2 Contents Gold- Characteristics The Gold Standard- Definition Brief HistoryProblems of Paper CurrencyAdvantages of Gold Standard implementationDigital Gold Currency (DGC)Risks of DGC’sProblems with Gold StandardSuggestions
3 GOLD Gold is a commodity Has intrinsic value Does not have inflation Desired, highly valuedIncapable of being created or destroyed.DivisiblePortableIndestructible by heat, pressure, corrosion. Does not react.Industrial demand, jewel demand, investment demand
4 GOLD STANDARD DEFINITION A commitment to fix the price of domestic currency in terms of a specified amount of gold.National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price.A county under the gold standard would set a price for gold, say $100 an ounce and would buy and sell gold at that price.This effectively sets a value for the currency; in our fictional example $1 would be worth 1/100th of an ounce of gold
5 BRIEF HISTORY 1800’s- Bimetallic system(Essentially Gold) 1900-Gold Standard Act1933-End of Gold Standard. Only Jewellery could be held.1946-Bretton Woods System(Fixed exchange rates. Gold trading at $35/ounce.(Foreign transactions in gold)1971- End of Bretton Woods System.
6 Claimed by a Muslim scholar, Ibn Khaldun that God created the two precious metals, silver and gold to serve as a measure of all commoditiesGold had played an important role for many centuries until the end of Bretton Wood’s systemAfter the collapse of Bretton Wood’s system, fiat money and a floating rate exchange system have taken place in the monetary systemFiat money has no intrinsic value, used only as a medium of exchange.
7 Problems of paper currency Paper currency had no intrinsic value, making the exchange rate arbitrary and subject to manipulation & instability as we saw during the financial crisis.Problems of inflation- Benefits the debtor, benefits Govt. at the expense of the people-as inflation grows the tax also multiplies. (Inflation tax)Employees feel trapped in wage slavery. (What $1 buys today, it might not buy tomorrow)Makes corruption and fraud easy87 countries have undergone major currency crises over the past 25 years due to the monetary systems.
8 Advantages of Gold Standard implementation Low transaction costs, since only accounting record need to be kept. (No LC, no exchange rate transaction costs, no exchange rate risk)Prevents multiple deposit creation in banks, money multiplying, and the resulting risks and speculation, and speculation in foreign exchange.Play the role of stable international unit of accountGold can be used for saving, as it is wealth in itself.Impacts on consumerism, political, religion, social order, technology and globalization would increase the economic stability of Muslim countries.
9 DGCOne world currency backed by gold- Digital Gold- One world currency backed by gold,Digital gold currency (or DGC) is a form of electronic money based on ounces of gold. It is a kind of representative money that is exchangeable for gold on demand. Proposed exchanges: Goldmoney, ebullion, and e-gold(1996)Gold will no more be investment, as investment implies expected return.
10 RISKS OF DGC’Sthe exchange rates of DGCs fluctuate against national a currency, which is reflected by the price of gold in a particular currency.the purchasing power of gold (and therefore DGCs) is measured by its fluctuation against other commodities, goods and services. Since gold has historically been the refuge of choice in times of inflation or economic hardship, the purchasing power of gold becomes stronger during times of negative sentiment in the market. This has speculative interference.Strict governance, and agreed upon rules of governance by all countries.Fluctuations of national currency against goldData security
11 Problems with the Gold Standard Some believe gold resources would be depleted and prices of gold would be pushed up.Volatility of gold, due to its narrow market.Gold prices can also be manipulated, though not as easily as the U.S. dollar or other currencies. Speculation and manipulation will not be as easy as when local currency is valued against the U.S. dollar
12 SUGGESTIONSStart the official circulation of silver dirham first, gauge the respose, and then move on to gold.Wages payable in silver and gold.Individual Savings in gold.Proposal of a currency backed by a broad based basket of commodities, including the gold dinar and the silver dirham.Central banks to set up the development project for the gold dinar.Countries must agree on using the gold standard.The developing countries must come together to help each other grow, OIC to facilitate trade growth.