Imam Muhammad (d. 189), the companion of Abu Hanifa (d. 150) – Allah’s mercy be on them both – the main transmitter of his madhhab and a mujtahid in his own right, said: ولا بأس بأن يستعين المسلمون بأهل الشرك على أهل الشرك إذا كان حكم الإسلام هو الظاهر عليهم. “It is alright for the Muslims to seek the help of polytheists when fighting against (other) polytheists if the rule of Islam is dominant over them.” (al-Siyar al-Kabir السيار الكبير , 4:191, emphasis added)
This is the authoritative statement on the matter in the Hanafi madhhab. Imam Muhammad clarifies the hukm of what is designated in fiqh as the issue of seeking assistance in war from the disbelievers. He notes that assistance can be sought when Islamic rule is dominant. The implication of this condition is operative. That is, when Islamic rule is not dominant, seeking assistance is not allowed. In other words, seeking assistance is strictly conditional. If, and only if, the rule of Islam is dominant, it is allowed for the Muslims to use non-Muslims in war. When Islam is not dominant, that is, when the disbelievers are dominant, it is not allowed.
Two points need to be clarified here. One, the rule of Islam being dominant refers to the existence of Dar al-Islam, which is the abode wherein the rules of Islam (Shari’ah) are applied and the security of the lands is secured by the authority of Islam, that is, by the Muslims. Two, seeking assistance can be of the form where the Muslims ask some non-Muslims – such as the Ahl al-Dhimma (Non Muslim citizens) living in Dar al-Islam – to fight with them or it can be of the form where some non-Muslims request to fight alongside the Muslims. In other words, the request can come from either side. However, in either case, the non-Muslim must fight under the command and leadership of the Muslim army.
Imam Muhammad goes on to respond to a contention made by some that since al-Zubayr (ra), from the Muslims who migrated to Habasha, fought with the Najashi when an enemy of his fought him, it is allowed for Muslims even to fight under the command of a non-Muslim army. Imam Muhammad responds to this by saying that the correct interpretation of these narrations is that either the Najashi was a Muslim as the time or the Muslims had no other choice as indicated by some narrations. He stated,هذا الحديث يستدل من يجوز قتال المسلمين مع المشركين تحت رايتهم، ولكن تأويل هذا من وجهين عندنا: أحدهما: أن النجاشي كان مسلما يومئذ، كما روي، فلهذا استحل الزبير القتال معه. والثاني: أنه لم يكن للمسلمين يومئذ ملجأ غيره “This hadeeth indicates that it is permissible for Muslims to fight with polytheists under their banner, but this interpretation has two aspects for us: One: that the Negus was a Muslim on that day, as narrated, so Az-Zubayr turned fighting with him. The second: that the Muslims did not have other alternate recourse at that time” Therefore it is an exceptional case which cannot be generalised.
Shams al-A’imma Abu Bakr Muhammad ibn Abi Sahl al-Sarakhsi (d. 483), one of the early Hanafi fuqaha, explains the evidence for the above-mentioned Hanafi position in his commentary on al-Siyar al-Kabir. He notes that the Prophet ﷺ sought the assistance of the Jews of Bani Qanuqa’ against Bani Quradha and he allowed some disbelievers to come to battle with the Muslims as in the case of Safwan in Hunain and Ta’if. He explains that this type of action is but an instrumental use of the disbelievers for an end that is to the benefit of the Muslims. At the same time, he adds, that in other cases the Prophet ﷺ refused disbelievers to fight with him, such as in the case of Jewish allies of Abdullah ibn Ubayy who came along to fight in Uhud. The Prophet ﷺ ordered them to return saying, «إنا لا نستعين بمن ليس على ديننا»“We do not seek assistance from disbelievers.” Al-Sarakshi mentions that in such cases those who were refused were a Ahl ul-Man’ah (أهل منعة Considerable Force) in which case it is disliked to allow them, as they could turn against the Muslims if the Muslims suffer a blow and find themselves weak. This is in the case where the disbelievers intend to fight under the banner and command of the Muslims. As for the case where the disbelievers are a considerable force and they intend to fight under their own banner and leadership, this is absolutely prohibited (Sharh al-Siyar al-Kabir شرح السيار الكبير 4:191-3).
