The Gold Standard Anchored in Islamic Finance

The Authors provide a comprehensive background for recent international financial crises rapid expansion of interest-bearing debt and monetary expansion though the fractional reserve banking system. In this context, the authors provide an analysis of the experience and issues associated with international payments systems the various forms of the gold standard, the Bretton Woods system and the present system of flexible exchange rates.

The authors go on to examine the case for fixed exchange rates (gold standard and other interesting variations) anchored in Islamic finance. The message of this book is that the gold standard could provide a solution for addressing international financial instability if and only if it is anchored in 100% reserve banking, which is an essential pillar of Islamic finance.

The message of this book is simple. As international payments systems, the gold standard and the gold-exchange standard have historically failed because governments could not resist printing excessive quantities of money relative to their gold stock, the fractional reserve banking system created more and more money through the credit multiplier, and government intervention rendered prices and wages less flexible. The failure was not in the gold system but in the hostile environment of its operation.

The printing of money by reserve currency central banks, such as in the United States and Great Britain, was particularly problematic as they could finance their budget and external deficits simply by printing. This fueled inflation and speculation, creating asset bubbles and eventually resulting in financial crashes. The fractional reserve banking system encouraged banks to create mountains of debt that were of questionable quality, endangering their own solvency, and in turn requiring government bailouts and more money being printed.

All along, government interventions in financial, product, and labor markets have impaired the adjustment mechanism. No international payments system could have survived under these conditions.

Establishing a gold standard, or any standard based on any other real commodity or commodities, does not require a global conference and agreement. Countries, or a group of countries, can achieve the same goal if they follow a few recommended steps.

It is our contention that the Islamic financial system affords the best financial setting for one or more countries to establish a link to gold. The Islamic financial system has the following essential features: (i) a banking system that embraces two distinct categories of banks—depository banks that are based on 100% reserve banking, and investment banks that essentially act as pass-through institutions channeling investor funds to desired projects—that prevent banks from taking risks with, and leveraging, their clients’ deposits; (ii) prohibition of interest-bearing debt and encouragement of risk sharing through equity participation and Islamic bonds, whereby the bond holder has direct access to the underlying asset, and is thus sharing the risk.

The adoption of a gold standard by the Western economies in 2014 is a nonstarter. It is not even on their radar. It is something that would not be given a moment’s attention by senior decision makers. Yet, it is something that Muslim countries may consider today as a very attractive option in a world of continuing financial turmoil. And who knows? In the future, its demonstrated success may begin to attract non-Muslim countries to a financial system that embraces 100% reserve banking, risk sharing, and a link to gold or to other real commodities. We hope that our presentation provides a fruitful direction toward a more stable financial future.

About the Authors

Hossein Askari is Iran Professor of International Business and International Affairs, George Washington University, USA.

Abbas Mirakhor is first Chair of Islamic Finance at the International Center for Education in Islamic Finance (INCEIF). Formerly, he served as Dean of the Executive Board of the International Monetary Fund (IMF) and as Executive Director representing Afghanistan, Algeria, Ghana, Iran, Morocco, Pakistan, and Tunisia.

Bibliographic Information

Title: The Gold Standard Anchored in Islamic Finance

Author (s): Hossein Askari & Abbas Mirakhor

Publisher: ‎ ‎ ‎ Palgrave Macmillan

Length: 312 Pages

ISBN:‎ 9781137485823

Pub. Date: June 10, 2014

The Gold Standard Anchored in Islamic Finance