G-khan
04-21-2003, 07:38 AM
By Shan Saeed
When the global economy is passing through turbulent times, stock markets are volatile and countries trying hard to keep up with arduous times of war , Malaysia has coined a plan what is perhaps the first of its kind, -the golden dinar proposal for bilateral and multilateral trade among Islamic countries.
The plan, announced by Prime Minister Mahathir Mohamad, aims to prevent another currency crisis of the scale seen in Asia in 1997-98. Just as the capital-control measures introduced in response to the financial crisis in 1998 were initially viewed with skepticism, the dinar-gold plan has its share of critics and supporters.
Malaysia's concern since the attack on the nation's currency has been the vulnerability and volatility of money- a bane suffered by this country and others in the region in 1997-98 that it now wants to avoid or minimize. Having one of the most 'open' economies, Malaysia is often at the mercy of swings in its currency. Though pegging the Malaysian ringgit to the US dollar in 1999 has brought some semblance of stability, the currency is nonetheless still subject to constant volatility. Hence the gold-diner idea.
Although gold might not solve the problem, it is less unstable than the US dollar and has an intrinsic value that paper money does not have. It is believed that with gold, speculation and manipulation could be avoided and thus the international trade would be safe from being undermined. The gold diner was used by the Muslim world as far back as the second caliphate (AD 632), until the fall of the Ottoman empire in 1924. According to the Islamic law, one diner is equivalent to 4.22 grams (0.135 ounce) of pure gold and the value is based on demand for gold.
In modern times, a gold-backed system was adopted internationally until the Bretton Woods system collapsed in the 1970s. The dinar is already being used as a currency by the Islamic Development Bank but it is indirectly pegged to the US dollar, with one Dinar equivalent to one special drawing right [SDR] of the International Monetary Fund. [The SDR, the "currency" established by the IMP, is set to a basket of five major currencies, i.e, the US dollar, British pound, Japanese yen, French franc and German Deutschmark - the last two in their euro equivalents.] Private initiatives abound in gold-backed payment systems, including as e-gold, gold-money, gold economy, e-Diner and so on, but they are mostly confined among private individuals and firms using gold as payments.
The Malaysian plan, however, is different in that it uses gold as money and not as a gold-backed instrument, a feature that is important for the gold Dinar proposal to be successful as it would avoid the pitfalls that caused the failure of the Bretton Woods system. The plan seeks to use the diner not for day-to-day settlement of trades but for bilateral payment arrangements, later to be extended to multilateral payment arrangements, and is solely confined to the settlement of trades.
The gold diner, whose denomination has yet to be determined, will not exist in physical form but will be defined in terms of gold. Observers believe that Malaysia is likely to adopt a one-ounce diner. Therefore, if the price of one ounce of gold is $365 as it is now, the value of one gold diner will be $365 or equivalent in other currencies based on the prevailing exchange rate.
Since there will be no physical transfer of gold, settlement of trade balances between countries would be conducted through their respective central banks every three months, for instance by transferring the beneficial ownership of gold in their custodian's account at the Bank of England. Exporters would then be paid in their respective national currencies by their central banks on the due date of exports, based on the gold-dinar exchange rate prevailing at the time of export. Similarly, importers will pay their central bank in their national currency equivalent to the amount of their imports.
Apart from the economic benefits, the gold-diner proposal also has a political dimension to it. It is a response to "an inherently unstable and ultimately unjust global monetary systems. It is expected that relations among Islamic nations would be strengthened via the trading system. It is "a system that will also allow the Islamic community to use its collective surpluses to fund each other and help each other grow and benefit and people of many Muslim nation would prosper.
Some observers believe that the nature of the prevalent international financial system means alternative systems such as those proposed by Malaysia and should be seriously considered. Developing countries were true losers in the current global fiat money system as the 1997 East Asian financial crisis had flashed out. Thus the gold-diner system "promises a much more stable and just monetary system, having intrinsic value in itself", unlike currencies.
However, like currencies, gold could also create arbitrage opportunities, in which case there would be a need for regulations that restrict the diner to real transactions. There are more benefits than risks with the Malaysian proposal. In this structure, exchange-rate risks, a phenomenon of the current floating exchange-rate regime and the source of much chagrin, would be eliminated, as there would be no need for forward, futures or options on currencies.
And unlike the forward, futures and options markets, the gold dinar does not depend on speculators for increased liquidity. According to one economist, the virtual nature of the gold dinar and the strict limit and authority on the usage of it serves as a barrier to speculative activities and arbitrage opportunities, two reasons gold-backed systems broke down in the past.
The gold dinar is akin to the forward contract but with its problems of 'barter', speculative and arbitrage elements removed and is also a superior tool for managing foreign exchange risk. Since people of every race, creed and nationality treasure gold, it is a suitable global currency that enjoys global diversification, meaning that no single country's unique risk may be significantly embedded in gold.