Al-Sarakhsi also addressed the issue in his fiqh masterpiece al-Mabsut المبسوط (10: 23-24). Here again, he mentions some cases in which the Prophet ﷺ refused disbelievers from fighting with him and others where he allowed it. He notes that the difference is in the strength of the disbelievers and whether they fight under the Muslims or by themselves. When they fight as individuals who does not comprise a strong force, they can be allowed for in this case, doing so serves our purpose and there is not a threat. But if they want to fight as a separate entity under their own banner, this is not allowed as it entails a potential threat. Al-Sarakhsi cites the hadith in which the Prophet asked the Jewish allies of Abdullah ibn Ubay to return in Uhud, summarising the hukm as follows:تأويله أنهم كانوا متعززين في أنفسهم لا يقاتلون تحت راية المسلمين، وعندنا إنما يستعين بهم إذا كانوا يقاتلون تحت راية المسلمين، فأما إذا انفردوا براية أنفسهم فلا يستعان بهم، وهو تأويل ما روي عن النبي صلى الله عليه وسلم أنه قال: «لا تستضيئوا بنار المشركين»، وقال صلى الله عليه وسلم: «أنا بريء من كل مسلم مع مشرك» يعني: إذا كان المسلم تحت راية المشركين. “The correct interpretation of this hadith is that they were powerful in themselves not fighting under the Muslims’ banner. For us, we only seek assistance from them if they were fighting under the Muslims’ banner. If instead they want to fight under their own banner then we do not seek assistance from them. This is also the correct interpretation of the Prophet’s ﷺ saying, «لا تستضيئوا بنار المشركين»‘Do not seek light from the fire of the polytheists’ and his ﷺ saying, «أنا بريء من كل مسلم مع مشرك» ‘I am free from every Muslim who fights together with a polytheist’, meaning if the Muslim is under the polytheists’ banner.”
This is the basic position on this matter according to the Hanafi fuqaha, reiterated by other early and later scholars as the following two citations also show. Abu Bakr al-Jassas, (أبو بكرالجصاص) in his Ahkam al-Qur’an (أحكام القرآن) 2:559 said, وقال أصحابنا: لا بأس بالاستعانة بالمشركين على قتال غيرهم من المشركين إذا كانوا متى ظهروا كان حكم الإسلام هو الظاهر، فأما إذا كانوا لو ظهروا كان حكم الشرك هو الغالب فلا ينبغي للمسلمين أن يقاتلوا معهم. “Our companions (Hanafi fuqaha) said that it is okay to seek assistance from the polytheists when fighting other polytheists when the rule of Islam is dominant. If the rule of shirk is dominant, Muslims should not fight with them.” And Alaa’ al-Din al-Kasani (علاء الدين الكاساني) in his Bada’i al-Sana’i, (بدائع الصنائع) 7: 101 said, ولا ينبغي للمسلمين أن يستعينوا بالكفار على قتال الكفار؛ لأنه لا يؤمن غدرهم، إذ العداوة الدينية تحملهم عليه، إلا إذا اضطروا إليهم “The Muslims should not seek assistance from the disbelievers in fighting other disbelievers – except in the case of dire necessity – because there is no security from their betrayal. Their enmity against Islam pushes them towards such betrayal.”
We may note in the reasoning of the Hanafi fuqaha, based on the evidences, that their concern is with Muslims not falling under the influence of the disbelievers or being utilised for their agenda or for the protection and furtherance of their interests. This is why they stipulate that seeking their assistance or allowing them to fight with us is only allowed when Islam is dominant and they fight under our authority. In such a case, they serve our interests and there is nothing to fear. If this is not the case, however, then we would be serving their interests and the blood of Muslims would be split in the service of the interests and agendas of kufr entities.
This reasoning is also discernible in the related issue of seeking the assistance of disbelievers against Muslim rebels. Ibn ul-Humam (ابن الهمام) mentions in Fath al-Qadir (فتح القدير) (6: 109) that Ahl al-Adl (those who have the legitimate authority in the eyes of Shari’ah) can use the Ahl al-Dhimma in fighting the rebels so long as the fight remains within Dar al-Islam. But if the fight moves to Dar al-Shirk, they cannot use the assistance of any disbelievers.
We may conclude by saying that in this issue there are a number of ahadith in which the Prophet ﷺ explicitly prohibits seeking the assistance of disbelievers in war, such that the hadith extracted by Ahmad and al-Nasa’i in which he ﷺ said, «لاَ تَسْتَضِيئُوا بِنَارِ الْمُشْرِكِينَ»‘Do not seek light from the fire of the disbelievers.’ [Ahmad] However, in other ahadith he ﷺ did seek the assistance of some disbelievers or allowed them to fight with him. This is because the prohibition is not absolute but conditional and subject to a criterion. For the Hanafi fuqaha, this criteria is the dominance of Islam and that any disbelievers fighting with us fight under our banner and leadership. This will only be the case in the case of individuals or small groups. As for anything that means they fight as separate entities or we fight for their interests, this is not allowed.
On Wednesday the 6th of December 2017 Donald Trump made an announcement of al-Quds (‘Jerusalem’) being officially recognised as the capital of Israel which drew reactions from world leaders across the globe.
