The Wall Street Journal's "human interest" section today carried a story about a movement in Malaysia to restore a sound "Islamic" currency to the country as a way of ending dependence on "credit" and the U.S. Dollar. (James Hookway, "Malaysian Muslims Go for Gold, But It's Hard to Make Change," WSJ, 09/03/10, A1, A14.) Going back to denominations from the heyday of the Islamic hegemony, some people have joined with the government and started striking Dinars in gold, and Dirhams in silver. The people interviewed as well as the appeared to believe that the gold standard was somehow traditional in western Europe, and that having gold not only as the standard, but as the sole currency was the only way to have a sound, non-usurious currency: "Its value is stated not by the World Bank, but by Allah."
First, the obvious errors. Silver, not gold, was the standard of value in Europe for millennia, and in the Americas and throughout much of Asia. Gold didn't achieve widespread acceptance as the standard of value until the 1870s. Until 1873, for instance, the U.S. dollar was defined in terms of silver, not gold. There just wasn't enough gold to go around, for one thing (the California, Australia, and Alaska strikes didn't happen until beginning halfway through the century), small value gold coins are not usually too practicable (too small in size and easy to lose), and, as the headline states, it's "Hard to Make Change" for high value gold coins — and these days, even the silver; a Dirham goes for around US $4, nor do they appear to be considering using copper, tin, or bronze tokens for small change, as was common in the west. The result is that consumers can't carry out normal transactions and trade suffers. A Dinar (from the ancient Roman "Denarius") is worse, going for nearly $190.
Nor are the respective values of gold and silver set by Allah. They are, rather, set by the aggregate of economic votes in the market place based on what a willing buyer will pay, and a willing seller accept. Except insofar as the Creator provides the Nature on which standards such as truth, love, and justice that infuse (or should infuse) our human interactions (including commercial transactions) are based, the Deity has nothing to do with the price of gold or silver.
As for non-inflationary . . . only if new supplies aren't discovered. Spain suffered 400% inflation from the influx of gold and silver during the 16th and 17 centuries. The real danger, however, is deflation, i.e., having insufficient money in circulation to provide for the needs of commerce, whether ordinary consumers, or business. As a past savings approach, a gold standard that mandates only gold or 100% gold-backed paper is a virtually certain recipe for an economic downturn due to an insufficient money supply, such as hit the United States in the first Great Depression of 1893-1898, and which caused serious problems in 1929-1938.
Nor is continuance of the system prevalent through much of the rest of the world the answer. If the Islamic world were to switch over to the type of system being implemented in Malaysia, it would suffer economic stagnation and a more or less rapid decline from the sudden constriction of trade. Of course, if the world continues to issue massive amounts of government debt to back its currencies, we can expect fairly soon to go into a sudden precipitous decline as soon as people catch on that the stock market and government deficit spending aren't really signs of a healthy economy.
The only sane answer is to restrict all new money creation to a private sector asset backing. Owners of existing wealth can monetize the present value of their marketable goods and services in the usual way: by drawing bills and discounting and rediscounting the notes. This can be done either between private parties (merchant's acceptances) or at a financial institution (banker's acceptances). All money created to finance the present value of future marketable goods and services — that is, to finance new capital formation — would be based on bills drawn on that present value, discounted at a commercial bank, and rediscounted at a central bank, with the added proviso that to qualify for rediscounting, all new capital formation financed in this way must be broadly owned.
The fact is that not too many people understand money. The people interviewed, for example, separated "money" from "credit," evidently not knowing that money is just one form of credit. In any event, you might want to view the video referred to in the first news item. It doesn't give any answers, either, but if you read The Formation of Capital and then The Capitalist Manifesto you will:
• Strike a blog for monetary sanity. Dan Moore, our Man in Ohio, reached out to a husband and wife team in New York City who had written and produced a rap video, "Fear the Boom and Bust," about John Maynard Keynes and Friedrich von Hayek. Dan had a long talk with them, and they agreed that there need's to be a demonstration outside the Federal Reserve building in Washington, DC to focus attention on the problem. The Keynesians and the Austrians (and the Monetarists) all take the necessity of past savings to finance new capital formation as a given, but the video gives a good summary within the past savings paradigm. What you need to do, then, is read CESJ's new edition of The Formation of Capital and view the video in light of a paradigm such as binary economics that has the potential to "Free Economic Growth from the Slavery of Savings."
• We now have a full schedule for the trip to Chicago next week. The overreaching objective is, of course, the enactment of Capital Homesteading by 2012, the 150th anniversary of the passage of Abraham Lincoln's original Homestead Act. A number of tracks, however, must be incorporated into the effort. We expect, for example, stiff resistance from Academia. For that reason, it is essential to begin organizing and networking with natural law scholars, both within and without Academia, to begin introducing the inhabitants of the Ivory Tower World to real life and the necessity of an asset-backed currency and widespread direct ownership of the means of production. Compared to Academia, the political world will be much easier to crack. Politicians, after all, have to be elected.
• We unearthed a video from September of 1958 of Mike Wallace interviewing Mortimer Adler shortly after the publication of The Capitalist Manifesto. [http://www.kelsoinstitute.org/pdf/cm-entire.pdf] It's only half an hour, and well worth the time.
• Our blog followers have increased by 20% over the last week alone.
• As of this morning, we have had visitors from 41 different countries and 40 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Russia, India, and Brazil. People in Venezuela, Guatemala, Poland, Bangladesh and the United States spent the most average time on the blog. The most popular posting is the one on "The Federal Reserve . . . This Time It's Personal," followed by "News from the Network" from two weeks ago, one of last year's postings on the stimulus, "Aristotle on Private Property," and, finally, "Creating a Life Supporting Economy," the press release for Supporting Life.
Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.