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02 The Gold Standard
The significant increases in the fiat money supply in recent times by the Federal Reserve and Bank of England are inflationary, and instrumental in the devaluation of the dollar and pound versus commodity prices. Non-convertible fiat currencies are a relatively recent phenomenon. President Richard Nixon took the US dollar off the gold standard in 1971, and the world followed.The Islamic world, maintained the gold/silver standard and a consistent currency policy over several centuries, as did many other areas of the world.
The currency standard in the Islamic state (Caliphate) is based exclusively on gold and silver.The state only issues coinage and notes which are gold and silver or 100% backed by gold and silver - the bi-metallic standard. Although gold/silver is the official standard of the State, there is nothing to prevent citizens from dealing with or owning other currencies, including those based on fiat money (non-convertible paper based without any gold/silver backing).
Weights
Shariah Dinar of gold = 4.25 grams of gold.
Shariah Dirham of silver = 7 tenths of a Dinar = 2.975 grams.
The Islamic texts that indicate that gold and silver are the basis for the state's currency are numerous. For example, the prohibition of hoarding (saving without purpose) explicitly refers to gold and silver as currency.
The Zakat tax is obliged with reference to gold and silver units: "One half dinar in every 20, and 5 Dirhams in every 200", specifying the Zakat rate at 2.5%. Similarly the compensatory blood-money for those killed as specified by the Prophet Muhammad was 12,000 Dirhams of silver.
Gold and silver are also mentioned in the Islamic texts in connection with the prohibition of usury. When trading gold for gold or silver for silver the weight must be equal; for example two people might trade coins of a different denominations, or coins for unminted bullion but equality of weight must be maintained. Such trades must also be "on the spot" i.e. transacted immediately, without delayed settlement by either party.
Interestingly, global gold holdings have increased by an annual average of 2.5% over the past 200 years, naturally keeping pace with the increase in output of products and services. If this system were adopted it would have provided a basis for currency which is stable and has intrinsic value.
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