Here we present a few points regarding this development.
1. The US administration is intentionally provoking Muslims globally. That does not come as a surprise, particularly from Trump. But gratuitous provocation against the sanctities of people usually attracts uncontrollable reaction. If the new US embassy in Jerusalem, whenever it is built, or other US interests around the world, get attacked, the US administration has no one to blame but itself.
2. The reaction of world leaders is laughable. European leaders (France, Britain) and leaders of regimes in the Muslim leaders (Turkey, Gulf States, Saudi, Pakistan, Jordan) are feigning concern about the peace process and the now-allegedly-compromised neutrality of the US, as if the US were a neutral adjudicator in the first place and as if the peace process was going anywhere. What each of them is actually worried about is their own narrow political interests.
3. This latest transgression against al-Quds is symbolic. Al-Quds is already under effective Israeli occupation. Moving an embassy from Yaffa (‘Tel Aviv’) to al-Quds means little within the greater frame of a brutal occupation of the city and indeed of all Palestine. Even symbolic moves in politics, however, carry important meaning. It may be the equivalent of one move on the political chess board but it signifies the persisting domination of the opponent and his thorough control over not only the game but also its rules.
4. The protest of the Muslim street is laudable and also carries strong political meaning. It signifies the persistence of resistance, however small, however apparently impotent. That the flame still burns is of utmost value. Further, Muslims *should* protest when the sanctities of Allah are denigrated. Not being able to do more is not an excuse to not at the least express anger and condemnation. Our iman demands it.
5. Keeping the greater frame in mind is also critical in terms of conceiving the problem and solution. The problem is not where we draw the borders (’48, ‘67, etc.), the status of al-Quds (shared, international, Jewish, Muslim), or how much of Palestine we are given. These issues are distractions whereby the coloniser offers us crumbs. The problem is the occupation of Palestine, all of it, and what allowed it: the absence of the Khilafah.
The solution, in turn, is not in hoping for some (miraculous) beneficence from the US or UN. The solution is the military liberation of Palestine, all of it, from a military occupation. An occupation that is protected and maintained by the surrounding Arab states and ignored by other Muslim states like Turkey and Pakistan. They have all betrayed Palestine, among their greater betrayal of Islam and the Muslim Ummah. Hence, our rage should be first directed at them and our political work at changing them, at expelling western neo-colonial interference, and uniting the Muslim lands under a sincere Islamic leadership. This alone can pave the way for liberating Palestine the only way is can be liberated: the way of Salah al-Deen.
Uthman Badar is a student of Islamic sciences, philosophy and a member of Hizb ut-Tahrir Australia.
In his tract on monetary reform, John Maynard Keynes referred to gold as a barbarous relic, whose rigidity had fettered the world from economic freedom and prosperity. He spoke at a time when the Occident were suffering from macroeconomic anaemia and were yearning for a solution. In sheer desperation, fiat money became the drug that gave growth-addicts what they craved for in the short-run. However, years after its introduction, the fiat system has induced far more volatility than it sought to resolve. In truth, Keynes failed to realise that barbarity was a trait not of gold but of fiat, insofar as it has plagued the world with monetary anarchy. In fact, the very system he consigned to history has never been more relevant than it is today.
Islam’s imminent arrival as a political entity has necessitated a vital discourse, in which its ability to purge the world of its monetary woes by way of bimetallism must be explicated. In this regard, many have written extensively on the theory of such a system, yet few have discussed the more practical steps necessary to make it a reality. This paper shall do just that, by explicating transition and any potential complications the caliphate may experience during this period. In doing so, it shall bring clarity to a pertinent topic, particularly for those seeking a more permanent solution to the monetary problems that pervade them. For simplicity, this paper shall concern a gold standard as opposed to a bimetallic system, albeit much of the following would naturally apply to the latter. Finally, this paper shall also concern a bullion and exchange standard, as these are the most likely variations a caliphate will adopt on a domestic and international level respectively.
Perhaps the most important issue that one ought to briefly address before delving into such a topic, is the mechanics of a gold standard. Under this system, the total money supply in any given economy is determined by the quantity of gold it possesses in reserves. The value of money is therefore chained to the value of gold, and because an economy must maintain convertibility by redeeming its currency at a particular rate at any given point in time, the supply of money is generally fixed and endogenous. This leads to price stability in the long-run, which is integral to macroeconomic success. Thus, the gold standard is a monetary system that actively regulates both the quantity and growth of money, so as to attain domestic equilibria.
