Gold is coming back. Many independent thinkers from all over the world are calling for it to come back and restore soundness to our currency and we ought to do that simply by restoring to the people the freedom to choose. As the amount of paper-money in circulation has increased in the last decade until mountains high, reaching figures that can hardly relate to earthly matters, side by side, taxation, unemployment, poverty and crime have increased to the same degree. It is the system of artificial paper-money in the hands of bankers and politicians which has mainly contributed to our present economic miseries.

"The banking institutions are more dangerous to our freedom than the enemies' armies... The creation of money has to be removed from the banks' hands."
(Thomas Jefferson)

Inflation cannot seriously be presented as a mere question of national accounting as if it was deprived of any social and moral implications. If we are forced to use a particular medium of exchange at the same time as this medium is subjected to a permanent devaluation by the various causes of inflation, we are being cheated. At best, we are being unjustly taxed and at worse, we are being legally robbed.

In order that the value of the currency may not be altered by design and be liable as little as possible to fluctuation, freedom to choose gold and silver should return again to the civilised world, and no paper currency ought to exist except as what it was originally intended for, that is, as a private limited contract unable to bear interest and thus removed from indiscriminate circulation.

The Idea of Credit Money

Credit has a great function in society, but not, as many people seem to suppose a magical power. It cannot make something out of nothing. It seems strange that there should be any need to point that out,but often what is represented - accounting - seems to overlap what is actually happening - the real events. Thus credit has been too often presented as the philosopher's stone capable of curing all the economic evils of society. It would be a great prospect if governments could pay off the national debt,defray the expenses of government without taxation, and finally, make the fortunes of the whole community simply by printing a few characters on bits of paper. But to make more money does not make people richer, it only brings the value of the currency down while it gives a tremendous advantage to those with the privilege of making the extra money.

Though normal credit between people is but a transfer of money from hand to hand, today's banking credit, the most common form of credit is more complex than that.

In the beginning people were lured to find it convenient to store their gold (or other commodity money) somewhere and use money substitutes (banknotes or current accounts) for daily transactions. Banks then seek profit by lending money substitutes supported by their hold of commodity money deposited with them to new customers. Eventually, the banks' reserves cover only a small fraction of their liabilities. Most people hold money substitutes that cannot,in aggregate, be redeemed.

The banks do not lend the money deposited with them, as it is popularly believed. Every bank loan or overdraft is a creation of entirely new money(credit) which adds to the amount of money in the community. When a bank lends, it creates credit. The percentage of 'cash to credit' necessary for a bank to function varies from 5% to 10% including its reserves with other banks, depending on the country. This means that a bank can create credit 'out of nothing' up to 20 times the amount of money it holds in cash. Over 95% of all money in circulation is made of banking cheques. It is, therefore,not exact to say that the governments create inflation, they only regulate it, or try to regulate it, but the creation of the credit - most money is credit - is made by banks.

People who oppose banking say that such a regime is inherently a fraud and induces instability and imbalance over the entire economy. The idea of the 'fractional reserve' system, which tried to prevent chaos, in fact, guaranteed and legitimised private banks to issue too many money substitutes and deposits,causing inflation. The government saw their obligation to take over in order to prevent confidence-shaking 'runs' on banks as customers tried to withdraw funds. Central banks emerged with the gift of a monopoly over the issue of banknotes and extensive regulatory powers. By requiring banks to hold reserves against a certain proportion of their deposits, the central bank assume full control of the money supply. Governments usually then offer further 'protection' by providing deposit insurance and by requiring central banks to act as 'lenders of last resort'.

Thus the paper notes that we identify as cash are themselves a credit or a non-redeemable promissory note whose value is established by the government. Of course, a non-redeemable promissory note cannot be a credit because that is a self-contradiction. Therefore our 'cash' is born from a deception based on the unfulfilled contract of the governmental promissory notes. At this point, inflation becomes an ordinary element of the economy, regardless of the inherited theft involved in the system. The banks reign over our money at the expense of individual freedom.

Money is trapped within the banking system, that is to say, money has nowhere else to go. Sooner or later, money, coming from a bank deposit, ends up in another bank deposit. A prudent person keeps his capital in the bank to save it from inflation by obtaining some interest offered by the bank if deposited with them. All the small amounts, that were being devalued,are now becoming aggregated in the banker's hands. The banker, being taught by experience what proportion of the amount is likely to be wanted within a given time, and knowing that if one depositor happens to require more than the average, another will require less, is able to lend, that is to create further bank deposits, far beyond what he holds in cash.

The unjust system gives a tremendous advantage to the banks who become the unwanted managers of our money, while condemning us to suffer the permanent effects of inflation. An end to this system is now being called for and a new voice is emerging.

The Return to Gold and the Islamic Case

As we said at the beginning, the word is out to restore gold as the universal medium of exchange. There is a strong voice in the US and Europe to privatise money as a means to restore stability over prices,but it does not hold the total truth on these issues.

This new voice to restore gold is basically guided towards the elimination of the national Central Banks. They want a world with many private banks issuing banknotes and deposits representing claims in gold (rather as American Express travellers cheques represent claims on the US dollar). Since there would be no possibility of government bail-outs any hint of imprudence by a bank would cause customers to shift to its competitors.

In this way, the banks maintain the management of the currency. And even if one bank tried to expand its note issue irresponsibly the system could cope with it. Since its clients would spend the money on goods and services,the notes would be transferred to other people, most of whom would be clients of the banks. These banks would return the notes to the first bank and demand payment in gold. The first bank would lose reserves and be forced to rein in its lending. And in order to maintain a perfect market discipline, they argue, it will be necessary for private banks to back their currency with 100% reserves. In other words, while today banks promise to redeem notes and deposits on demand, they in fact lack the reserves to meet more than a fraction of the possible claims, being thus guilty of an 'implicit theft'. The new regulations would force banks to supply money in an identical amount to their gold stock, 'one for one'. Some banks would still go bankrupt but de-stabilising 'runs' would not happen. Nor could competition between banks lead to over-issue of notes. The amount of total money in circulation would increase slowly only as supplied by the mines.

This new voice, while grasping correctly the nature of money issuing by the banks, still ignores a fundamental issue which is the interest on money. It is crucial at this point to present an Islamic case that will shed light on these issues according to Islamic Law. The essentials are outlined here. In Islam, money cannot be rented or interest charged upon a loan. The new challenge which arises from Islamic Law itself is: Why do we need banks at all? The elimination of these usurious institutions is our main task for the next century. Banks need to be eliminated and new institutions be born to replace some of the services which are acceptable, like guarding money against a danger of theft or transferring and transporting money from one place to another. The new institutions will not be able to expand the money held by them, nor to charge interest on possible loans, thus eliminating the desire to lend money in the first place.

Only if the restrictions on issuing money are considered alongside the prohibition of interest, will we be able to offer solutions to our Muslim community and the world. To do that we do not need banks. This is what is so particularly evil about the idea of Islamic Banks. They are worse than ordinary banks,because they have prevented the Muslims from offering a real answer to today's problems.

The following text will present guidelines for an understanding of money, money substitutes and debt according to Islamic Law.

Go to Chapter 2

The Return of the Gold Dinar