Saturday, September 25, 2010

Numismatic oddities

The release of dinar and dirhams minted from pure gold and silver by the PAS-led Kelantan state government recently can best be described as a political ploy to convince Muslim voters that PAS is serious about reviving the glory days of Islam.

In those great days when Goldman Sachs was not in existence and Wall St was probably some muddy field, dinars and dirhams were the media of exchange of the Muslim world.

In Kelantan, the initial run of coins worth about US$640,000 (RM1,978,880 based on US$1 = RM3.092) ranging from one dirham - containing about US$4 (RM12.3680) worth of silver at current prices - and one dinar - worth US$189 (RM584.388) - to an eight-dinar coin worth US$1,518 (RM4,693.66) were issued and were sold out, ironically bought by buyers using the ringgit, Malaysia's official currency, to pay for them.

While the idea of reviving a currency from the time of the Prophet is romantic, it is also rather simplistic.

For any currency to be worth anything today - without the backing of gold - its value relative to other currencies has to be determined via trading on the foreign exchange markets. Thus the value of the ringgit is determined on a daily basis by the forex market (it is on a real-time basis for the traders).

And for a currency to be traded on a foreign currency exchange, it has to be recognised as the official currency of a nation.

This is where the weakness of the Kelantan dinar and dirham lies - how does one determine their value in ringgit or, say, US dollar terms?

Its proponents may say that it is very simple - just base it on the value of the precious metal it contains. Thus the gold dinar and silver dirham would be worth what the metals are worth in the metal exchange.

If that is the case, then the values of the dinar and dirham will be affected by fluctuations in the metal markets due to supply, demand and speculation and are unstable in value like any other paper currency.

If the price of gold shoots up, then the eight-dinar coin would be worth more than its current value of US$1,518 (RM4,693.66).

Thus to say that "1,400 years ago, a chicken cost one dirham. Today, it still costs approximately one dirham" ( does not compute.

Today's Kelantan one-dirham coin has about US$4 (RM12.3680) worth of silver in it. Assuming silver doubles in value ceteris paribus, the one-dirham coin should be worth US$8 (RM24.736). Would a chicken cost US$8 (RM24.736) then or would it remain at US$4 (RM12.3680)?

Of more importance is the fact that those who authorised the issuing of the Kelantanese dinar and dirham have not heard of Gresham's Law, a concept that is found in any A-Level economics textbook.

The turbaned ones wearing Arabian robes and stroking their beards of wisdom obviously have not heard of the phrase "bad money chasing out good money".

According to, "the proposition known as 'Gresham's Law' is often stated baldly as 'bad money drives good money out of circulation.' Ancient and medieval references to this tendency were informed by circumstances in which lightened, debased, or worn coins had assigned to them the same official value as coins containing greater quantities of precious metal. In this context the tendency, which had yet to be elevated to the status of an economic 'law,' was one in which 'bad' coins alone, that is, coins possessing a relatively low metallic content ('intrinsic value'), continued to be offered in routine payments, while 'good' coins were withdrawn into hoards, exported, or reduced through clipping or 'sweating' (that is, purposeful erosion by chemical or mechanical means) to an intrinsic value no greater than that possessed by their 'bad' counterparts."

According to wikipedia: "If 'good' coins have a face value below that of their metallic content, individuals may be motivated to melt them down and sell the metal for its higher intrinsic value, even if such destruction is illegal. As an example, consider the 1965 United States half dollar coins, which contained 40% silver. In previous years, these coins were 90% silver. With the release of the 1965 half dollar, which was legally required to be accepted at the same value as the earlier 90% halves, the older 90% silver coinage quickly disappeared from circulation, while the newer debased coins remained in use. As the price of bullion silver continued to rise above the face value of the coins, many of the older half dollars were melted down. Beginning in 1971, the U.S. government gave up on including any silver in the half dollars, as even the metal value of the 40% silver coins began to exceed their face value."

Economists have noticed the tendency for people (of all faiths) to cut/shave off bits of gold or silver from coins made from these precious metals which they would amass, melt down and sell off for a tidy profit. The debased or smaller and lighter coins would remain in circulation even though their content of precious metals would be worth less than their face values.

Some experts have opined that this led to the issuance of paper currencies and coins made of cheaper metals like copper, nickel and zinc.

In fact when the prices of copper and zinc shot up in 2006, the United States government banned the melting or mass exportation of nickels and pennies as the melted-down coins were worth more than their face value.

According to Islamic Law, the Islamic Dinar is a specific weight of 22k gold (917.) equivalent to 4.25 grams while the Islamic Dirham is a specific weight of pure silver equivalent to 3 grams.

These specifications were established by Umar Ibn al-Khattab based on their weights: "7 dinars must be equivalent to 10 dirhams." Umar reigned as Caliph from 634-644.

Gold and silver dinars and dirhams were in use in the Muslim world till the fall of the Caliphate. Later, they were replaced - as in many other parts of the world - with paper currency which is still in use today.

Several Muslim nations still call their legal tender paper currencies dinar.

As for the gold dinar and silver dirham in Kelantan, it is unlikely for them to gain legal tender status and replace the ringgit as the medium of exchange. They will also not revive the glory of the Muslim world during the Caliphates.

At best they will be numismatic oddities.

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