Currency Systems and the Transfer to the Gold and Silver Standard

Mazin Abul Adhim
Members of Hizb ut Tahrir regularly write assessments on how to practically implement complex Ahkam Shari’yyah in the Muslim lands once the Khilafah is re-established. This is an analysis that I recently wrote and presented to the Hizb on how to transfer the currency systems in the Muslim lands from the fiat standard to the gold and silver standard once the Khilafah is re-established.

History and Weights Before Islam
The Arabic word for currency is “An-Naqd.” An-Naqd is used in the language to mean to assess something and identify the good and bad in it, or sifting through Dirhams and removing the counterfeit from them. It is also used to identify the act of giving and taking Dirhams, for example the Hadith of Jabir regarding selling his camel to the Messenger of Allah ﷺ where he said: فنقدني ثَمَنَهُ “He paid me (Naqadani) its price,” meaning he gave me the price as Naqd (currency) immediately. It is also used for the name of currency itself.

Currencies are known as the thing that people traditionally agree to use as a central medium of exchange – whether metallic or not – for goods, and wages for labor and services, such that all goods, labor, and services are measured with it.

People used to exchange goods and services by barter before they knew currencies, where, for example, someone with oranges would trade their product for apples, and someone with a mule could trade the use of his mule for oranges. However, because such a format of exchanging goods and services by barter was obviously difficult and restrictive when trading goods and services on a larger scale, societies thought of choosing a central good with an intrinsic value that is easily exchanged to become a standard by which to measure all goods and services. So, they established currencies, which became the sole unit of measurement. And since gold and silver were known since ancient times to be valuable minerals with an intrinsic value, they were taken as the central currency, and Dinars and Dirhams were coined from them. They are especially characterized by relative scarcity, where they are very difficult to mine, and the cost of mining gold and silver is nearly equal to their market value. Gold is also distinguished by incredible malleability durability, where one single gram of gold can be beaten into a one square meter sheet, and is immune from tarnishing, while silver is distinguished by its incredible durability, retaining its qualities even when melted and reformed repeatedly.

The Roman Empire and the lands subordinate to it adopted gold as the basis of their currency, and as such they coined from it Heraclitan Dinars that has a specific shape and weight. The Persian Empire and lands subordinate to it, on the other hand, adopted silver as the basis of its currency, and they coined Dirhams of a specific shape and weight. Roman Dinars were of only one shape and weight, whereas Persian Dirhams had numerous shapes and weights.

Pre-Islamic Arabs, particularly Quraysh, used to trade with neighboring countries and regions. They would return from Ash-Sham bearing golden Caesarean Dinars, and silver Chosroes Dirhams from Iraq, and, less often Humayri Dirhams from Yemen. They would bring Heraclitan gold and Sassanid silver to the Hijaz. However, they did not deal with these Dinars and Dirhams by number, but rather by weight, considering them as ore – meaning pure material of gold and silver, not coined money. They ignored taking them as coined currency due to the various types of Dirhams and their different weights, and the probability of Dinars being reduced in weight due to their frequent exchange, even though they had a fixed weight at that time. They depended on weight to prevent fraud and they had specific weights used for weighing, which were the رطل Ratl (1.428kg), the وقيّة Waqiyya (119g), the نشا Nasha (weight of 20 Dirhams), the نواة Nawa (weight of 5 Dirhams), the مثقال Mithqal (4.25g), which is the weight of the Dinar, the Dirham (2.975g), the دانق Daniq (0.5g), the قراطQirat (0.2g), and the حبة Habba (0.15g).

History and Weights Under Islam
The weight of the Dinar did not differ in either the times of Jahiliyyah or in Islam; it has a fixed weight.

When Islam came, the Messenger of Allah ﷺ consented to dealing with Dinars and Dirhams. He also consented to considering them as a central currency, and he consented to the weight with which the Quraysh weighed these Dinars and Dirhams. Tawuus narrated from Ibn ‘Umar that the Messenger of Allah ﷺ said: الْوَزْنُ وَزْنُ أَهْلِ مَكَّةَ وَالْمِكْيَالُ مِكْيَالُ أَهْلِ الْمَدِينَةِ “The weight is the weight of the people of Makkah, and the measure is the measure of the people of Madinah’.” The Mithqal had a well-known weight for them: a weight of 22 Qirat less one Habba, and from it we know the conversion of the rest of the weights. 10 Dirhams weighed 7 Mithqal, and the Ratl was 12 ounces with each ounce being 40 Dirhams. For those wishing to find these weight conversions, you can read either Funds in the Khilafah State or The Economic System in Islam.

