Fiat and commodity money: a debate among scholars

Abstract

Recent monetary crises have brought back the interest of scholars especially Muslim scholars to re-evaluate the current fiat monetary system. Interestingly, their views are varied and lead to a debate among them to present the rationale and the arguments they hold and to propose the alternative system. This paper is written to study their views and hence set three objectives. to present systematically the views, to evaluate the views, and last to conclude what monetary system should be proposed. This paper fir.ds that the issue of seigniorage is explicitly accepted with regards to the possible mismanagement domestically; while internationally, results in the lack of an international unit of account leading to injustice in the international monetary system through certain currency domination. Interestingly, the two International Seminars on Monetary and Fiscal Economics of Islam held in Mecca 1978 and Islamabad 1981 have highlighted the issue seigniorage domestically and have developed a sophisticated fiat monetary system under Islamic economics. However, this paper argues that in the practice the proposal seems difficult to be implemented and hence need more research. Unfortunately, the research on the matter seems to be forgotten and the trend is likely to a discussion on Islamic Financial Institutions. However, the Asian financial crisis refreshes the matter and inspires two International conferences on the stable money held in Kuala Lumpur 2002 and 2007. The paper finds that the valuable contributions of both conferences were the idea of supplementary currency and monetary union. Thereby, the gold as supplementary currency is also proposed to eliminate the above flaws of fiat monetary system, for it can become a non-governmental unit of account and means of payment for ordinary transactions and internet. Consequently, it would serve as a check on inflationary governments. Finally, the non-developed countries should think of strengthening their position in the world monetary league, thus, the idea of monetary union should become an agenda.