This Series Webinar is the 2nd Round Webinar held by lecturers and students of the Sharia Financial Management Study Program at UIN Sunan Kalijaga. This Series 4 webinar was held on Friday, April 17, 2020, from 09:30 AM to 11:00 AM WIB. This Series 4 webinar was led by one of the lecturers of the Sharia Financial Management Study Program at UIN Sunan Kalijaga, Mrs. Muhfiatun, S.E.I., M.E.I. The speaker for this Series 4 webinar was Drs. Bedjo Santoso, MT., Ph.D., Vice Rector I of the Sultan Agung Islamic University of Semarang.

The webinar's theme is “Fiat Money and Financial System Stability: Is It Possible to Return to the Gold Standard?” The moderator began by discussing the 2019 High-Level Conference (KTT) of Muslim countries in Kuala Lumpur, Malaysia. One of the key topics at the KTT was the pursuit of global financial stability. Datuk Mahatir Muhammad proposed the idea of reinstating the use of gold dinars as the currency for Muslim countries as a means to achieve global financial stability. Recently, China has once again made a surprising move, following the initial shock of the Covid-19 outbreak in January, by introducing digital currency as a new form of payment and announcing the abandonment of fiat money. This digital currency will be standardized to gold, thus closing the possibility for speculators to speculate. The underlying reason for abandoning fiat money is that it has been proven to make the world’s finances unstable, as seen in the financial system in Indonesia, particularly due to the vulnerability of the Indonesian currency to fluctuations in the dollar.

In the Webinar Series 04 discussion, the speaker highlighted the historical dominance of gold currency in the global monetary system. Gold currency has been in use since pre-Christian times, from the Bimetallic System in 1923 to the Bretton Woods System in 1971. Following 1971, fiat money has been in use for 50 years.

Throughout the 13 centuries of gold currency usage, only one crisis is recorded, during the reign of the Mamluk dynasty. In contrast, fiat money has experienced 8 crises, and according to some authors, a global crisis occurs approximately every 5 years.

Is there a problem with using fiat money? Yes, there is. Over the past 50 years, the use of fiat money has been associated with 8 economic crises and 7 global crises. The Current Monetary System rests on three pillars: fiat money, fractional reserve requirement, and interest-based systems. The use of fiat money has been a subject of debate, with a notable conflict between the Bullionist and non-Bullionist factions in 1800, which was won by the Bullionists. The non-Bullionist perspective, which argues that the use of gold currency is unstable, has been deemed incorrect.

Fiat money has several positive aspects. First, it is elastic to needs, allowing for quick adaptation to meet demands. Second, it is easy to use. Third, it can swiftly respond to changes in the microeconomy. However, there are also numerous weaknesses associated with fiat money. First, it lacks intrinsic value. Second, governments have the freedom to print money. Third, the existence of seigniorage, the difference between the value of money and its production cost, poses a challenge. Fourth, there is a lack of support for social justice. Lastly, national sovereignty is threatened. On the other hand, gold currency has its own set of advantages and disadvantages. Its advantages include being valuable, rare, homogeneous, and storable. However, it also comes with disadvantages such as high usage costs, lack of elasticity, and the government’s limited control over it.

The crises associated with fiat money often stem from currency speculation. Additionally, the use of fiat money can result in the loss of wealth due to its value being eroded by inflation. For instance, over a 40-year period, the purchasing power of the Rupiah has decreased by 8% annually, while the US dollar has decreased by 5% annually. In Indonesia, the inflation rate reached 78% in 1998. If there is a 7.5% inflation in a year, the cost of living in Rupiah would increase by 100% or more over the next 10 years.

Secondly, fractional reserve banking, or reserve banking, has the weakness that it allows banks to easily generate profits by essentially printing money. This leads to a multiplication of the amount of money in circulation. For instance, if a customer sells land for Rp100,000,000 and deposits the money in Bank A, the bank will keep Rp10,000,000 and credit Rp90,000,000 to another customer. The recipient of this credit will then deposit their money in Bank B, which will follow a similar process, keeping Rp9,000,000 and crediting Rp81,000,000 to another customer. This process continues, leading to the money in circulation expanding from Rp100,000,000 to Rp1 billion.