The Messenger of Allah ﷺ used these weights, as did Abu Bakr, ‘Umar, Uthman and Ali (ra). The Muslims continued using Heraclitan Dinars and Chosroes Dirhams in their shape, coinage, and pictures throughout the life of the Messenger of Allah ﷺ, the Khilafah of Abu Bakr As-Siddiq and the first years of ‘Umar’s Khilafah. In the 20th year of the Hijra, which was the 8th year of ‘Umar’s Khilafah, ‘Umar coined new Dirhams in the Sassanid style and retained the Pahlavi faces and writing while adding some words in Kufic Arabic letters such as “In the name of Allah” and “In the name of Allah, my Lord.” Muslims continued using Dinars in Byzantine style and Dirhams in Sassanid style together with writing certain Islamic words in Arabic letters until the time of Abdul Malik bin Marwan. In the 75th year, or possibly in the 76th year after Hijrah, Abdul Malik coined Dirhams in specific Islamic style carrying Islamic texts engraved upon the Dirhams in Kufic script after abandoning the Sassanid style. In the 77th year, he coined Dinars in a specific Islamic style and engraved upon them Islamic texts with Kufic Arabic script, abandoning the previous Byzantine style. After Abdul Malik had coined Dirhams and Dinars in a specific Islamic style, Muslims had their distinct currency in a unique Islamic style and they abandoned other people’s currency.

The Ruling of Islam on Currency Systems
Despite Islam allowing people to exchange goods and services using whatever they wished, it specified the currency by which exchange takes place to be gold and silver. It made them the measuring currency to be referred to for measuring goods and labor, and the basis for all transactions. It determined for them a specific weight standard, which is the weight of the people of Makkah: “The weight is the weight of the people of Makkah.”

Islam linked some Shari’ee rules with gold and silver in their capacity as gold and silver, and their capacity as currency, money, and prices for things and wages for labor. Among these Ahkam:

1- Prohibiting hoarding gold and silver, Allah ﷻ said:

وَالَّذِينَ يَكْنِزُونَ الذَّهَبَ وَالْفِضَّةَ وَلَا يُنْفِقُونَهَا فِي سَبِيلِ اللَّهِ فَبَشِّرْهُمْ بِعَذَابٍ أَلِيمٍ

“Those who hoard gold and silver and do not spend them in the way of Allah, give them tidings of a painful punishment” [At-Tauba: 34]

2- The obligation of Zakat, including the specific weight of the minimum Nisab, as Rasool Allah ﷺ said: “Nothing from gold is taken until it reaches 20 Dinar; if it reaches 20 Dinar, then a half Dinar is taken from it. And nothing from silver is taken until it reaches 200 Dirham; if it reaches 200 Dirham, then 5 Dirhams are taken from it.”

3- Blood money (Diyya), which is 1000 Dinars or 12,000 Dirhams, as narrated in the two Ahadith: “The blood money for one soul…for those who deal in gold would be 1000 Dinars” and “A man from Bani ‘Adiyy was killed so the Prophet ﷺ made his blood money 12,000 (Dirhams).”

4- The minimum value of something stolen to obligate cutting the hand, as narrated in the Hadith “The hand of the thief is not cut except for one-quarter of a Dinar or more.”

5- The laws of currency exchange, as in the Hadith “The Prophet ﷺ prohibited silver for silver or gold for gold except equally. He commanded us to purchase silver with gold or gold with silver, however we wished.”

This indicates that currency in Islam is gold and silver because all rules linked to currency are linked to gold and silver in their capacity as prices for all goods and labor and currencies for exchange, whether they are coined or in ore form.

However, this does not mean that it is not permitted for Muslims or the Islamic State to take anything else as currency or to deal with anything else. It is definitely allowed without any dispute, because buying and selling took place in the days of the Messenger of Allah ﷺ through barter by exchanging goods for each other just as it took place with currencies of gold and silver. The Messenger of Allah ﷺ consented to all of this without preventing or disallowing it.

The Gold and Silver Standard in the Modern Age
Countries in the past used to deal in gold and silver, whereby each country would use a specific fixed shape for their gold and silver in order to distinguish their money from other countries’ money. Each country would then issue, in parallel with the gold and silver reserves, paper money at a fixed and specific ratio. Then the country would agree to issue paper money while maintaining gold and silver reserves at that ratio.