Under the international gold standard, exchange rates between adherents were fixed and global prices moved concurrently. This co-movement occurred at the behest of an automatic balance-of-payments adjustment process called the price-specie flow mechanism. As international settlements had to be dealt exclusively in gold, any country running a deficit in its balance-of-payments would face a net outflow of gold. This internal contraction of the money supply would subsequently force internal prices to fall (deflation); increasing the demand for exports and correcting any deficit in the balance-of-payments. The antithesis is also true for countries that experience a budget surplus. Thus, the gold standard is a monetary system that also determines the value of one currency in respect to another, so as to attain international equilibria.
Fiat money is intrinsically useless, insofar as it is not backed by anything tangible. Hence, its value is derived purely from the supply and demand for it, that is, on the faith and confidence people maintain. As a result of its lack of intrinsic value, fiat money is extremely flexible, allowing those who are a monopoly over it to influence its supply by printing more of their currency at any given point in time. In doing so, they gain access to vast amounts of unsubstantiated capital, albeit in exchange for harsh inflation with no real growth in output. It is precisely this trait of extreme flexibility, that has created a number of virulent problems that need urgent attention. In addition to perennial inflation, the manipulation of fiat money has led to phenomena such as rapid depreciation, loss of purchasing power, exchange rate volatility and financial crises. In light of this, it is apt that we discuss an alternative like the gold standard, so as to make it that much more a reality.
The benefits of a gold standard are well known and do not require extensive detail. In brief; as the supply of money is fixed and endogenous, agents are unable to manipulate the money supply for short term gain. As a result, inflation is kept to an absolute minimum and prices in the long run are very stable. For instance, under the classical gold standard, inflation averaged only 0.1% per year in the United States. This internal price stability is just as advantageous externally, with the movement of gold achieving equilibrium in the balance- of-payments by way of the price-specie flow mechanism. Finally, the gold standard has a prodigious record of stability and success, indicative of its suitability as a monetary system and its strength over time.
Precious metals such as gold and silver have been used as forms of money for centuries. Their combination of lustre, malleability, density and scarcity make them an excellent store of value, unit of account and means of exchange. These unique traits were recognised by the Romans, who introduced the silver denarius, which became one of the most widely used coins of its time. They were also understood by the Byzantines, who introduced the gold bezant, which spread across much of Europe and the Mediterranean. Bimetallism was also integral to the caliphate and its legacy; as a strong and stable monetary system that the Muslims went on to use for much of their prodigious future. In this regard, the gold standard is no anomaly. It maintains an illustrious history and was conducive to success. However, for brevity this paper shall focus exclusively on those monetary regimes in history that are of relevance, so as to place transition in its appropriate context.
In this regard, the international use of gold as a monetary system of exchange often begins with the classical gold standard in 1880. Under this regime, central banks around the world were obliged to adhere to the rules of the game, so as to maintain an equilibrium in the balance-of-payments. However, this commitment began to abrade once World War I began in 1914. During the inter-war period, countries around the world decided to unfetter themselves from their ‘golden fetters’ in order to pursue higher expenditure by way of inflationary finance. Once the First World War had ended, many attempted to return to a gold standard, albeit with great difficulty. This led to a gold exchange standard from 1925-1931, which allowed countries except the United States and the United Kingdom to hold dollars, pounds and gold. However, this system was short-lived by Britain’s abrupt departure in 1931 due to capital flight, which exhausted most of its reserves.
From 1933-34, US President Roosevelt suspended the gold standard, only to then nationalise gold by prohibiting its private ownership in coins, bullion and certificates. Post Great Depression and World War II, the Bretton Woods system was finalised and gold returned once again in 1945. Dominated by the United States, this agreement marked a transition not only in monetary system but in political hierarchy, shifting power away from the United Kingdom, whom were unable to make their case with John Maynard Keynes, and towards the United States, whom succeeded with Harry Dexter White. Under the Bretton Woods system, countries agreed to settle their international balances in terms of the dollar on condition that they could be redeemed for gold at a parity of $35/oz. However, persistent balance-of-payments deficits depleted US reserves and led to a global crisis of confidence in their (in)ability to redeem the dollar for gold. US President Richard Nixon was therefore forced to halt convertibility in 1971, which consigned the gold standard to monetary history.
The point of this historical overview is not to analyse the variations of a gold standard, but to recognise that many countries have made the transition before. It is certainly not an impossible task, as it is often made out to be. In fact, there have been many instances in history where this has occurred. For example, the United States transitioned in 1792 by way of The Coinage Act, which legally placed the country on a bimetallic system and also in 1897, when it formally adopted the classical gold standard. Across the Atlantic, Britain transitioned in 1816 after the Master of Mint, Isaac Newton, inadvertently overvalued gold, leading to the demonetisation of silver and also in 1925 through The Gold Standard Act initiated by Winston Churchill.