Third, concerning interest and default, Mera’s mathematical model has demonstrated that the presence of interest leads to an increased likelihood of businesses failing or defaulting, as indicated by the mathematical formula Rdefault. These three pillars contribute to activities that can trigger crises, such as speculation and arbitrage. According to Triyono’s theory on the occurrence of crises, the monetary sector tends to become overheated, leading to inefficiencies in the money market, as financial institutions prioritize creating credit for the monetary sector over the real sector. Many sources indicate that the gap between the real sector and the monetary sector is ninefold. Data from the World Bank reveals that the amount of money in circulation worldwide now amounts to 120% of the total global GDP.

Returning to the gold system has its advantages, but there are also obstacles to consider: 1) Gold sufficiency, 2) The need for a unified currency system within a country, 3) Disparities in social, economic, and political aspects among countries, and 4) The necessity for regional, rather than individual, implementation. Additionally, a major obstacle is an IMF article prohibiting central banks from reverting to the gold system. As an alternative, countries can strengthen the real sector by utilizing economic instruments such as zakat and wakaf. These instruments have the potential to bolster the real sector. If a return to the gold system is desired, it should be done gradually, involving the community and incorporating a digital model. Implementing “Back to Gold” is a challenging task that falls within the purview of the state, rather than individuals or communities.

There was significant engagement from the participants due to the compelling topic. As a result, the moderator only chose a select few questions that encompassed the entire discussion, including:
Question:
How does the value of money change when gold is traded?

Answer:

When gold is traded, its value is influenced by the commodities it is exchanged for and the purpose of the trade. Gold may not always be directly traded but could be used as a medium of exchange or barter, such as exchanging gold for rice, which is then secured by a clearing institution. Securing gold is a challenging endeavor, as it has already required the expenditure of trillions of funds to maintain its value against fiat money. Research indicates that the cost of securing the clearing concept exceeds the cost of ensuring stability.

Question:

What is the impact of using two different currency values in a country?

Answer:

A country using two currencies would damage its reputation, likely leading to the dominance of one currency, such as the Rupiah, due to its more efficient use. Any transition to a gold standard should be gradual. If both systems are implemented, people may prefer using paper money due to their perception of gold as valuable, leading them to hoard it rather than use it for transactions. If the price of gold rises, people will rush to find gold mines, despite the high costs involved. However, if gold becomes abundant, its price will decrease. If the supply of gold surpasses the amount of money in circulation, some of the gold will be utilized solely for jewelry.

Question:

If it is possible to make gold the sole measure of value, how will real transactions occur? Additionally, not all Indonesian people have access to digital means. What will the smallest fraction of gold be like in this scenario?

Answer:

This is a conceptual design, and any related issues would be resolved gradually. In the past, America had to back its money with gold reserves before 1971, ensuring that the amount of money issued was equivalent to the gold held in the bank. This implies that if a country issues money totaling Rp1 trillion, there must be Rp1 trillion in the Central Bank. If gold is solely utilized as a standard measure of value, its value will remain stable. The smallest denomination would be equivalent to the dirham, as gold currency cannot be divided into smaller units than the dirham.

Question:

If a gold-based currency is adopted, we will lose to the gold reserves in America, while Modern Monetary Theory (MMT) involves printing money based on projects. In your opinion, which approach is more relevant: a gold-based currency or MMT, which prints money based on projects?

Answer:

The text discusses the advantages of a gold currency over paper currency, highlighting the negative impact of paper currency, which can lead to a global crisis impacting more than just individuals. It suggests that countries without sufficient gold reserves should consider implementing commodity money, ensuring that multiple countries participate and taking into account the gold reserves of neighboring nations. For instance, if Indonesia has ample gold reserves and Brunei has fewer gold reserves but abundant oil, they could engage in commodity exchanges. This transition should be gradual and should prioritize financial and economic stability. The gold system is said to provide stability, fairness, and align with Islamic principles.