There were therefore three types of money in the world: metallic money made of gold and silver, paper money that could be exchanged for gold and silver, and paper money that had no backing whatsoever.

The world continued using gold and silver as the basis of currency and money until shortly before World War I, when people stopped dealing with them directly. After World War I the world returned to using gold and silver partially, but then began to decrease again over time. As World War II approached, the world’s economies of the world began suffering, and people became fearful of the value of their currency, causing many banks around the world to shut their doors and refuse to exchange the paper currency for gold or silver. In 1944, 730 delegates from 44 nations met at the UN and agreed to the Bretton Woods Agreement (which included the creation of the IMF in 1945 “to monitor exchange rates and lend reserve currencies to various nations,” as well as the World Bank “to provide financial assistance for countries during post-WW1 reconstruction”). The Bretton Woods Agreement pegged the US dollar to the price of gold, and the US dollar was taken as the reserve currency of the world linked to the price of gold, which stabilized world currencies. But in 1971, Richard Nixon suspended the Bretton Woods Agreement, stopped the convertibility of the US dollar to gold, and left the world currencies to “float” according to the fiat standard (“fiat” is Latin for “let it become,” meaning a decree for the paper to hold a certain value based only on that decree).

The value of fiat currency depends on public confidence in the value of that currency granted to it by law. It has no intrinsic value in itself; rather its value depends on the law that made it as legal tender. If the law were to abolish transactions involving it or people lost confidence in it, then it would become worthless.

The Benefits of the Gold and Silver Standard
If the benefits of the gold and silver standard were to be compared with the fiat (paper currency) standard and other standards, it would be inevitable that the gold and silver monetary standard would become the global standard. These benefits would not leave any room for other standards to remain in existence. The most significant of these benefits are:

1- The severe devaluing of the fiat currency of a particular country, which we often witness happening to countries with economic problems or due to war, would not happen, as gold and silver maintain their value regardless of the financial or political stability of a country.

2- The gold and silver standard necessitates the free circulation, import, and export of gold and silver, which leads to monetary, financial and economic stability around the globe.

3- Exchange rates of currencies between countries would become stable. This would lead to a boom in international trade, as traders would no longer fear the uncertainty of exchange rates or the expansion of foreign trade, and people would be able to move commodities and money around the world much more easily.

4- If the gold and silver standard was employed, central banks and governments would not be able to freely print money, as the authorities would fear that if they exceeded limits in issuing banknotes, the demand for gold and silver would increase and they would not be able to meet this demand.

The Return of the Gold and Silver Standard
There are many obstacles in the way of restoring the gold and silver standard in the world today, including:

- The absence of a State capable of achieving such a large undertaking, and the pre-requisites that must be sought prior to establishing such a State in order to complete this undertaking, such as the existence of large gold reserves, or the presence of gold and silver mines within the land, or the existence of neighboring countries with either large gold reserves or large gold and silver mines

- The opposition of the colonial Capitalists of the West who greatly benefit from the fiat standard today, and the political and economic strategies we should expect them to employ to prevent the establishment of a successful gold and silver standard

- The lack of gold reserves in the lands where the Khilafah is likely to be re-established relative to the value of fiat currency currently in circulation, and the logistical problems associated with transferring the current fiat standard into the gold and silver standard with such limited gold reserves available

- The problem of manufacturing hundreds of millions of weight-accurate gold and silver Dinars and Dirhams quickly enough to distribute within the time allotted to the full transfer of currency over to the gold and silver standard

Each of these problems require lengthy and in-depth research and analysis in order to fully understand them, and to devise a suitable action plan in order to deal with them; but, in this paper, we will only discuss one of them, namely: How to practically transfer the current fiat standard in the Muslim lands, upon the re-establishment of the Khilafah, into the Islamic gold and silver standard, with only a limited amount of gold in its reserves.

The Gap
Transferring from one currency system to another is a dangerous undertaking; it could lead to the collapse of the economy, the anger and upheaval of the masses, and widespread economic unrest, which would, in turn, allow the enemies of Islam an opening through which to attack the Khilafah and harm it greatly. Therefore, this matter must be planned carefully, all options must be considered, and all contingencies must be made to ensure a smooth transition that instils confidence and relief in the citizens of the State, rather than cause fear and uncertainty.

The greatest obstacle in the face of a smooth transition is the lack of gold and silver in State reserves relative to the value of the currency in circulation that is to be replaced. So, for example, Pakistan has around 65 metric tons of gold in reserves, which is worth around $2.5 billion USD, but they also have 1.8 trillion Rupees in circulation according to the State Bank of Pakistan, which is worth around $16.8 billion USD. This gap of $13.5 billion in currency value would need to be addressed, and cannot simply be ignored or erased without major repercussions.