Historically, there have been a number of ways to transition to a gold standard. One such route had been to return to a pre-devaluation parity, which was the binding par value of currency in terms of a specific weight in gold. Another had been to implement a parallel gold standard, that grew alongside the prevailing currency until the market adjusted in the long run, at which point transition had ran its course. The more conventional path was to redefine the existing currency in terms of gold and stabilise it around the prevailing rate that was set by the market at the time. Some even chose monetary reform, by demonetising the existing currency gold had come to be defined in, only to establish a much stronger system of gold-backed currency thereafter.
#1 Restoring Parity
As for restoring a pre-devaluation parity, this would be almost impossible. To illustrate this, it is useful to consider the United States. Both the pre-1933 parity of $20.67/oz. and the 1971 parity of $35/oz. are far too low relative to the prevailing rate. In fact, it would also be inconceivable to return to any parity in the 1980’s or 1990’s, which averaged an even higher $350/oz. This is because prices in the US have risen multiple times what they were in 1971 and the real price of gold has also changed since. Hence, anything around or below the recent, albeit old parity of $35/oz. would imply a harsh adjustment. Churchill’s poor decision to return to gold on a prewar parity serves as a clear warning of this. After high inflation during the inter-war period, the relative purchasing power of gold at the prewar parity was much greater around the world than it was in Britain. As a result, gold fled the country en masse, pound-sterling faced downward pressure and the United Kingdom suffered from sharp deflation. Using the same rationale, choosing a parity that is multiple times higher than the prevailing rate would invite inflation, which is just as detrimental to economic stability.
#2 Parallelising Money
As for a parallel gold standard, there are two opposing schools of thought on this strategy. The first accepts it to be a feasible, albeit lengthy option that is smoother over the long-run, whereas the second takes it to be a futile option that does nothing to achieve transition. The principle idea behind monetary parallelisation is for government to legitimise gold as money without demonetising fiat currency, so as to avoid any volatility due to an imbalanced parity value. This might be done through legislation that ensures the enforceability of new contracts denominated in gold, the distribution of gold-redeemable notes, et cetera. In this regard, proponents have stressed the important role of government in facilitating these changes and managing expectations to improve distribution and confidence. When the new currency finally becomes equal to the old in strength and status, they would both compete at the behest of individual choices between them. In fact, this view suggests that upon experiencing inflation, agents would naturally switch to gold due to its retention of value.
However, for whatever reason transition does occur by way of parallelisation, it may not be immediate and could take many years. This occurred in 1922, when the Russian government introduced the gold chervonet as a parallel currency to the fiat ruble. Both circulated for 25 years until the ruble was finally pegged to gold in 1947. This lengthy transition may have been a result of monetary competition and its ability to entice people between currencies due to their relative strength. Upon realising the depreciation of one, many would want to deal in the other, creating an infinite incentive to switch between the two. As currency competition is often binary in nature, this system would only work if gold was unanimously perceived to be better than the alternative. In fact, what this view fails to realise is that transition would only become inevitable once the demand for gold reaches a threshold, after which the use of fiat becomes relatively redundant.
Conversely, the extreme may also be true. The second view suggests that parallelisation is futile as there may be no competition at all between the two, such that one dominates the other entirely, rendering it useless as a means of exchange. Proponents of this view also suggest a number of potential drawbacks that exacerbate this outcome; uncertainty could be common, as people must decide between fiat money and gold in fear of incurring opportunity costs; maintenance may be high, as governments must manage two currencies in order to preserve stability; change could be painfully slow, as the lengthy time to transition would contradict any radical objectives of the state and finally, as this option is contingent on the relative demand for gold, which is ambiguous, it may be that the market reaches a detrimental parity that would create instability.
The arbiter between these two opposing views is the Islamic Sharia, which stipulates that the state is strictly obliged to implement a gold standard. In fact, the very notion of a parallel system becomes rather inane once this is understood. After bimetallism is legally established as a new monetary system, fiat money would become useless, whilst existing currency would derive its value solely from the granted ability to exchange it for gold and silver. In other words, what is already in circulation would become a claim to gold until a new currency replaces the old, which is akin to redefining existing currency as opposed to parallelising it with gold. Hence, the caliphate would rush to dismantle the fiat system, rendering parallelisation an inappropriate strategy for transition, insofar as it does not agree with the Sharia, and by extension, the objectives of the caliphate.
This leaves two alternatives; to redefine and stabilise existing currency in terms of gold around the prevailing rate or to demonetise the existing currency and establish an entirely new one altogether. Whilst these options are independent, it is perfectly reasonable to enact both at two points in time, such that the former is chosen in the short-run with a plan to enact the latter in the long-run. This paper shall explicate such a transition in order to investigate the potential complications associated with each strategy in both time periods.