And because gold has all the characteristics of a good money - desired, highly valued, durable, stable, and incapable of being either created or destroyed. It can play the role of a stable international unit of account that is missing in the current floating exchange-rate system since the demise of the Bretton Woods system in 1971.
The plan (gold-dinar) warrants consideration as a welcome alternative to the existing international financial system, which has many shortcomings. With 87 countries having undergone major currency crises over the past 25 years, and in a world without a stable and predictable international standard of value, the gold-diner project is trying to create a reference value - gold - that would supposedly operate outside this unstable environment.
While the plan will become operational with consensus from many countries. The gold dinar will solve all the problems of many nations' economic, social, political and cultural woes and enhance foreign trade. The project can become a stepping stone to another system that also opens the doors to participation from other non-Muslim countries, rather than an end in itself.
The problems holding back its effectiveness are the issue of volatility of gold due to its narrow market and the fact that not many of Malaysia's major trading partners produce gold. For these reasons the proposal for a currency backed by a broader-based basket of commodities and services that includes the gold diner and the silver dirham as two of its components.
The other components could include crude oil, palm oil or rubber, products of which Malaysia and its major trading partners are significant producers or users. A currency backed by a broader basket that is also interest-free (and therefore compatible with Shariah law, a Malaysian and Islamic concern) would be more stable than if it would rely only on one of its components.
As to the repercussions of the plan, reactions have been mixed as to the impact on gold resources and the gold market. Some believe gold resources would be depleted and prices of gold would be pushed up. Others, believe the impact on gold prices would be positive but the actual volume of physical gold stored or traded would be minimal.
Compared to other factors - war in Iraq and the resulting impact on oil prices, or a change of a policy of the Chinese or Japanese towards dollar holdings - the gold dinar would have a comparatively less dramatic effect. The reason is that since the mechanism involves the settlement of balance at the end of a determined period of time, there is no necessity to hoard large amounts of gold.
For example, if at the end of a three-month cycle, the total exports from Malaysia to Saudi Arabia is 2 million gold dinar and the total exports of Saudi Arabia to Malaysia is 1.8 million gold dinar, only a relatively small amount - 200,000 gold dinar - supporting a total trade value of 3.8 million changed hands.
And the mechanism could be further refined if the credit or debit outstanding at the end of each quarter can be forwarded to the subsequent quarters and final settlement is made only at the end of the year, thus for the year as a whole, the payment flows are further minimized.
http://www.dawn.com/2003/04/21/ebr5.htm
When the global economy is passing through turbulent times, stock markets are volatile and countries trying hard to keep up with arduous times of war , Malaysia has coined a plan what is perhaps the first of its kind, -the golden dinar proposal for bilateral and multilateral trade among Islamic countries.
The plan, announced by Prime Minister Mahathir Mohamad, aims to prevent another currency crisis of the scale seen in Asia in 1997-98. Just as the capital-control measures introduced in response to the financial crisis in 1998 were initially viewed with skepticism, the dinar-gold plan has its share of critics and supporters.
Malaysia's concern since the attack on the nation's currency has been the vulnerability and volatility of money- a bane suffered by this country and others in the region in 1997-98 that it now wants to avoid or minimize. Having one of the most 'open' economies, Malaysia is often at the mercy of swings in its currency. Though pegging the Malaysian ringgit to the US dollar in 1999 has brought some semblance of stability, the currency is nonetheless still subject to constant volatility. Hence the gold-diner idea.
Although gold might not solve the problem, it is less unstable than the US dollar and has an intrinsic value that paper money does not have. It is believed that with gold, speculation and manipulation could be avoided and thus the international trade would be safe from being undermined. The gold diner was used by the Muslim world as far back as the second caliphate (AD 632), until the fall of the Ottoman empire in 1924. According to the Islamic law, one diner is equivalent to 4.22 grams (0.135 ounce) of pure gold and the value is based on demand for gold.
In modern times, a gold-backed system was adopted internationally until the Bretton Woods system collapsed in the 1970s. The dinar is already being used as a currency by the Islamic Development Bank but it is indirectly pegged to the US dollar, with one Dinar equivalent to one special drawing right [SDR] of the International Monetary Fund. [The SDR, the "currency" established by the IMP, is set to a basket of five major currencies, i.e, the US dollar, British pound, Japanese yen, French franc and German Deutschmark - the last two in their euro equivalents.] Private initiatives abound in gold-backed payment systems, including as e-gold, gold-money, gold economy, e-Diner and so on, but they are mostly confined among private individuals and firms using gold as payments.
The Malaysian plan, however, is different in that it uses gold as money and not as a gold-backed instrument, a feature that is important for the gold Dinar proposal to be successful as it would avoid the pitfalls that caused the failure of the Bretton Woods system. The plan seeks to use the diner not for day-to-day settlement of trades but for bilateral payment arrangements, later to be extended to multilateral payment arrangements, and is solely confined to the settlement of trades.
