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Islamic State To Mint Its Own Gold Dinar

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Islamic State To Mint Its Own Gold Dinar

Post by GirlBye on Sat Nov 17, 2018 4:34 pm

We've all got the usual problems over the Islamic State, ISIS, IS, whatever they're calling themselves this week. A return to a medieval theocracy isn't generally regarded as an advance in the human condition after all.

But they've also decided to return to medieval currency and monetary policy by minting their own gold, silver and copper coinage. As I've mentioned before I've been on a TV show with a gentleman who insisted that such a gold dinar would be the solution to all sorts of economic problems. I and the economics professor who were on with him were rather less convinced if truth be told.

Here's the reason they're giving for this new currency:

The Islamic State has announced that they will start producing their own currency in areas under its control, in an effort to “emancipate itself from the satanic global economic system”.
Isil which is thought to be the wealthiest terror group in the world - announced on Thursday its plans to reinstate an ancient Islamic dinar currency using gold and silver coins in a move "purely dedicated to God"
The self-declared state’s Treasury said it would soon be issuing another statement to explain the new currency's exchange rate and where to find it.
The currency, based on the original dinar coins used during the Caliphate of Uthman in 634 CE, will include seven minted coins: two gold, three silver and two copper.

It looks like the gold dinar will be around a half ounce of gold and thus have a current value in the $600 range. But there's three major problems with their idea. Yes, agreed, this might be just what the Koran says should happen but we've gained a certain amount of knowledge about things currency and monetary since that volume was composed.

The first problem is that they're saying they want to do this to differentiate themselves from that "satanic" global economy. And making your money out of something that is instantly exchangeable for any and every other currency on the planet really isn't going to do that. Gold (and silver) are instantly tradeable anywhere there's a jeweler or antiques shop. You can swap if for $, £, €, any other currency at all, anywhere you can physically transport the coin to.

The way to cut your economy off from all those Godless is not therefore to have a currency which all and any of them would be delighted to hold. Rather, it's to have a paper based script which is only of any value within the territory that you control. 

Print up some banknotes, say it's legal tender, just like every other fiat currency, and it'll be worth toilet paper outside your territory and whatever value you ascribe to it inside it. That's the way to create an autarkic economy, not the adoption of a highly liquid and international commodity as your currency.

The second problem is that given this international exchangeability is that the prices within the IS territory are going to be highly volatile.

 Wheat has, for example, an international price. So does oil: and thus the domestic prices of both of them are going to be linked (at least, maybe not exactly the same, but trade across even the least porous border will mean linked to) to those global prices.

 And by having a commodity based money those prices will also be linked to the global variations in the gold and silver prices. If gold doubles in value globally then wheat, as expressed in the local currency, halves in price within the Islamic State. If gold halves in value then wheat doubles in price similarly. 

This isn't the introduction people might want to a stable and well functioning economy. The local value of money will not be determined locally at all but by the various machinations of gold dealers in London, New York and Zurich (and no doubt many other places too).

The third is that Gresham's Law does still hold. That gold dinar will be considered "good money." It is good money after all: we can take it anywhere in the world and get that current value of half an ounce of gold. By comparison the Iraqi Dinar (just to give an example) is "bad money" in that it's not so fully exchangeable nor does it have anything other than the power of the Iraqi government to stand behind its value. And Gresham's Law says that bad money will drive out good.

This attempt to introduce a bullion based currency, gold and silver dinars, is going to fail. Which will be fun as as above, we've rather learned some stuff about matters currency and monetary in the last millennium and a bit. I doubt that the various mullahs pushing it are going to be too disappointed, or even understand why it's not working, given the fanaticism with which they view the world. But there's going to be some real amusement watching our own gold bugs watching this experiment. They are in for a real disappointment I think. For it's just not going to work.

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