M E M O R A N D U M TO:
The Right Honorable Dr. Mahathir Mohamad, Prime Minister, Malaysia
FROM: J. Douglas Bowey and Antal E. Fekete
SUBJECT: Islamic Gold Dinar and Silver Dirham Initiative
DATE: 1 November, 2002
Authors of the Islamic Gold Dinar and Silver Dirham initiative are to be congratulated for their ingenuity, courage, and timing on designing and instituting an international monetary system based on hard money. The following points may be useful to further improve the efficiency of this bold initiative inaugurated by Malaysia.
1. No Monetary Role for Gold and Silver without Free Coinage. The Gold Dinar and the Silver Dirham will not be money and can’t have any monetary role until and unless at least one government officially opens the Mint to gold (silver). This means "free coinage of gold (silver)," that is to say, the Mint must stand ready to convert gold into Gold Dinars (and silver into Silver Dirhams) in unlimited quantities free of charge, on the account of anyone tendering the right amount and fineness of gold (silver). In the absence of this commitment, the Dinar and the Dirham, just like the U.S. Gold and Silver Eagles, will remain souvenirs and keepsakes, having no monetary role to play whatsoever. They will not enter into monetary circulation, and will not be used for accounting purposes. This is one of the critical points missed by virtually all hard-money advocates today. It goes without saying that all taxes, duties, imposts, restrictions on the import and export of gold and silver must be abolished and declared unconstitutional.
2. First Step: Open the Mint to Silver. As the IMF has imposed a ban on monetizing gold (but not silver), for tactical reasons it might be advisable to test first by declaring the Mint open to silver only. This would have the effect of attracting capital in the form of silver to countries with a Mint open to silver. A bill market would spring to life more or less spontaneously. It would then finance the production and distribution of crude oil and other important commodities in terms of the Dirham. There is no need unnecessarily to affront and offend the U.S. by declaring the dollar ineligible for billing crude oil deliveries. However, opening the Mint to silver would be just as effective in puncturing the balloon of dollar-hegemony. The dollar would start fading away as the trading currency of the world.
3. Second Step: Open the Mint to Gold. Once the principle of billing in Silver Dirhams is accepted, as a second step, the Mints can be declared open to gold as well. IMF fulminations notwithstanding, Islamic and other countries can go safely ahead with their gold and silver circulation and bill markets trading bills payable in gold and silver, because the denial of IMF dollar-credits can no longer hurt them. They will be able to attract all the capital they want in terms of gold and silver.
4. Third Step: Finance the Trade in Crude Oil with Gold Bills. A gold bill is just an invoice evidencing the sale of goods in urgent demand (such as crude oil, grain and other agricultural commodities, copper, etc.) by the producer to the distributor. It has to be "accepted" by the latter, must mature in 91 days or less without the possibility of extension, and it must be payable in Dinars at maturity. The bill is a "self-liquidating" instrument. This means that, at maturity, the bill is paid out of the proceeds of the disposal of the underlying merchandise by the distributor. A spontaneous trading in gold bills will spring up. In the bill market, outstanding gold bills are bought and sold at a discount, which depends on the number of days left to maturity and the discount rate. The discount rate varies inversely with the "propensity to spend." The greater the demand for the underlying merchandise, the lower is the discount rate. Sellers of bills are those who have salable merchandise to ship; buyers of bills are those who have short-term liquid funds to invest. The discount rate may move up or down in such a way as to facilitate the clearing of outstanding bills in the market. The discount rate should not be mistaken for a rate of interest, as explained in (9) below.
5. Making the Banks Irrelevant. The beauty of the plan is that it can bypass any and all banks that may be suspected of affiliation with or allegiance to the big multinational dollar banks. Banks are irrelevant to the bill market trading gold bills. There is no need to establish new dinar banks and train personnel either; that would take years. The spontaneous bill market trading of dinar bills would be a more than adequate replacement for financing domestic and world trade.
6. Attracting Capital from Abroad. Here is the mechanism whereby a country that has opened its Mint to gold can attract capital. The Central Bank stands ready to rediscount gold dinar bills at the posted rediscount rate. A higher rediscount rate will attract gold to the Mint resulting in a capital inflow. A lower rediscount rate will expel gold from the country, allowing capital to seek higher returns abroad. Foreigners will send in gold in response to a higher rediscount rate as they want to hold the most liquid short-term instrument: the gold bill of exchange.
7. Wages Must Be Payable in Gold Dinar and/or in Silver Dirham. In order to facilitate dinar and dirham circulation, employers must be requested to pay wages in Dinar or Dirham. Employers get Dinars and Dirhams by selling their gold bills in the bill market, or by rediscounting them at the Central Bank. The workers will spend their dinars and dirhams on consumer goods. The circle is now complete: the consumer’s coin is paying the bill at maturity, by which time the underlying consumer good is sold in exchange for the dinar or dirham.
8. Bimetallism Would Be a Mistake. Do not fix the bimetallic ratio between the Gold Dinar and the Silver Dirham. Let the market find and adjust the proper ratio, whenever necessary, without government intervention.
9. Islamic Law Banning Usury and Interest. It must be clear that there is no lending or borrowing, nor interest paying and taking, involved in bill trading. The function of the bill market is not lending; it is clearing. The producer bills the distributor for merchandise shipped, with "terms: 91 days net." The important point to grasp is that the producer is not a lender; and the distributor is not a borrower. The term 91 days net is part of the contract. Hardly any distributor pays cash to the producer for merchandise shipped for resale. Bills circulate spontaneously before maturity; the producer may use them to pay his suppliers, who will be glad to take the bills in payment for the supplies shipped. Alternatively, the producer may discount his bills in the bill market for cash. The transaction has nothing to do with lending and borrowing at interest. Discounting bills is part of the process of clearing. In more detail, discounting is an essential part of the trade in consumer goods. The amount of discount is of the same character as the markup on merchandise representing overhead and profit of the merchant, allowable charges under Islamic Law. The amount of discount depends (1) on the number of days the bill has to run before maturity; and (2) on the discount rate. The discount rate is not an interest rate. The former reflects the propensity to consume; the latter the propensity to save, the relation in either case being inverse. That is, the higher the propensity the lower is the rate and vice versa.
Note that gold distribution and the bill market are just the two sides of the same coin: neither could stand without the support of the other. In order to make the gold dinar an instrument of world trade, there must be a complementary bill market.
We would be pleased to answer any questions derived from this MEMORANDUM, or to act as consultants and/or advisors to Governments that are courageous enough to implement a plan to open the mint to silver and/or gold.
J. DOUGLAS BOWEY is a Private Merchant Banker living in Los Angeles, California. He has traveled extensively and lived in the Islamic world. Bowey’s specialty is strategic alliance finance.
ANTAL E. FEKETE is Professor Emeritus (Mathematics), Memorial University of Newfoundland, St. John’s, Newfoundland, Canada. He is a world-class economist specializing in monetary science and history. He lives between St. John’s, Newfoundland, Canada, and Budapest, Hungary. He has written extensively. A portion of his writings may be seen on the website www.goldisfreedom.com.
J. DOUGLAS BOWEY and ANTAL E. FEKETE have recently joined forces to create an opportunity. Together they will now begin to offer this opportunity (methodology) to "select" Central Banks/Governments. This methodology allows Central Banks/Governments to continually increase their gold and silver reserve holdings, with minimal risk, without the use of "financial engineering," and while retaining full physical control of those reserves.BOWEY and/or FEKETE may be contacted through:
J. Douglas Bowey and Associates
Beverly Hills, CA