The gold diner, whose denomination has yet to be determined, will not exist in physical form but will be defined in terms of gold. Observers believe that Malaysia is likely to adopt a one-ounce diner. Therefore, if the price of one ounce of gold is $365 as it is now, the value of one gold diner will be $365 or equivalent in other currencies based on the prevailing exchange rate.
Since there will be no physical transfer of gold, settlement of trade balances between countries would be conducted through their respective central banks every three months, for instance by transferring the beneficial ownership of gold in their custodian's account at the Bank of England. Exporters would then be paid in their respective national currencies by their central banks on the due date of exports, based on the gold-dinar exchange rate prevailing at the time of export. Similarly, importers will pay their central bank in their national currency equivalent to the amount of their imports.
Apart from the economic benefits, the gold-diner proposal also has a political dimension to it. It is a response to "an inherently unstable and ultimately unjust global monetary systems. It is expected that relations among Islamic nations would be strengthened via the trading system. It is "a system that will also allow the Islamic community to use its collective surpluses to fund each other and help each other grow and benefit and people of many Muslim nation would prosper.
Some observers believe that the nature of the prevalent international financial system means alternative systems such as those proposed by Malaysia and should be seriously considered. Developing countries were true losers in the current global fiat money system as the 1997 East Asian financial crisis had flashed out. Thus the gold-diner system "promises a much more stable and just monetary system, having intrinsic value in itself", unlike currencies.
However, like currencies, gold could also create arbitrage opportunities, in which case there would be a need for regulations that restrict the diner to real transactions. There are more benefits than risks with the Malaysian proposal. In this structure, exchange-rate risks, a phenomenon of the current floating exchange-rate regime and the source of much chagrin, would be eliminated, as there would be no need for forward, futures or options on currencies.
And unlike the forward, futures and options markets, the gold dinar does not depend on speculators for increased liquidity. According to one economist, the virtual nature of the gold dinar and the strict limit and authority on the usage of it serves as a barrier to speculative activities and arbitrage opportunities, two reasons gold-backed systems broke down in the past.
The gold dinar is akin to the forward contract but with its problems of 'barter', speculative and arbitrage elements removed and is also a superior tool for managing foreign exchange risk. Since people of every race, creed and nationality treasure gold, it is a suitable global currency that enjoys global diversification, meaning that no single country's unique risk may be significantly embedded in gold.
And because gold has all the characteristics of a good money - desired, highly valued, durable, stable, and incapable of being either created or destroyed. It can play the role of a stable international unit of account that is missing in the current floating exchange-rate system since the demise of the Bretton Woods system in 1971.
The plan (gold-dinar) warrants consideration as a welcome alternative to the existing international financial system, which has many shortcomings. With 87 countries having undergone major currency crises over the past 25 years, and in a world without a stable and predictable international standard of value, the gold-diner project is trying to create a reference value - gold - that would supposedly operate outside this unstable environment.
While the plan will become operational with consensus from many countries. The gold dinar will solve all the problems of many nations' economic, social, political and cultural woes and enhance foreign trade. The project can become a stepping stone to another system that also opens the doors to participation from other non-Muslim countries, rather than an end in itself.
The problems holding back its effectiveness are the issue of volatility of gold due to its narrow market and the fact that not many of Malaysia's major trading partners produce gold. For these reasons the proposal for a currency backed by a broader-based basket of commodities and services that includes the gold diner and the silver dirham as two of its components.
The other components could include crude oil, palm oil or rubber, products of which Malaysia and its major trading partners are significant producers or users. A currency backed by a broader basket that is also interest-free (and therefore compatible with Shariah law, a Malaysian and Islamic concern) would be more stable than if it would rely only on one of its components.
As to the repercussions of the plan, reactions have been mixed as to the impact on gold resources and the gold market. Some believe gold resources would be depleted and prices of gold would be pushed up. Others, believe the impact on gold prices would be positive but the actual volume of physical gold stored or traded would be minimal.
Compared to other factors - war in Iraq and the resulting impact on oil prices, or a change of a policy of the Chinese or Japanese towards dollar holdings - the gold dinar would have a comparatively less dramatic effect. The reason is that since the mechanism involves the settlement of balance at the end of a determined period of time, there is no necessity to hoard large amounts of gold.
For example, if at the end of a three-month cycle, the total exports from Malaysia to Saudi Arabia is 2 million gold dinar and the total exports of Saudi Arabia to Malaysia is 1.8 million gold dinar, only a relatively small amount - 200,000 gold dinar - supporting a total trade value of 3.8 million changed hands.
And the mechanism could be further refined if the credit or debit outstanding at the end of each quarter can be forwarded to the subsequent quarters and final settlement is made only at the end of the year, thus for the year as a whole, the payment flows are further minimized.
http://www.dawn.com/2003/04/21/ebr5.htm