UKM Don: Gold as Currency is Not Flawless

Source: http://www.ukm.my/news/index.php/en/extras/794-ukm-don-gold-as-currency-is-not-flawless.html

By Shahfizal Musa

Pics by Hairul Azmi Mohd Jahid

BANGI, 21 Julai – Using gold as currency is not free from weaknesses as it has many disadvantages, a UKM economics Professor said today.

Prof Dr Mansor Jusoh from the Faculty of Economics and Management giving his inaugural lecture on “Losing Control of Money: Financial Stability and Inflation Control” said because gold is a commodity it could be taken out of circulation for profiteering and that would result in increases of its price.

This will cause deflation and even worse resulting in the lack of currency for trading.

“These two situation will not help to handle a crisis but only will make it worse. The gold currency do not ensure financial stability or price stability and is prone to deflation,” he said.

Right now the money in use is valued using the floating exchange rate mechanism or fiat money where the money issued by the government of a nation is declared as legal tender and thus accepted for trade. This is where the value of currencies is determined by market forces.

In a fiat financial system, there is no restrain on the amount of money that can be created thus allowing for unlimited credit creation whereas using gold as currency, the amount of money available for circulation is limited by the amount of gold that is available in a particular country.

Islamic scholars and intellectuals have urged the world to go back to using gold as currency because it was recognised as the financial system that is more stable and practiced during the time of Prophet Muhammad.

But Prof Mansor said that using gold as currency is also not an Islamic system.

“Before the time of Islam, the Arabs of Mecca and Medina had been using gold and silver which were introduced by the Romans and the Persians. Islam came and continued with the use of that currency without any changes,” he said.

He said the fiat monetary system if accompanied by sound policy implementation, can in principle ensure price stability. He argued that the perception of fiat money is the cause of usury by some Muslim is misleading .

“This view is not accurate. Usury does not originate from the fiat system. Usury had already existed even in the times of prophets Jesus (Isa) and Muhammad and the currency that is used then was gold and silver,” he said.

Based on economic consideration, it is difficult to imagine any country that would switch the present system to the gold system which have failed in the past. It do not ensure price stability and can force the government of a country to give up its control on currencies when its value could be determined by the international commodity market.

Vice-Chancellor Prof Tan Sri Dato’ Wira Dr Sharifah Hapsah Syed Hasan Shahabudin, Deans of Faculties, senior universities officials, lecturers and students attended the lecture.