Over the weekend of 29/8/15, a new propaganda video was released from the Islamic State (or ‘Daesh’ as it is also known from its Arabic acronym). The long (54 min) video uses a combination of Islamic history, Quranic quotes, and libertarian economic views to argue for a return to the gold standard rather than the fiat currencies we have today. Daesh is very explicit in their condemnation of the US global economic policies that have made the US Dollar the global reserve currency, and the group lays out a decent, albeit cherry-picked narrative of the gold standard in economic history. The video shows how the Islamic State has begun to mint coins, the plans of which first circulated on social media months ago. In a second video released shortly after, people living under Daesh rule express their optimism that this new approach to the economy will seriously weaken the global financial order dominated by the USA. This blog will go through the presentation and arguments made by Daesh, bringing the reader to a better understanding of the issues involved. Ultimately, I argue that Daesh ignores and does not fundamentally address some of the most serious problems with the gold standard and as such their claim to undermine the global financial system through this minting of their own coins doesn’t hold up to scrutiny.
The video starts with ‘clash of civilizations’ rhetoric seen from the Daeshi point of view; America and its fraudulent financial system were attacked on 9/11. “America was dragged by its legs into Afghanistan and Iraq,” says the narrator. The video mentions the Jews as being central to the American financial system but the video did not engage this topic further as it continued its analysis of what it sees wrong with the global financial system. One did not leave this video thinking that Daesh was propagating an anti-Semitic narrative about how Jews supposedly run the global economy. Instead, they also repeatedly refer to the “tawagheet,” an Arabic word for ‘tyrants.’ This refers to Arab leaders who repress Islam in their countries and often (though not always) align themselves with the USA. Good examples of these kinds of rulers were Hosni Mubarak in Egypt, Saddam Hussein in Iraq, Ben Ali in Tunisia, King Hussein in Jordan, the Assads in Syria, etc. This actually is a common theme in AL-Qaeda propaganda as well, where they referred to these regimes as un-Islamic or not Islamic enough, calling them the ‘near enemy.’
From an historical perspective, the picture that Daesh paints about the gold standard is rosy and oversimplified. I must give them credit, however, for presenting a much better description of the prevailing balance of US dollars outside of US borders acting as the global reserve currency, and how these things are tied to rates of American borrowing that are unsustainable. Daesh is certainly not the only group making this argument- their hatred for the US Federal Reserve is most notably shared by libertarians in the USA, an interesting overlap the video never explicitly addresses. Daesh then offers its own solution- a return to real gold and silver coinage and not fiat notes- which it claims will bring down the American financial empire. Let’s look at the history to understand the problems of gold coinage and see what Daesh offers, if anything, as solutions.
First, in its history of the gold standard, Daesh correctly pointed to one major issue in the history of gold coinage- that people would shave off small parts of the gold, and still trade the coin as if it had the same value. Even when not done deliberately, experience showed that gold coins degraded through circulation and lost value. While Daesh acknowledges this problem in the history of using gold coins, it offers no explanation for how it expects to avoid it now. Second, Daesh does not mention the real problem some governments experienced with gold coins- that some people took the coins, melted them down, and stopped using them as currency but rather refashioned them into other objects for their own keeping. If done on any large scale, it removes gold from circulation and the government would have to issue more and replenish its reserves. For the sake of argument, let’s take the current market value of gold, measured as of 9/3 at 1123.70. Let’s measure the values of the coins Daesh minted, assuming they are actually pure gold as the group claims. The 4.25 gram coin at that market value is worth roughly 168.5 USD. The larger coin, weighing in at 21.25 grams would be worth around 842 dollars. These are quite lucrative sums and it is not unforeseeable that people would smuggle these out to sell them.
Third, the modern history of the gold standard is a volatile one, despite its touted virtue of bringing stability to the money supply. This is especially important pre-WWII before the dollar-gold standard was introduced by the Bretton Woods Accords, as Daesh correctly presents. Granted, these countries were trading currencies that were representations of gold held in reserve (or at least in theory). Arguably, the failures of the gold standard were one of the problems that led to both world wars, as countries that tied their currencies to gold struggled painfully to revive their economies when any kind of downturn came their way, as is inevitable in the global capitalist system (need I remind readers that no country has succeeded in constantly growing without any kind of economic slowdown or recession?). William Jennings Bryan, for example, based his populist platform in American politics at the end of the 19th century on his opposition to the gold standard, claiming that America’s farmers were being “crucified on a cross of gold.” Why was this?
