aziz Nik Mat said the state would strive to expand the use of the gold dinar and silver dirham in all transactions, including paying civil servants' remuneration…

…Nik Abdul Aziz, who is also PMBK chairman, said to date 1,000 traders had agreed to use the gold dinar and the dirham silver currency in their transactions, besides Lembaga Tabung Haji and Bank Islam Malaysia.

"There is no reason why transactions in syariah currency cannot be practised in the state as it was widely used thousands of years before the fall of the Ottoman Empire," he said, adding that other states were encouraged to use the currency. - Bernama

Whether using gold and silver is a good idea is a debatable point (I don’t think it is, etheorist defers), but there is the question of whether the Kelantan state government has the right to issue currency.

From the Central Bank of Malaysia Act 2009 (Part VIII – Currency; emphasis mine):

Unit of currency

61. (1) The unit of currency in Malaysia shall be the ringgit, which shall be divided into one hundred sen.

(2) The abbreviated form of the ringgit shall be “RM” or “MYR”.

 

Right to issue, print or mint currency

62. (1) The Bank shall be the sole authority to issue currency notes and coins in Malaysia and such notes and coins shall only be printed or minted by or under the authority of the Bank.

(2) The Government, any State Government, public authority, financial institution, other institution or person shall not issue, print, mint or authorize the printing or minting of currency or any document or token payable to bearer on demand being documental tokens, which in the opinion of the Bank, are likely to pass as legal tender.

 

Legal tender

63. Only currency notes and coins issued by the Bank shall be legal tender in Malaysia.

That’s about as clear as you can get legalese to be. Since the Kelantan government is issuing these coins as payment for use in trade and in payment of civil service wages, they are already in violation of Section 62 (1) and (2), as the dinar and dirham are obviously intended for use as “legal tender”. Unless BNM has authorised the Kelantan Gold Trade to issue coins on its behalf, then we’re going to see an early test of the CBMA 2009.

Update (15 August): The PM confirms my interpretation of the law, and that BNM is investigating the matter.

Technical Notes

Central Bank of Malaysia Act 2009 Part VIII, Section 61-63, pg 53-54(warning: pdf link)

21 comments:

  1. Say you have a bracelet and want to trade it with with my 4 goats, and I agree with the transaction.

    Will that be legal according to BNM ?

    Hahahha ... it's all about mutual agreement .. people should be free to trade .. be it with gold or a piece of earth !

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  2. Within the scenario you present, yes it is legal. But that is not what the Kelantan government is doing. They are contemplating paying civil service salaries in dinar and dirham, which implies in turn that they are willing to accept dinar and dirham in payment for government services, fees, licenses, fines and taxes - which is how legal tender is defined. And that is not legal.

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  3. Salam,
    I had followed your link from Rocky's Bru and I'm impressed with your analytical, level-headed and fact-filled post here. From what I've been reading, many people are emotional and biased about this. Some even see the people who raise questions of whether the issuance is against the Federal Constitution as "being against Islam"! Sheesh.

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  4. Mat, thanks. You might want to stick around for the next post.

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  5. Why does everything PAS do must be related to Islam? If the currency at Rasulullah era was Pound or USD would PAS enforce the use of it? Why does this people want to Arabs so much? Serambi Mekah? This people should just get a life.. Please remind this so call wanna be Arabs that not all Arabs are Islam.. Just be yourself as a Malay & lead a good Islamic life.. Thats more usefull then trying to be an Arab..

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  6. good point, anonymous 2.08pm

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  7. Which would you chosse if you could? A RM or MYR which have falling for 30 years against the Sing dollar or gold/silver currencies. Rest easy though the ringgit is too well entrenched to be unseated by some medieval currency. However, just like many people have found ways to beat BNM's regulation banning the trading of the MYR outside Malaysia. This seemingly hare-brained scheme by the Kelantan government can also be one such instrument. I am sure many people would hoard some 99.99% pure gold bars if they could get them at reasonable cost. The Kelantanese may have found a way to beat BNM's restrictions on the ownership of physical gold bars. Dare I say Malaysians now have an alternative to the ever shrinking fiat MYR for to store some of their wealth. Legal or not, I say give the government something to think about when they want to debase the MYR again.

