The two metals, gold and silver, have been used as a medium of exchange for centuries. This medium of exchange is referred to as money. Currently the only currency used in the world is that of the fiat form of standardisation . This fiat standard results in a currency with an arbitrarily assigned value and without any tangible backing. Although fiat predominates in the world today gold still has an important role to play. The importance of gold may appear to be latent, but close scrutiny of political and economic affairs exposes issues related to gold in the global economy. Attempts have been made to completely eradicate the significance of gold in monetary terms. This is a process known as demontisations . Recently, there have been several attempts at demonetising gold. Certain landmark incidences are reviewed here. This discussion is an attempt to shed light on the role of gold in the recent past, present and future.

Two decades ago on 15 August 1971 the convertibility of gold into dollars, for official holders, was suspended. Ever since World War I the capitalist nations and their financial institutions have persistently marginalized gold. They have worked to demonetise gold. The importance of gold can be appreciated by analysing economic events of the last three decades. There has been a downturn in the prices of gold, which was triggered by the sale of gold by central banks. By contrast we find that, within official sectors, gold reserves have only declined by 6%.

In 1999, at a fringe meeting of the IMF/World Bank Annual Meeting in Washington , a historic five-point agreement was reached. 15 European central banks (including ECB) declared their allegiance to the idea of gold in the economy. The communiqué which was read out by Mr Wim Duisenberg, President of the European Central Bank stated:

• Gold will remain an important element of global monetary reserves.

• The above institutions will not enter the market as sellers, with the exception of already decided sales.

• The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

• The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.

• This agreement will be reviewed after five years.

Although it was a European agreement, it was put together through the Group of Ten central bank governors who meet regularly in Basle , Switzerland , on a monthly basis. Japan , and US who were part of the G10, supported this agreement. In fact, Japan announced on 27th September 1999 that she too would not be selling or lending gold. The US announced, in May 1999, that neither the US nor the IMF would be selling or lending gold.

This agreement covers nearly 50% of the world's official gold holdings as the 15 signatories collectively hold approximately 16,000 tonnes (including the 2,000 to be sold by 2005) out of the world total official holdings of 33,500 tonnes . Also by 2005 UK and Sweden might be either in or preparing to be in the Euro, thus bringing their reserves under ECB control. The Euro as a result will have equal if not greater gold "backing" than the US dollar.

Alan Greenspan the Chairman of the Federal Reserve, said on 20th May 1999 to the House Banking Committee soon after Britain announced its decision to sell gold that "gold still represents the ultimate form of payment in the world. Germany in 1944 could buy materials during the war only with gold. Fiat money in extremis is accepted by nobody. Gold is always accepted."

Writing in 1923 to rejecting the arguments to return to a gold standard, John Maynard Keynes stated in his, Tract on Monetary Reform : 'The value of gold has not depended on the policy or the decision of a single body of men; and a sufficient proportion of the supply has been able to find its way, without any flooding of the market, into the Arts or into the hoards of Asia for its marginal value to be governed by a steady psychological estimation of the metal in relation to other things. This is what is meant by saying that gold has "intrinsic value" and is free from the dangers of a "managed" currency.'

These statements highlight an important point, which has been known for centuries. That is, even before Islam, gold was known to have an "intrinsic value" and it was (and still is) well suited for use as a currency. The Fiat currency standard was introduced by the colonialist nations to manipulate the world currency markets and serve as one of its tools for economic colonisation . The fact that these colonialist nations still hold vast gold reserves and are signing agreements not to sell or lease the gold indicate that the Fiat currency standard is nothing but a tool of the colonialists. They suspect that the gold standard will one day return. They stated in an article by (www.ncpa.org) "experts in global finance are suggesting adoption of a global gold standard as the best way to restore and perpetuate the world's financial stability .They point out that developing nations are opting to withdraw from the global economy and abandon free-market capitalism". Also we find that in June 2001 Russia started to issue gold coins as legal tender and it has started selling dollars and building its gold reserves. The re-emergence of the interest in gold is clear. This is mainly due to the manifest benefits of using the gold standard.