#3 Redefining Currency
As for redefining existing currency in terms of gold and stabilising it around the prevailing rate, this would be ideal in the short-run. The key challenge to this strategy is estimating the correct parity between gold and existing currency. As this paper has outlined, if the value is inaccurate, the consequences could be harsh. In fact, the parity that would avoid transitional instability would be similar to the market price of gold and the sharia has permitted the state to stabilise it at that. It is unlikely to be identical, as there would be an inevitable shift in real demand following an attempt to stabilise the value of currency in the short-run. This is simply because lower inflation expectations increase the demand for cash and significantly reduce the inflation-hedging demand for gold. The latter will most likely dominate the former once transition is publicly announced, as it is one of the main reasons why the real price of gold is as high as it is today.
In any case, an accurate value could be estimated by a moving average over a time period that was a function of the parity’s proximity to the market. The farther it was from the prevailing rate, the longer it would take to transition. In this regard, a shorter moving average (of three-months for instance) may be a useful starting point. In fact, this parity should be determined by a group of experts who are skilled in monetary theory, so as to achieve a more precise figure. The simple idea behind this complex process is to get as close to the right value as possible, so as to avoid any harsh adjustment; if the parity was within a safe threshold at the time of transition, any minor correction would be innocuous and could be managed with relative ease.
It is imperative that the caliphate firmly announces its intent on completing its transition to a gold standard at a particular date in the near future. In order for this prodigious shift to be effective, the state would also need to manage expectations by formally outlining a transitional plan for both the short and long run. It would also need to commit to this entirely. In reaction, the economy would naturally adjust towards a new equilibrium in the short-run. In fact, it would also determine the market-clearing price of gold, which the caliphate ought to adopt as a matter of monetary policy. This figure would abrogate what was estimated before it, as the market would set the parity, not the expert. This is simply because the latter provides us with an estimation, whilst the former provides us with information on prices in the present and the certainty that they are prevailing.
Dealing with Deficit
After a gold parity has been estimated, it is necessary to determine if there are enough reserves to ensure that existing currency can be redeemed at that rate in the future. The question as to whether there is enough gold to sustain a gold standard has been heavily debated. Once again, it is useful to consider the United States. By dividing the sum of currency and checking account balances, M1 ($3.5 trillion), by the US gold stock (261.5 million oz.), we get an approximate rate of $13,400/oz. Such a high parity would cause an unprecedented influx of gold as it would seek to take advantage of its greater purchasing power. This would inflate prices until $13,400 buys an ounce of gold. In fact, at the current price of gold ($1300/oz.), the difference between M1 ($3.5 trillion) and the value of US gold ($340 billion) is $3.16 trillion, which is a costly imbalance.[18a][19a]
Upon surveying those countries whose reserves are insignificant in proportion to their money supply, one must conclude that it would be almost impossible to maintain a fully redeemable gold standard at a parity around the prevailing rate without price instability. This is more to do with the ubiquity of fiat money than it is to do with the shortage of gold. In this regard, it may seem that the United States is an extremity when gauging the ability to sustain a fully backed gold standard. Although illustratively useful, it is concededly the paragon of financial irresponsibility, as it has allowed its money supply to spiral out of control. However, its gold reserves are the largest in the world, and what matters in this discussion is the proportion of existing fiat currency to gold. Hence, contrary to the aforementioned, the United States is better suited than most in the discourse of transition, as it can maintain a gold parity closer to the rate that achieves the least instability.
As for those countries whose reserves are significant in proportion to their money supply, one must conclude that on average, there would still be a notable shortage, albeit with a few nugatory exceptions. In the event that there is indeed a lack of gold reserves to maintain the right parity, the caliphate would need to fill the deficit by way efficient monetary policy if it wished to avoid a harsh price adjustment. This may seem very disconcerting prima facie, but upon inspection, one would realise a number of caveats and solutions to this problem. Firstly, as the caliphate would transition to a bimetallic system as opposed to a gold standard, the money supply would not be as limited due to additional silver bullion. In fact, the contribution of silver is significant here, as it would effectively back what gold was unable to of the money supply. In other words, bimetallism would alleviate the pressure on gold and ensure transitional stability due to greater reserves.
Secondly, data on gold reserves account for public holdings rather than privately owned gold, which may be purchased by the state in order to boost reserves. This contribution is significant and must be assessed. It is useful in this instance to consider Turkey; a country with roughly 456 tonnes of gold and an M1 supply of roughly $119 million (31/12/16).[18b][19b] Dividing the latter by the former yields a parity of $8144/oz., which is multiple times the current price of gold at $1300/oz. However, Turkey maintains a large supply of private gold; estimated to be 3500 tonnes. If only a fraction of this was willingly contributed, the caliphate would have enough reserves to cover the M1 supply. In this regard, suppose all privately held gold was added to Turkey’s existing reserves; this would bring the total to 3956 tonnes, lowering the parity to $939/oz, which is far below the current market price of gold, meaning plenty, if not too much, to ensure a smooth transition.