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  8. vinnan, that's an easy, easy choice. I would choose the depreciating currency against gold and silver - every single time. The reason is simple - gold/silver backed currency cannot support economic development while constraining growth, allows zero scope for counter-cyclical policy, and periodically creates depressions.

    Your comment about hoarding points to one of the mechanisms as to why that happens. If currency is hoarded, you have a de facto shrinkage in the money supply, which then restricts economic activity.

    There's also a reason why the adoption of fiat currencies historically coincided with the industrial revolution.

    As to the MYR against SGD, that has more to do with demographics and the internal exchange rate balance (tradables versus non-tradables).

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  9. Gold standard hasn't been used in a very long time, that laypersons are unfamiliar with the perils of gold standard. Anybody lay supporters of gold standard should read about every single recession that happened before the 1940s.

    These recessions are worst than any single recession any single average living person today have seen. One huge thing that caused or exacerbated the recession is gold standard.

    In particular, goldbugs should read about the Long Depression that happened in between 1873 and 1879. Or maybe, just the Great Depression.

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  10. the problem... Dinar is not a currency (yet)... It a commodity which is still trade using RM currency.. and they did not forced people to pay tax etc.. with it.. but accept it as alternative method of payment. Dinar will remain as a commodity/alternative payment method as long as the price/salary/contract denominated in RM and not in Dinar. check their website they're pricing Dinar in RM.. and not otherwise.. could one day RM will be priced in Dinar??

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  11. That state is not forcing employees to accept metal. Only those who agree get it. So that makes it legal from that side.
    Further, if it is legal to voluntarily trade a bracelet for 4 goats, it is also legal to voluntarily trade labor for lumps of metal, even if these look like coins. The point is that they are not claiming to be currency nor legal tender!!! They are just pieces of metal indicating weight and purity. So that makes it legal from that angle, too. Who are you to stop me from accepting my salary in goats or grain or metal or any other kind?
    Of course, the paper money racketeers would rabidly be against it, but to have something to stand on, they would have to come up with a good argument first. And the first thing that stands against them is that no law is violated.

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  12. Once again:

    The issue is not trade between different parties, nor is it specifically the payment of wages in dirham and dinar to civil servants.

    But that payment of wages to civil servants must also mean that the Kelantan Government is willing to accept dinar and dirham for payments of taxes, fees, assessment, fines and so on. If they don't, they would be perpetrating an injustice - how can you pay your employees in one medium (voluntary or nor), yet demand payment in a different one?

    But by this very government acceptance of payment in dinar and dirham is where they cross the line between medium of exchange (which is legal), and legal tender (which is not).

    Is that clearer?

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  13. If the state's reasoning for all this is so legalistic, then let the other side take recourse in legalistic manoeuvers, too. Let the state government allow a money changer to set up a desk where those making payments in metal to the government can change their dinars - at full market rates - and thus the payment can formally be received in legal tender. That way the legal tender law is not violated, and no one loses.

    By the way, the state would not have to accept metal payments if they pay in metal. There is no law mandating that. It's mere conjecture or speculation that they would have to.

    The payment to and receipt of metal by employees is with full knowledge of and concurrence with that fact, i.e., voluntary. So what exactly would state's injustice be by not accepting metal formally? Everybody knows that the money changer does. There is no law against money changers.
    If farmers wanted to pay in grain, the state might also set up a grain trading desk with the identical function. You cannot keep people from engaging in honest trade.

    Insisting on unbacked paper money is merely a way of perpetuating the rip-off of people by the money printers, and there is ultimately no excuse for it.

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  14. Then we obviously have to agree to disagree.

    "Insisting on unbacked paper money is merely a way of perpetuating the rip-off of people by the money printers, and there is ultimately no excuse for it."

    Yes there is. I refer you to Hafiz's comment above - few people living now remember the problems associated with metal-backed currencies. There's a reason why nobody uses it anymore.

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  15. His account is not authoritative. You find many that say the exact opposite.
    The western Roman empire went down the tubes with corrupted money, while the eastern one (Byzantium) stayed for another 1000 years - with a stable gold currency. But that is neither here nor there, because we were not around during those historical times. And neither does it matter if anybody still remembers gold standard times.