Note that not all countries suffer from such a wide gap between the gold reserves and the fiat currency in circulation. For example, Turkey has around $31 billion USD worth of Turkish Liras in circulation, and 442.1 metric tons of gold in its reserves, worth around $17 billion USD, which would cover about 55% of the fiat currency in circulation. But many countries in the Muslim lands suffer from a gap worse than even that in Pakistan. Therefore, a contingency plan must be devised in order to deal with such gap – no matter how wide or narrow – in a manner that will ensure a stable economy before, during, and after the transition to gold and silver.

The Options
After more than 15 years of discussing this matter with members of Hizb ut-Tahrir and thinkers around the world, I have concluded that there are three main models for how to convert the fiat standard in the Muslim lands into the gold and silver standard, each with their own positives and negatives:

1- The first option is to keep the current fiat currency in circulation, and simply back it with the available gold and silver in reserves.

This would require devaluing the current fiat currency down to whatever the total value of the gold and silver reserves are. It is the easiest and simplest solution, as it can be done quickly behind the scenes, and does not require a potentially messy situation related to the practicalities of removing the current fiat currency or distributing the gold and silver currency. This is also the most problematic solution, as it will devalue the currency of all citizens, including the poor, and would not only lead to hardship for them, but might also lead to unrest among the masses.

Devaluing the currency is not as problematic as it might seem, as many nations worldwide have experienced massive devaluation of their currency, and survived, such as Indonesia, whose currency was devalued by 80% from 2000 Rupiah per 1 USD, to 16,800 Rupiah per 1 USD; and Iraq, whose currency devalued from around 0.5 Dinars per 1 USD to over 2000 Dinars per 1 USD at one point. The Soviet Union experienced massive currency hyperinflation over the course of its growth, where the Ruble went from 0.56 Rubles per 1 USD to over 5,960 Rubles for 1 USD, but they survived and the people adapted. Therefore, people can adapt and deal with such situations, but it is certainly not the preferred option, and let’s not forget that the collapse of the Indonesian Rupiah caused the unrest that led to the overthrow of Suharto.

2- The second option is to allow the current fiat currency to continue circulating, but to disassociate the new Khilafah from it entirely, setting up the new currency entirely independently from the old currency, paying wages and distributing Zakat and all other forms of payment from the State using only the new gold Dinars and silver Dirhams.

This is a high-risk option with great results if successful, but comes with a major drawback of upsetting the wealthy elite who might have large amounts of cash wealth, as it will render their cash wealth entirely worthless very quickly.

If the Khaleefah chooses this option, he will have the benefit of a smooth process of setting up a new currency, and the major benefit of literally handing out gold and silver to the masses – which will instill a great deal of confidence and excitement if done quickly and correctly. It will also free the State from having to deal with any of the complications associated with compensating for the gap between the gold reserves and the value of the previous currency. It would also free the State from having to deal with any counterfeiting operations that might exist related to the previous currency.

The primary danger of this option is not being able to distribute the new gold and silver currency quickly enough through State wage payments and expenses, which is almost certainly will be the case, and would lead to mass poverty – as people would not have a functioning currency – and huge popular unrest. Such a situation would be perceived as State incompetence, and most people might not understand the cause of the problem or the benefit of this approach.

3- The third option – and the most complex of the three – is to distribute the new gold and silver currency based on establishing a “need before greed” threshold for replacing cash currency in people’s hands, ensuring that everyone who needs the cash they own has it replaced in full, and anything above that, such as savings (which will mostly affect the wealthy) is “owed” by the State to them, and is paid to them when more gold and silver are available.

This option is my favored option, as it offers a great deal of versatility in application – in that the State can choose how best to distribute the gold and silver currency to those most in need of it, as well as allow the State greater flexibility when it comes to determining how much gold to keep in the treasury for State expenses. It will also allow the State additional time to investigate ill-gotten wealth by the wealthy elite in order to remove such wealth from the final distribution calculation. It also offers an immediate reassurance to the middle and lower class wealth brackets that the State is looking out for them and giving them gold and silver directly in the place of their worthless paper. This option also has a higher chance of keeping the wealthy elite happy, as their wealth will be protected by the State, and might even increase significantly in value after the value of gold and silver both increase over time.