Finally, there are a number of ways to deal with a deficit if it transpired. In the short run, the most effective policy would be to issue partially backed currency, whilst the state sought the reserves needed to maintain a fully backed system. In other words, this currency would resemble sovereign bonds that are redeemable at a future date for an amount that could not be fulfilled in the short-run. Not only is this justified but it is also efficient, as it ensures stability for the state to reach full convertibility in the near future. In the long run, the caliphate may wish to purchase any remaining gold on the foreign exchange market, albeit this may not be feasible if what is required is too great. In this instance, the state will be in possession of valuable assets that it may wish to exchange or sell for gold on the international market. In addition to this, central banks maintain significant non-required reserves that have been accumulated by the financial sector. The caliphate must purge this from its money stock to bring its reserves down to the appropriate value of its gold supply.
It is also worth noting that this monetary imbalance between gold and fiat is an unsurprising phenomena that will continue to deteriorate over time. The imperative for growth has convinced many nations to print money ad infinitum, leading to incessant growth in the supply of money. Such is the nature of capitalism; it is only once this ideology ceases to exist that the world will forgo its unconstraint predilection for growth. With that said, the caliphate will still have to deal with the toxic remnants of its predecessor. In this regard, the existing reality will inevitably make transitioning away from it far more difficult than it has to be. After redefining the existing currency in terms of gold and stabilising it at the prevailing rate in the short run, the caliphate would need to then focus on introducing an entirely new currency that would be far stronger than its predecessor.
Before investigating the transition to an entirely new currency in the long run, it is worth commenting on the issue of inflation. In the event that the parity does not remain at a level that is conducive to transition due to a shortage of gold, aggregate prices will have to rise for the market to reach an equilibrium. For instance, the transitional parity set by the US market would be based on the scarcity of gold and if it were to be demanded in the same quantity the dollar is today. At roughly $13,400/oz., this is far greater than the current price of gold ($1300/oz). In other words, more dollar would be required to buy the same ounce of gold post transition if the United States did not adjust its reserves. Thus, the dollar would have to depreciate in respect to gold and vice versa. As internal gold increases in price, external gold would seek to exploit its higher purchasing power within the country, leading to a large influx (of imports) into the United States.
This rise in the money supply would increase prices up to a point where $13,400 buys exactly one ounce of gold. If the United States chose to contradict the market by fixing the gold parity at $1300/oz., it would not be long before it exhausted its gold reserves. Although this figure optimises price stability in the short-run, the United States would only have enough gold to secure part of its money supply, after which convertibility would cease. Therefore, expanding the supply of gold to a level that ensures a truer parity would not be in vain, as it would reduce the factor of transitional inflation. In this regard, it is certainly plausible to suggest that monetary policy used by the caliphate to expand its gold reserves would cause the existing currency to depreciate marginally, causing an equally smaller rise in prices, as opposed to short-run hyperinflation.
#4 Reforming Currency
After redefining existing currency in the short-run, the caliphate should look towards monetary reform in the long-run. This discussion ought to be included in the discourse of transition, lest we restrict it strictly to the shift from fiat money to a gold standard. Introducing a new currency is an extremely complex process that requires extensive thought and even greater planning. It is often the case that monetary reform occurs out of necessity due to some deficiency, such as hyperinflation, exchange rate volatility, counterfeiting, et cetera. In this regard, many have argued that the absence of extreme monetary phenomena is sufficient to warrant the preservation of existing currency. On the contrary, this paper shall proceed on the knowledge of those very issues that are often rendered benign, when in reality they pose a grave threat to macroeconomics stability.
The caliphate would naturally adopt the gold dinar and silver dirham, which have their roots in both Islamic history and text. This bimetallic currency and their respective weights would replace any existing currency in circulation. As for monetary reform, this must be done with great caution. The introduction of new currency is no light matter and consists of four fundamental phases, each as integral as the last; ensuring the necessary monetary prerequisites, making the right preparations, producing the new currency and implementing it.
As for the first phase, the necessary macroeconomic conditions must exist well before a new currency can be implemented. In fact, establishing new currency alone would not resolve severe monetary phenomena such as hyperinflation or exchange rate volatility. It is therefore imperative that the state achieves an equilibrium before it introduces the dinar and dirham, so as to set the stage for monetary reform. However, it may well be that reform takes place in a very dynamic and difficult context, in which case the act of implementing a new currency may ameliorate the situation. In any case, the right macroeconomic environment (characterised by price stability, robust growth, political confidence, fiscal balance and strong balance-of-payments) ought to be in place before the introduction of a new currency, so as to create those conditions conducive to reform.
