Why the gold dinar and silver dirham have failed to take off in Malaysia

Tuesday, 18 January 2011

Hugo Salinas Price

The well-intentioned efforts of Malaysia’s former Prime Minister Mahathir to introduce the gold dinar and the silver dirham into monetary use in Malaysia failed for various reasons.

The gold dinar

Physical gold cannot be used as money except under conditions where there are no money-substitutes in existence, such as legal tender fiat money or paper notes redeemable in gold or silver issued by a fractional-reserve banking system. People will retain the gold coin and pay with any alternative money if it is at all possible for them to do so.

However, gold and silver can both be used as money by weight in a bimetallic monetary system where payments in either gold or silver, and only in these two metals, can be made, but under the condition that a free market price sets the ratio between gold and silver (no fixed legal ratio between gold and silver for payments) and that no other monetary means of making payment are available.

Malaysia uses a fiat monetary unit called the ringgit. No Malaysian in his right mind is going to use a gold dinar or a silver dirham to make any payment, if he can make the payment in ringgits.

So much for the attempt to introduce the gold dinar and the silver dirham into circulation in Malaysia.

The silver dirham

Much of the reasoning which applies to the gold dinar also applies to the silver dirham. But silver is different from gold.

Unlike gold, a silver dirham can be granted a monetary value by the monetary authority and thus, the silver dirham can become money alongside of the fiat monetary system. (Gold is valued exclusively by weight and purity, whatever its physical form. Silver, on the other hand, is more useful in the form of coinage than as bullion. Thus, it is possible to mint silver coinage whose intrinsic silver value is lower than its monetary value. This cannot be done with gold.)

Silver coins are no longer minted for use as money, because silver is rising in price and thus a dirham with an engraved monetary value would soon be worth more melted down into silver bullion, that as a coin.

This problem can be overcome by the simple expedient of not engraving a monetary value upon a silver dirham, but simply giving it a quote by the monetary authority. When the price of silver rises, the quoted monetary value of the silver coin is also raised by the monetary authority. The silver dirham will remain a part of the mass of ringgit currency indefinitely. The ringgit will continue to be the monetary unit of Malaysia; the silver dirham will be a part of the monetary mass of ringgits.

There is one condition to this form of creating a silver dirham with a monetary value.

The engraved coins which were formerly in existence had a fixed value, which did not fluctuate when the price of silver fell, and the same condition must apply to the quoted value of the monetized silver dirham: its quoted monetary value in ringgits, taking the place of an engraved value, must not be reduced when the price of silver falls. All the silver coins in existence in the world up to the middle of the last century, had a monetary value superior to the value of the silver which they contained, and falls in the value of silver did not affect these coins at all.

The initial quoted monetary value of the silver dirham can be superior to the content of silver in the coin by about 15% and the quote will be raised to maintain this margin as the price of silver rises. This will give the monetary authority a profit or seigniorage on the minting of the coin and allow small rises in the value of silver to be disregarded.

This silver dirham will have a known monetary value, but because of Gresham’s Law, it will not be used as money by Malaysians except in cases of dire necessity. It will be possible to use it as money, but it will not circulate. People will save it. Saving a silver dirham will no longer be a commodity speculation regarding the price of silver. It will be an investment in silver as money, and its attraction as an investment will be vastly enhanced.

The main use of this silver dirham will be to attract savings and protect them from devaluation. The silver dirham will be a bulwark protecting family savings. That will be its main function.

These savings will take place outside the banking system. It will not be necessary to pay interest to attract these popular savings, nor to raise the interest rate to promote savings. Owning silver dirhams which are no longer simply a commodity, but actually a currency with a known monetary value will be such an attractive proposition, that Malaysians will save up an enormous amount of silver dirhams though they pay no interest.

When this has taken place, the monetary authority will be in a position to reduce the creation of additional fiat money ringgits. This will reduce monetary inflation. Eventually, the expansion of the money supply can be drastically reduced and at that point, the Malaysian population will face the demand for money with their saved silver dirhams. The dirhams will come out of hiding and circulate, because they must.

The creation of the silver dirham monetized in ringgits will be an important step in breaking the monopoly of fiat money issued by the banking system, a monopoly which has placed bankers in the position of being able to demand constant rescues by their respective governments. These rescues are paid, one way or another, by the people. This has to stop. Real money permanently in possession of the people is a function of the State which must be recovered from the bankers which have usurped it. The silver dirham, with a monetary value quoted by the monetary authority, is an important first step.