Conditional Currency Convertibility Based on Primary Commodities: The Shari'ah-Compliant Grondona System

Conditional Currency Convertibility Based on Primary Commodities: The Shari'ah-Compliant Grondona System

Jameel Ahmed (University of Baluchistan, Pakistan), Patrick Collins (Independent Researcher, Japan) and Ahamed Kameel Mydin Meera (Z Consulting Group, Malaysia)
DOI: 10.4018/978-1-7998-0218-1.ch004
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Practical policies are urgently needed to enable countries to reduce their vulnerability to the damaging influence of the world-wide, debt-based money system, which is the underlying cause of economic instability and financial crises in the world economy. Due to its flexibility in response to market forces, the Grondona system of conditional currency convertibility based on primary commodities can be safely implemented independently by individual countries in terms of their national currency. This chapter introduces the Grondona system and describes simulations of how it might have operated over recent years in some countries, which show the stabilizing influence that it would have on the economy of implementing countries. It also explains how implementation by each of the D-8 countries would exert a stabilizing influence on their mutual exchange-rates, thereby facilitating their collective evolution into a currency “bloc”, and so strengthening them collectively against destabilization by external shocks.
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With the end of gold-based convertibility of the US Dollar in 1971, the world’s dominant reserve currency lost its real anchor, thereby converting it into a mere “fiat” currency, and initiating an era of increasing economic instability and international injustice. Since most other currencies were defined in terms of the USD, they thereby all became “fiat” money. It is surely no exaggeration to say that most of the fundamental problems in the world economy today are either caused or aggravated by the dominant role of “fiat” currencies which are, in addition, initially issued as debts to the banking system. Such fiat money has long been recognized as “Riba” in Islamic economics – fundamentally unjust, since no private group in society should receive the benefit of seignorage arising from creating new money. Perhaps the first authoritative, clear-eyed, uninhibited exposure and condemnation of the fraud underlying the entire, modern-day, “western” economic system was that by Usmani (Usmani, 1999).

In addition to having long been recognized by Islamic economists, this major problem has recently become the subject of increasing attention among “western” economists outside the “mainstream” as taught in most universities, which, to their shame, ignore the whole subject. In recent years a growing number of organizations, notably the Public Banking Institute and the American Monetary Institute in the USA, and Positive Money in England, have been established to publicize this problem, which was largely hidden during the centuries before the Internet, and to promote solutions. The three annual RIFCON meetings held in Kuala Lumpur in 2010, 2011 and 2012 were a unique forum for exchange of ideas between the two cultures of Islamic economics and “dissident” western economics, both of which are rapidly growing in importance.

Moreover, present international monetary arrangements centered on the US dollar are widely predicted to end in another monetary crisis, as has happened repeatedly in the past when governments lost discipline over money creation. This was traditionally prevented by having to maintain a direct link to real commodities through guaranteed convertibility of the currency, most famously into gold, as was traditional for centuries in both Islamic and western economics. Hence the US government’s unilateral abandonment of its guarantee of gold convertibility of the dollar undermined the “western” economic system, and marked the beginning of its predictable decline and loss of influence.

Different aspects of the importance of currency being reliably convertible into real commodities, including particularly gold, have been discussed by many scholars of Islamic economics. However, in the modern world, which is now urgently threatened by the “Riba” western system, only a few scholars have updated this analysis to recommend realistic policy measures, such as Usmani mentioned above (Usmani, 1999). More recently Imran Hosein has written a clear description of the fraudulent nature of the “western” monetary system, leading to what he frankly describes as “the looming final stage of a fraudulent monetary system designed to impose complete financial slavery upon mankind” (Hosein, 2007). He also explains the protection against this result that the use of gold can provide, as taught in Islam since its origination.

Meera has written extensively about the privately-controlled, western, debt-based monetary system being the most important source of “Riba” in the world, and has led research into practical efforts to resist it, notably gold convertibility (Meera, 2004). He also led the three historic RIFCONs (Riba-Free Conferences) held in Kuala Lumpur. More recently he and colleagues have developed the IGENS system (Interest-free, Gold-based, Electronic Netting System) as a practical and modern means of obtaining the benefits of gold convertibility without needing government to formally implement it.

In this context, this chapter describes what the authors claim is a realistic, Shari’ah-compliant means of returning to real currency convertibility, although in a flexible form, which individual countries can implement independently – namely the Grondona system of primary commodity-based conditional currency convertibility. Simulations of its implementation in the two D-8 countries of Pakistan and Indonesia are presented, demonstrating the reliability of its counter-cyclical macro-economic influence. Finally the potential benefits of implementation by these and other D-8 countries, notably helping to insulate them from external destabilizing shocks, are discussed.

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