As for the second phase, preparation is key. These policies would concern the transition itself as opposed to the environment in which it occurs, such as adjusting the Bait-ul-Mal for the entirety of reform (including the cost of designing new currency, printing notes, minting coins, et cetera) or legislating specific canons and preparing their timely execution. Change must also be supported in every sector of the economy, which could be facilitated by reviewing and updating institutional legislation. Reformation also requires an efficient accounting system, which ought to be prepared by the state for independent auditors that would secure the integrity of new currency by way of accuracy in its exchange. Important as all these preparations are, true success is just as contingent on general awareness. The caliphate must ensure that the public understands what transition entails. With that said, it may well be that the state is selective in what information it releases and withholds, so as to prevent counterfeiters, who would seek to undermine the new currency’s reputation.
As for the third phase, currency production is of great importance, not least because it personifies political identity and economic strength, both of which are integral to the caliphate in its infancy. In this regard, the discourse of production must not be restricted to the minting of coins, but should also account for factors such as design. It would be wise for the state to model the dirham and dinar in a manner that would engender confidence within society, not only in terms of security measures but also in terms of aesthetics. As for the production of new currency, the various weights of the dinar and dirham should be used as a guide over what to print and what to mint. The unitary weight of these notes and coins have been predetermined and are well understood by those familiar with the text relating to them. In any case, the caliphate would need sufficient time to complete preparations before making the decision to demonetise existing currency in circulation.
As for the fourth phase, it is perhaps the most complex. In order to implement a currency, various steps must be undertaken by the caliphate. To begin, it must determine and establish a conversion rate with the existing currency in circulation, whilst maintaining the same weight in gold. Once rates are unified, the ability to convert freely must be made easy and accessible so as to minimise rigidity. As time progresses, the state may also need to adjust unitary denominations, so as to optimise the money supply. Monetary experts ought to also determine when the conversion between old and new currency should begin, when it should end and what limits (if any) should be imposed on conversion over this period, whilst taking into account the reality of all agents within the economy. Considerable thought must also be given to those financial assets, accounts and existing contracts that are denominated in the old and how they would be managed in light of the new.
Finally, the proper distribution of dinars and dirhams is imperative. The caliphate must identify and advertise exchange points where the public would trade their existing currency for new currency. These points must be well equipped, copious and evenly distributed. The state must also establish permanent storage points for currency and manage any potential logistical problems that may arise during the process such as emergency requirements for additional currency. In its plan for monetary reform, the caliphate must also decide how to rid the soon obsolete currency. These notes should be invalidated by ink markings or drilled holes, so as to signal their demonetisation. Upon second counting, the state ought to shred and or melt old currency and dispose of it in an appropriate manner, so as to eradicate it from the new system and prevent any confusion.
Despite the aforementioned, this paper shall posit that the primary ingredient to successful monetary reform is by far the credibility of government in its commitment to a transitional plan and the state’s management of price expectations. So long as internal and external agents perceive the new currency to be both strong and stable, reform would become an inevitable self-fulfilling prophecy. In this regard, once the caliphate has successfully transitioned from fiat money to bimetallism by backing existing currency with gold and silver, it ought to carefully plan the necessary steps to reform and replace existing currency with its own.
#5 Contemporary Variations
This paper has focused only on those transitional methods that have been tried and tested in the past. It may be the case that there are other, more contemporary ways to transition – of this there is no doubt. Although not the scope of our analysis, these variations could prove more efficient than those used in history. In this regard, it is entirely up to the caliph to decide what to adopt and in what manner to execute. One may even argue that this is best determined when the state is established, as the monetary reality is extremely dynamic.
As this paper has shown, transitioning to a new monetary system is no simple matter and it will certainly be one of the most difficult objectives that the caliphate has to pursue upon inception. From maintaining parity to dealing with deficit, monetary experts would have to resolve a number of problems in the short-run, albeit with immense reward in the long-run, from price-stability to macroeconomic prosperity. This paper sought to explicate those transitional variations that may be adopted by the caliphate as a matter of monetary policy and the potential complications involved, in the hope that greater clarity brings confidence to the reader.
Faruq ibn Qaysr
2 Muharram 1439 AH
22 September 2017 CE
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Al-Hejazi, A.K. (2017) Q/A on Transition. Asked by Faruq ibn Qaysr. [exchange] 29 Sept 2017. Ash, A. (2017) Turkey Targets ‘Under the Pillow’ Gold Again. [online] Available from: https: