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Why Should be Dinar-Dirham?

Why Should be Dinar-Dirham?

The majority of the economy will perhaps agree with the opinion that gold coins (dinar) and silver coins (dirham) become the alternative currencies deemed better than the paper currencies that we use every day. There are also some promoting these two types of currencies to evoke nostalgia for the heyday of the Islamic caliphate.

But yearning for the historical past is not supposed to make us lose sight that our duty is actually to plan for and embrace the better future. It’s true that the past could be a teacher, but if it takes too long to look back then we sometimes can’t have a good view of the obstacles ahead. We could consequently fall into gloom about the future because we get too carried away with the glory of the past that actually does not belong to anyone who lives today.

Due to a vibrant promotion of dinar-dirham, some call them Islamic currencies, or they are at least an Islamic heritage. That’s okay as those currencies were used in multiple times of the caliphate. Dinar is a direct translation of denarius which is a type of gold coin used in Roman times. Arabs, that is to say, inherited it from the Roman Empire.

Therefore, the fundamental question should be whether gold and silver coins can overcome the weaknesses of paper currencies in the present and future. There are several issues that make dinar-dirham more advantageous.

First, a paper currency issued by each country has developed into a very complex financial system. As a result, currency transactions become a series of long and inefficient things. To be able to buy goods made in Korea, the series of money transactions is much longer than goods transactions. The flow of goods includes only three stages, that is, importers buy from producers in Korea and distribute them to retailers which then sell them to consumers. The money transactions include at least five stages: (1) producers and importers transact in US dollars, (2) producers in Korea exchange dollars into Korean won, (3) importers exchange rupiah into dollars, (4) retailers pay rupiah to importers, and (5) retailers receive rupiah from end consumers, when the basic idea of using money is in fact to simplify transactions in the real sector. If the entire world uses dinar or denarius, the money transaction chain will equal the trade chain.

Second, in the floating exchange rate system, traders between countries face uncertainty in the exchange rate. For certainty, they have to hedge or swap. Both of them cost a lot of money for sure. If the entire world adopts dinar, there will automatically be no cost because the uncertainty of the exchange rate becomes irrelevant.

Third, inflation in each country tends to be highly affected by the monetary policy. Countries that adopt a looser monetary policy tend to suffer higher inflation. Therefore, the inflation rate in some countries tends to be different. If denarius becomes the single currency in the world, it is almost for certain that inflation throughout the countries will be more or less the same. What differs is the price development in the group of non-tradable items such as house rent, public transportation costs and barbers.

Fourth, the use of different currencies between countries can pose a danger caused by a currency war. Countries that want to enhance competitiveness in the international markets can design a strategy to make their currencies remain undervalued. Therefore, other countries will face a trade deficit and severe unemployment issues. This could trigger a currency war that will end up with the instability of the world finance.

If the world embraces one currency, this would avoid any danger. Fifth, countries with currencies in which international trade is denominated can easily “export” inflation to all parts of the world. Loose monetary policy in the United States can trigger prices in the world markets to soar which in turn sparks the global inflation. The US government earns seigniorage income from money printing, and the costs must be borne by the population of the world. America is unlikely to go bankrupt even though its debts pile up because the whole world is giving implicit bailout funds. If denarius becomes the world currency, all countries have an equal degree in the monetary sector.

Despite considerable advantages of dinar as put above, there are several claims that tend to be misleading. One example is dinar is anti-inflation, anti-usury, anti-speculation, etc. In terms of these issues, we will discuss them in a series of writings in the coming months. The point is that to make us understand dinar-dirham in an objective and straight manner. Just because they have advantages does not mean that those currencies are is flawless. Let’s see if we are destined to clarify this issue.

Dr Iman Sugema, Lecturer in IE FEM at IPB
M Iqbal Irfany, Lecturer in IE-FEM at IPB
Source: Ekonomiislami.wordpress.com

BSM Editor