In its most simplified form, the problem is one of rigidity. I actually agree in abstract with Daesh’s desire to mitigate the volatile fluctuations of fiat currencies that are no longer tied to any reserve metal. Since the early 70s when Nixon ended the dollar-gold standard, currencies only carry value because markets, and consumers more particularly, trust the government that has printed it. It might be better understood as a store of value that has no value in and of itself- but rather gets value because people are willing to trade actual goods and services for the fiat currency in the confidence that it will hold its value and they will be able to trade the currency for another good or service down the line. However, as a commodity in the global market, many speculate in the value of these currencies because large amounts of money can be made by correctly anticipating rises of falls in its value. Arguably, currencies along with staple foods that people need to survive should not be subject to such speculation but that’s another argument for another time. Returning to the problem of rigidity, Daesh is correct that using gold or a gold backed currency avoids many of the aforementioned problems but has different limitations of its own. Monetary policy in the modern world economy relies on several tools that would no longer function if the gold standard were in place. These include most specifically printing money, which when done in measured amounts is not always a terrible thing, or the use of foreign currency by a government to purchase back quantities of its own currency in the market to strengthen its price. Finally, the ability to adjust the interest rates at which money is loaned into the market is an important monetary tool, one Daesh is forgoing out of its Islamic opposition to charging interest.
Fourthly, the bases of the Daeshi economy are based on several very unstable and problematic sources. First, Daesh is reliant on oil sales, most of which is smuggled out through Turkey from what I have read. These smuggling routes are not new, indeed they were apparently developed when Iraq was under sanctions in the 90s. As my colleague and I argued in another post, both Syria and Turkey facilitate Daesh’s ability to continue exporting oil. Daesh is also making a lot of money from smuggling Syrian and Iraqi antiquities out of the country for sale, and sadly its destruction of major parts of Palmyra recently along with its apparent attempts to dig more up more artifacts only furthers this problem. A sharp paper recently analyzed the economy in the areas Daesh controls, looking at the economic activity in these areas before Daesh took control of them. The paper also uses a measure of light coming from the areas to guesstimate economic activity, and their findings show that the levels of activity in these areas are lower than they were before Daesh took over, and they weren’t high in the first place. They then question how much growth could really come out of these areas that did not have the infrastructure necessary to support significantly more activity, and if the economic growth could be expected to be turned into military power. They are pessimistic on both counts.
Thus I see several crucial flaws in the idea that Daesh using gold coinage will succeed domestically or have any serious impact on the global economy. First, they make no allowance for what will happen if people would rather hoard the gold and sneak it outside of the areas the Islamic State controls, or shave off thin amounts of gold as has happened in the past. Will they try to use barbaric punishments to keep this in line? Next, Daesh doesn’t realize that the countries that used gold as they will now faced major economic problems when inevitable economic downturns came and found it near impossible to steer themselves out because of the lack of policy options the gold standard gave them. Indeed, the problems faced by countries in the Eurozone like Greece and Spain that are unable to implement their own economic policies are broadly similar to what countries struggled with once they experienced a recession under the gold standard. Next, studies of the economy in the areas now under Daesh control showed their economic activity to be relatively weak even before being taken over, and they’re not achieving the same levels they used to. Additionally, the question of gold supply is left unanswered- because it would not exactly fit their argument to point out that the USA is by far the largest hoarder of gold in the world. What this all adds up to is a half-baked economic policy that will not achieve any of the goals Daesh aims to achieve.
UPDATE: October 8 I came across this piece detailing how Turkish authorities had raided a location where they found the presses and printing equipment the Islamic State has been using to mint their currency. It is unknown if this was the only location making the money but we can anticipate some impact on the availability of the coins inside of IS-controlled areas. If more information becomes available I will update.
*UPDATE 2: unfortunately the link to the original video I reference here is now broken but a newer, shorter version of the same video has appeared online. You can watch it here.