Not only does the Islamic State terrorist group believe it can band a group of ultra-religious militants together and simply storm across sovereign lands and take what they wish; but now they believe they actually have a legitimate national government governing them, with a superior financial system to boot.
Believe it or not, the terrorist group has appointed its very own Treasury Department with the task of legitimizing the groups finances which have been stolen from governments, banks, businesses and ordinary citizens. How do they intend to legitimize all these ill-gotten gains?
“The Treasury Department of the jihadist group that is now occupying large portions of Syria and Iraq announced Thursday that it plans to mint its own currency out of gold, silver and copper,” replies the Wall Street Journal.
Anyone who has ever followed the extreme price volatility of gold, silver and copper can only shake their heads in amazement and perhaps even a little bit of pity. Those murderous fools do not understand what they are getting themselves into. Maybe we should simply let their foolishness bring them down by their own hands.
The Insanity of Islamic State’s Monetary Plan
The purpose behind the terrorist group’s plan is to “break away from the ‘satanic usury-based global economic system’ and instead use a currency that’s ‘based on the inherent value of the metals’,” explains the WSJ. But what is the purpose of that?
“They are adopting as many of the accoutrements of government as possible,” replies Georgetown University professor Bruce Hoffman, who specializes in radical Islam. The idea here is that by presenting themselves as an organized government they might over time grow into the international community’s memory as an established government to be accepted as a self-governing nation.
Whether the tactic to dress a thief in king’s garb works over time or not is a different subject. The idea of basing a monetary system on gold, silver and copper is more pertinent at this stage, especially since many advocates of the system have been quite vocal even in developed nations.
What makes many believe that a modern financial system based on metals would work is that it worked in the ancient past. What they fail to recognize, however, is that metals-based systems worked so well back then because all nations were on the same page, all used the same metals, and their values did not fluctuate (at least, not by today’s level of fluctuation).
But trying to integrate a metals-based system in one country today while all other countries are using paper money puts the metals-based system at a grave disadvantage that would easily spell its own ruination. Here’s why:
To keep their paper-based economies stable, governments constantly tweak interest rates and other monetary policies. They generally make a successful go of it (not always, but generally) only because they control multiple levers that affect the value of their money. It’s like driving a car in traffic, where each driver controls the gas and brake of their own vehicle, and can thus respond to changing traffic conditions in their own immediate area at any given time.
But if you are using gold or silver or any other commodity that trades on the international market as your underlying currency, you would have a much more difficult time trying to keep your currency stable because you simply do not control all the levers. It would be like having your car attached to a bus or a truck or another vehicle; you do not control your own vehicle, but someone else does – in the case of metals-based currencies, that other driver would be the international marketplace.
Gold Relinquishes Financial Control to Others
Why is controlling your own monetary vehicle so important? Remember in May of 2013, when the U.S. Federal Reserve announced it would soon begin reducing its monthly bond purchases? Remember how the U.S. dollar strengthened and other international currencies like the Indian rupee, Brazilian real, and dozens of others plummeted in value because of a strengthening dollar?
To stabilize their currencies, the affected governments immediately began tweaking their policies and adjusting their financial levers to strengthen their money by either: a) raising interest rates which makes their currencies more valuable, or b) buying bonds which removes cash out of their economies and parks it in their central banks’ vaults, making their currencies more scarce and thus more valuable.
But if those countries used gold, for instance, as their currency, they would not be able to stabilize their money, since their own localized interest rates and bond purchases would not affect the international price of gold. Such a government would in effect be using an international unit as its money, which value it would have no ability to influence.
There is one way, however, by which a government using gold could stabilize its economy in response to changes in the metal’s value, and that would be to continually increase or decrease the quantity of its gold reserves at its central bank. But that is extremely difficult to do, and almost impossible on a large scale. Why? Because gold cannot be manufactured, or printed, like paper money is.
This means that a government in need of large sums of gold would have to purchase it on the open market or from other central banks at the going market price. Yet such large buy orders would end up driving the price even higher, forcing an ailing government to pay even more for the gold it so desperately needs. And if it simply does not have the money or resources to pay for all the extra gold it needs? It would not be able to stabilize its financial system. The government would simply be forced to watch helplessly as its economy devalues into ruination.
The “Gold Advantage” is a Disadvantage
People often refer to gold’s limited quantity as a beneficial attribute that makes it superior to printable paper money. But the sad truth is that gold’s limited quantity is a disadvantage during times of crisis, because locating it and acquiring it is so expensive.
Paper money, on the other hand, is as cheap as the paper it is printed on. It really costs nothing to print an extra zero or two at the end of your bills to make money cheaper when it is too strong, or remove a few zeros to make money stronger when it is weak. And this, in the end, makes paper-systems flexible, while metals-based systems remain rigid.
The only way a metals-based monetary system would work is if all nations’ financial systems were based on it. This is why it worked in the ancient past, because all nations used gold and silver as their currencies. Thus, it was easy to trade Rome’s grain for Egypt’s ivory, Greece’s olive oil for Asia’s silk. They all knew how much gold their goods were worth, and they all had a common acceptance of the value of gold.
But even then, no one nation had the ability to increase its wealth with the wave of a hand – which is why governments in those times invested so heavily in early chemistry, or alchemy, in an effort to discover an easier and cheaper way of making gold. Pretty much the only way for a nation to expand its wealth was through trade or the plundering of foreign nations and tribes, which is what drove them into Africa and the America’s.
In today’s complex world, governments have found an easier way of tweaking their financial positions in response to changing economic conditions – they simply print and pump more of their money into their economies, or buy-back and remove money as the case may require. Simple. And they still have interest rates they can play with too. It’s like each car on the road being controlled by its own driver, as opposed to all cars being linked like a train with only one driver controlling them all.
Incidentally, that last illustration describes the monetary system in Europe, where the Euro is intended to link all the other Eurozone economies to one another like a train, with only one main driver of the economic train, namely the ECB. It’s understandable how some European nations would rather be driving their own monetary vehicles.
Destruction by Their Own Hand
If the Islamic State terrorist group thinks it is going to simplify and stabilize its “government” by using a metal such as gold as its base currency, it is simply out of its mind and will be destabilizing its own financial system from within. With gold fluctuating as much as 20% to 40% in a single year, the entire financial system of Islamic State would be fluctuating up and down in value week after week like a ship bobbing up and down on a violent ocean.
And that is just with one metal to worry about. If it thinks it can simultaneously juggle the use of silver and copper in addition to gold, it would need to track and convert the value of three internationally traded metals like a fleet of three differently sized ships each bobbing up and down on the ocean at its own rate. Can you imagine trying to walk across all three ships on a wooden plank? That’s what a merchant living in Islamic State would be faced with, not to mention the very “Treasury Department” itself.
It is a futile endeavor which will be destined to failure. But you know what? If we can’t uproot them militarily, we probably needn’t worry. By the sound of their own monetary plans, they will most likely end up collapsing by their own hand.