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The Kelantan government recently mooted the idea of gold-based currency last month. This is not surprising as Kelantanese have always like gold. In the previous centuries, as far as the written history is recorded, currencies were always based on gold and/or silver. But it all stopped in 1973, the end of Bretton Woods Agreement.

That fateful day in 1973, during the presidency of Richard Nixon, the US stopped paying what it owes to foreigners according to the exchange rate fixed to the weight of gold. Under the Bretton Woods system, currencies of the world were pegged to the weight or value of gold. The pound sterling, US dollar, German mark, Italian lira, etc.

So these countries would export and import among each other, and when paying each other, they use gold eventually, because their currencies are fixed to gold. But some countries cheat and to make their country more competitive against the others, they devalue their currency. Say instead of 10 pound sterling buying one ounce of gold, they devalue it to 12 pound sterling buying an ounce of gold. Overnight, goods in Britain become cheaper than other countries.

So foreigners buy more British goods, British manufacturers and producers are more competitive and exports are up. With exports higher, income and employment are also higher.

What happened before 1973 was that the US stuck to its US dollar peg to gold, while other countries devalued their currencies whenever their competitiveness had been eroded, ie, when their current account was in sizeable deficit. At that time, the US current account was in huge deficit and Nixon didn't have much choice but to devalue and unpeg the dollar. That was the end of Bretton Woods.

Let's discuss the merit of the gold dinar. Let's start with the cons.

  1. Every single dinar is backed by its equivalent value in gold. So before we print another dinar, we must buy another dinar worth of gold. And where on earth do we store this gold? Gold is a resource metal, it is used in electronics (highly conductive) aside from its use in jewelry. If we hoard a large amount of gold, what do you think will happen to the price of gold?

  • Continuing from above, the price of gold skyrockets and the value of our dinar is higher. All other currencies that are not gold-based will devalue and become more competitive. Our exports would be lower as the country become less competitive, with the unpleasant side effect of higher unemployment, less income, etc. Would anyone want to buy our products if they are too expensive?
  • Keeping money or gold under the pillow is unproductive. Not to mention a safety hazard, if bad people know. Your mind would be preoccupied with the amount of gold you have under your pillow and you would neglect your duties.
  • It is said that Johor mufti Noh Gadut did suggest that every Muslim household keep 20 gold dinars (20 times 4.25 grams of gold) as savings. Looks like this mufti is out of touch with his people. Well, maybe Johoreans are that rich. But how many people have that much of money?

    So what are the pros?

    The government can't simply print money to plug the budgeted income less expenditure deficit. So there will be no more inflation. If the government has an income this year of RM20 billion from taxes, tariff and income charges, it can only spend that much, no more.

    Yes, it can borrow from the financial market, but it will have to pay it back with interest. The exchange rate will be stable. This will bind the government to fiscal responsibility. No more printing money.

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