    We are around now and can see where unbacked money leads, namely to the depression of all depressions, which we are in now and going to be for a long time. It will take some control over the issuance of money before that problem is solved. You don't need to be a gold bug to see that. Any backing will do.
    And the reason why nobody uses gold anymore is very simple: the paper money racketeers pushed it out of the way. And look at how much they own nowadays. That should tell you everything about unbacked money.

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  16. By any historical standard, we are not in a depression, and won't fall into one. Global output has already recovered to pre-crisis levels and unemployment never rose to depression levels.

    While under a fiat money regime there have been the occasional nasty financial crisis, and this latest one is as nasty as they come, there hasn't been a depression since the 1930s.

    The mechanism by which commodity backed currencies induce depressions is well understood - essentially the inability of a relatively fixed money supply to adjust to changes in money demand, which means all adjustments to shocks must come through changes in the real economy. And gold is worse than most because of its scarcity and weak and falling supply which makes it deflationary - in a closed economy using a commodity money regime, economic growth must converge to the rate of growth in the money supply.

    All the things that make gold and other metals such good stores of value (and I am not disputing this point), are precisely the same factors which cause economic depressions when they are used to back money.

    But even if you use an inherently inflationary commodity, the relative inflexibility of the money supply means you will still be subject to constant real economy booms and busts.

    The price of growth and relative stability in the real economy is an inherently unstable monetary regime and financial sector - again, I accept this as truth. Fiat money, fractional reserve banking and debt financing necessarily create financial fragility.

    But the converse is also true, that a stable monetary regime and financial sector via commodity backed currency means instability and volatility in the real economy. And the human cost of the latter is far, far greater.

    But if you won't accept the word of two economists, I doubt you'll accept any argument.

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  17. One last point:

    Under a commodity-backed currency system, there can be no such thing as counter-cyclical macroeconomic policy. Monetary policy is by construction impossible under all circumstances, while fiscal policy is highly constrained. Government borrowing to sustain aggregate spending in a recession results in competition between the public and private sectors for the same limited financial resources, at a time when money demand has already increased - full crowding out effects even if there is spare capacity in an economy. That raises interest rates (in a secular economy) or the rate of profit required to compensate investors (in an Islamic economy), which makes things worse in a recession.

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  18. Well, you've got that so wrong it's hard to choose where to start. And since I have not enough time to start sorting out all your points, I have to leave you with your hardcore Keynesian excuses as economic theory.
    Just look what our money is worth today, the un-repayable amounts of debt they have run up, ever worse concentration of capital, real US incomes of people stagnant over the last 30 years, real US unemployment rates at over 22% (if measured honestly and not misstated, see shadowstats), people losing their freedom to a cabal of paper money printers calling all the shots, including plans of taking us into another big war that the people don't want (again!!), etc. etc. All consequences of the Mickey Mouse money printed out of thin air you so fervently defend. Just try to open your mind a little. There must be a better way. The goal is getting the money racketeers off our backs.

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  19. I'm not a doctrinaire - I could have used a neo-classical framework or a monetarist framework with equal facility (I started life as a monetarist). I used the Keynesian explanation because it still is the best way to describe depression economics. To me, gold will always be Freidman's monetary base targetting taken to its logical extreme, which of course failed and for the same reasons - nominal price stability was bought at the price of real economic stability.

    The only economic framework that works with gold is Austrian, but Austrian business cycle theory implicitly assumes away economic growth, in which a gold based monetary standard would actually be beneficial. If you have to read Austrian, read Schumpeter - he got less things wrong.

    Otherwise, I absolutely reject gold as a monetary base - it just entrenches the logic of merchantilism, colonialism and imperialism. Inflation is a small price to pay for democracy, freedom and the enormous improvement in social welfare we've seen in the last two hundred years.

    Neither am I blind to the weaknesses of the financial system that we have - it's just that a gold or silver based monetary system is not a viable or stable solution. It will fail the first time someone hits a depression.

    Thanks for the shawdowstats tip, btw, I found it interesting reading, if a little bizarre.

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  20. The defense of a system that has brought us into the current situation is a little bizarre. And if you are prepared to suffer a little inflation for "democracy", then let the bounties of money printing be shared by all instead of going to a criminal bunch money racketeers.

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  21. 1 Sarawak Dollar (SWK$) = RM14.50

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