Tuesday, January 18, 2011

Talking Dinars

I was invited to this public lecture yesterday (and would have loved to have gone), but couldn’t make it:

Islamic Gold Dinar: Myths & Reality

Recently, there has been a well-publicised campaign about the re-introduction of the Islamic Gold Dinar. The proponents of this idea, the denarists, advocate that this country as well as the whole Islamic world “urgently” return to the Islamic gold dinar. They argue that if this return is achieved, nearly all the ills of modern economies would be solved. In short, what the denarists are doing is to propose an essentially historical system for the future.

INCEIF and the Association of Chartered Islamic Finance Professionals (ACIFP) invite you to a Public Lecture by Prof. Dr. Murat Cizakca, a Professor of Comparative Economic History at INCEIF. He will present a thorough analysis of gold /silver coinage systems in history.

The analysis presented by Dr. Murat – from my point of view at least – were predictable:

Don: Use paper currency, not gold dinar

KUALA LUMPUR: Islamic countries should continue to use paper currency instead of gold dinar, said professor of comparative economic history at International Centre for Education in Islamic Finance Dr Murat Cizakca.

History had shown that the return to coinage system could increase interest rates and inflation would be difficult to control, he said.

Speaking at a public lecture on Islamic Gold Dinar: Myths and Reality organised by Association of Chartered Islamic Finance Professionals and Inceif yesterday, he said money should serve as a medium of exchange, not as a commodity.

To be fair, it’s not strictly speaking necessary to return to a full coinage system – you can still use a paper currency system fully backed by gold. But that of course, is the worst of both worlds.


  1. care to explain "But that of course, is the worst of both worlds" ?

  2. The advantage of a metallic or commodity currency system is that it is theoretically independent of human influence - it is not a liability of a central bank that fiat money is. The risk of central banks issuing too much or too little currency is not there - because a central bank is not necessary, only a mint.

    But that advantage is also the system's disadvantage, in that it is also completely independent of the level and pace of economic activity, which means that a gold (or silver) based system will inevitably cause instability in the real economy.

    The opposite is true of a fiat money system, as money is created and destroyed based on economic activity. The price you pay is inherent instability in the financial system.

    A paper currency system backed by gold or silver or other commodity will have neither the credibility of a pure metallic system (since someone has to govern the issuance and backing of money), while also having none of the flexibility of endogenously created fiat money - you get, eventually, instability in either the real economy and the financial system, or both.

    Hence, the worst of both worlds.