The logic and feasibility of this option centers around understanding the following two realities:

a. The majority of people in the Muslim lands have very little fluid cash

b. The majority of wealth in the Muslim lands is held by a very small percentage of people

While it is difficult to determine the distribution of cash wealth among the people of any nation, we can get an idea of it from the general distribution of overall wealth in any particular country. For example, in 2015, according to Credit Suisse, 90% of Pakistani adults had less than 1% of all of Pakistan’s wealth, while the top 0.2% of the population held nearly 65% of the total wealth of the country.

Assuming the worst-case scenario, which is that these numbers indicate a direct correlation of the cash distribution in circulation (even though the vast majority of the 99.8% will have almost no cash to speak of, as most people live from paycheck to paycheck and have no savings), this would mean the following (recalling that Pakistan has around $16.8 billion worth of Rupees in circulation, and $2.5 billion in gold reserves):

1- 90% of the population has less than $168 million worth of Rupees total

2- 9.8% of the population has around $5.7 billion worth of Rupees total

3- 0.2% of the population has $10.9 billion worth of Rupees total

From this it can be seen that the Khilafah would only need to fully replace the $168 million worth of Rupees distributed among the bottom 90%, and then calculate the financial needs of the remaining 10%, distributing among them however much of the remaining $2.332 billion of gold the state wishes to release – as the State might wish to hold onto a specific amount of gold currency for State expenditures – in a manner that ensures a fair and balanced distribution for everyday life, and then set up a debt account for the remaining cash owed to the wealthy that will be paid in time.

It is important to note here that this is only a sample assessment based on assuming that there is a correlation between total wealth distribution and the distribution of fluid cash among the masses, which is almost certainly not true. The reality should offer a far more positive situation to deal with, where the lower 99.8% wealth bracket will likely have much less than $5.7 billion worth in fluid cash.

The exact numbers of the above reality must be assessed carefully and accurately by the Khaleefah and the administration of the Khilafah within the land it controls, and the solution must be implemented without delay if we wish to ensure economic stability and prevent popular unrest.

Once the distribution amounts are known, exchange centers can be set up in major towns and cities, and a deadline issued for citizens to hand in all old fiat currency in exchange for gold and silver Dinars and Dirhams, after which no more exchanges will be allowed.

An important point to note here is that the above does not include the calculation the amount of silver available in the land to be used as silver Dirhams, nor the fact that the Khilafah can ask the Ummah to donate their gold and silver for the sake of using it to back and establish the new currency. And we all know that the Ummah of Islam are the most generous people on earth when it comes to donating for an Islamic cause.

One Last Thing
A final matter that needs to be addressed is whether the Khilafah should use a representative currency or directly distribute gold and silver Dinars and Dirhams. It is my opinion that it is extremely important to immediately begin the restoration of the implementation of the gold and silver standard by putting real gold and real silver in people’s hands. This will achieve many great results – including, but not limited to – the following:

1- It will instill great confidence in the new currency system and in the new economy, even causing citizens of other nations to envy the status of the citizens of the Khilafah and their high standard of currency format

2- It will break all previous notions and associations with all former fiat currency systems, and establish the new concept of the new currency standard in the minds of everyone. Allowing old fiat currency to remain in people’s hands will maintain the people’s mental association of currency with the old system, and could hinder progress into the new system.

3- People will once again learn how to deal with the weights and measures of the Islamic system by practical application, renewing their understanding of the weights and measures of Zakat and various other Ahkam that are linked to the weight of gold and silver and other goods, such as wheat and barley. With the gold and silver standard, people will learn how to weigh gold and silver again, they will learn what a Mithqaal and a Ratl and a Qirat feel like, and they will learn how to test gold and silver for purity, all as a natural and practical part of their lives.

4- And no one can deny the effect that a Muslim from the Khilafah will have when visiting a foreign nation, carrying bags of gold to trade with, versus any other visitor carrying pocketsful of worthless paper, and how that will affect the perception of all those who deal with them.

The problem of minting gold and silver Dinars and Dirhams within such a short time-frame – as well as deciding what level of purity the coins should be, and so on – is something that must be researched and planned carefully, and is outside the scope of this paper.

May Allah ﷻ allow us to fully restore the implementation of the systems of Islam, including the gold and silver standard, and help us in choosing and implementing the best means and styles to transition the Muslim lands from the corrupt systems of Kufr that infest it today, to the breadth and mercy of the guidance of Allah ﷻ. Ameen.

وآخر دعوانا أن الحمد لله رب العالمين