When a state adopts the gold standard it uses the gold currency in its foreign and domestic transactions. It uses the gold standard, even if it used paper currency as long as the paper currency can be exchanged for gold and this exchange is fixed i.e. a specific unit of paper currency can be exchanged for a specific amount of gold.

The benefits of the gold standard are as follows:

• It would bring stability to the exchange rates between countries, as gold cannot be manipulated like the fiat currency. This will increase international trade and reduce trade barriers. Businesses which are dependent on imported commodities do not have to fear that these commodities will become too expensive as a result of their currency devaluing. Businesses which export their products do not fear their commodities becoming too expensive for the destined countries as a result of the increase in value of their currency. An example of this is the Argentinean Peso which was pegged to the dollar. This increased the trade between Argentina and the US as the exchange rate was fixed by an Argentinean currency board. But as Argentina also exported about 30% of its products to Brazil when the value of the dollar rose so did the peso and hence the Argentinean products became too expensive for the Brazilians. This severely impacted the trade between Argentina and other countries which were not pegged to the dollar. This artificial fixing of the exchange rate only benefited the US as we can see from the continuing crisis in Argentina . Also with the fiat currencies businesses used to buy financial instrument (hedge) to protect themselves from the fluctuation in the exchange rate. This added further costs to businesses involved in foreign trade.

• It would remove the problem of inflation, as gold is a scarce commodity. The money supply cannot be increased at the will or whim of a government. The prices of good and services may still increase as a result of gold coming into the state due to high level of exports. This increase is likely to be minimal and temporary as the inflowing of gold is due to trade and there is real wealth coming into the state. This will lead to economic growth, which would mean more good and services available, which would counterbalance the extra gold coming into the state. As long as the state allows the free circulation of gold (i.e. import and export) then there will be financial and economic stability. This can be understood if we consider the two scenarios.

(i) Gold going out of the state due to high level of imported goods and services.

This leads to prices of goods and services in the state becoming cheaper as there is less money (gold) in circulation. So the people will be more attracted to the local cheaper goods and services, as long as the state has a policy of self-sufficiency and is industrialised . This will reduce the demand for the imported goods and reduce the outflow of gold from the state. As the goods and services are cheaper within the state then this will increase the exports as they have a competitive advantage compared to foreign goods and services.

(ii) Gold coming into the state due to high level of goods and services exported.

This is where gold is being imported into the state this is likely to drive up prices in the short term as the supply of money has increased in the state, but it is likely to be minimal as the inflow of gold is likely to be staggered. Also as the inflow is due to increase in real trade, which will lead to economic growth as wealth is coming into the state. Which mean there will be an increase in goods and services and this will reduce the rise in prices. If the local goods and services within the state continue to be high then people will favour the foreign goods and service i.e. increase in imports. This will reduce the money supply within the state and hence will begin to drive down prices.

• Today international trade is hindered because of the lack of hard currencies. Many of the currencies are considered too weak and volatile for international trade. Globally, most transactions are carried out in US dollars. However, even in times of war the dollar is not stable, since it is only a fiat currency having no intrinsic value. It is only gold (and silver) that is a truly a stable currency. It is only through the bimetallic standard that these barriers to international trade can be removed.

These are some of the advantages of using the gold standard. If any state today adopted this standard, it could very quickly become a global standard. However, it is unlikely that any state today will adopt this standard as the economies of most of the nations today are dominated by the capitalist nations and it is not in their interest to adopt such a standard. It is only the Islamic State, carrying the ideology of Islam, that will adopt such a standard. Moreover, the shariah has made it an obligation to implement the gold (or silver) standard. When the Islamic State comes it will adopt the gold and silver bimetalic standard, thus transforming the current international money markets and free the world from the dominance of the capitalist nations ( insha -Allah).

Abu Musab, Economics Correspondent, KCom Journal, 09 March 2002