The Gulf’s Currency Solution

The Gulf’s Currency Solution

May 9, 2008

(This appeared in the Asia Times on May 9, 2008.)


Persian Gulf states, including Kuwait, Qatar, and the United Arab Emirates, are talking about dropping their currencies’ pegs to the US dollar. Inflation in these states is spinning out of control, as the peg causes their currencies to follow the dollar lower.

They have been somewhat hesitant about this, not least because of concern over a viable alternative. They could peg to another currency, such as the euro, or even the yen, but pegging to either of these could at some point create the same difficulties that the dollar peg is creating now. It was not that long ago that the euro was trading at US$0.87.

Another option is some sort of currency basket, as is used by Singapore. This is not a bad solution, as it provides some diversification among central bankers’ errors. However, in the sort of dollar-led worldwide inflation that is happening today, typically all currencies sink together.

Of course, these countries could try to go it alone, with an independent currency. But there is hardly any guarantee that the home-grown central bankers would be better than those at the US Federal Reserve or European Central Bank. Smaller countries have a history of regular currency crises.

The problem with all these alternatives is that, at their base, they rely on some personage like US Federal Reserve head Ben Bernanke to manage the currency properly. There is little evidence that this ever happens. Central bankers always screw up, eventually.

There is one – and only one – monetary system that has a history of not screwing up. That, of course, is gold. One of the most common currencies in the Gulf region was the gold dinar. Ibn Khaldun, the 14th century Arab genius, wrote that the dinar had the weight in gold of 50.4 grains of barley, or 4.25 grams. Today, gold dinar coins are still being produced, in Malaysia. They contain 4.25 grams of gold. The first standardized gold dinar coins date from AD 698. They contain 4.25 grams of gold.

Why did people use these coins for over 1,000 years? Because, when using the coins, they never ran into problems, like those governments face today, that would cause them to adopt another system. These regions are no strangers to fiat paper currencies. The king of Persia issued a fiat paper currency in the year 1294, the first paper currency outside of China. These systems didn’t last. You can imagine why.

Faith and superstition could never persist for 1,000 years. Gold makes good money because it has the most desirable characteristic of money: it is stable in value. “And God created the two precious metals, gold and silver, to serve as the measure of value of all commodities,” Ibn Khaldun wrote in the 14th century. “For other goods are subject to the fluctuations of the market, from which they [gold and silver] are immune.”

Five hundred years later, the great steel baron Andrew Carnegie wrote, “The one essential quality that is needed in the article which we use as a basis for exchanging all other articles is fixity of value. The race has instinctively always sought for the one article in the world which most resembles the North Star among the other stars in the heavens, and used it as ‘money’.”

Gold’s monetary value is stable. When you see the “price of gold” soaring today, you are witnessing the decline in value of currencies worldwide. A currency pegged to gold, even if it is made of paper, is also stable in value. Paper currencies are pegged to gold in a fashion that is very much like an automatic currency board. In effect, there is a currency board linked to gold.

There are probably too many people in the world for everyone to use gold coins. That is one reason paper currencies, linked to gold, were invented. However, for a smaller region like the Persian Gulf states, it would be possible to use gold coins in daily transactions. The 4.25 gram gold dinar is worth a little over $100 today. Wouldn’t it be interesting to pay a Dubai hotel bill with gold coins? Token silver coins, redeemable for gold dinars on demand, could be used for smaller transactions. Bank transactions would remain electronic, but bank reserves could be redeemed for gold bullion on demand. Paper money would cease to exist in the Gulf states.

The Gulf states are uniquely suited for this change because their main export is oil. They don’t have to worry as much about the “competitive disadvantage” that results when the US dollar or other major currencies are devalued. Governments’ desire to avoid this “competitive disadvantage” is why major currencies typically decline together, causing inflation everywhere. Of course, the Gulf states would be paid for their oil in dinars – dinars linked to gold.

In 2003, then-Malaysian prime minister Mahathir Mohamad proposed a pan-Islamic gold dinar currency. It’s time to revive that idea. If the Islamic states form a currency bloc based on gold, and stick with it, before too long the gold dinar would become the world’s most popular currency.

Nathan Lewis is the author of Gold: the Once and Future Money, (2007), now available in five languages. Formerly an economist serving institutional investors, he runs an investment fund in New York. His website is: