No sovereign (supra-national) institutions are necessary to establish a single  currency.

Al-Bai’ Bithaman Ajil is not a bona fide sale, but a financing transaction,
hence, the United Arab Emirates, which pegs its currency to the dollar, refused this week to match the US Fed interest rate cut.

Confidence in the financial system has collapsed.

Unlike the crisis at the end of the 1990s, however, help from the International Monetary Fund (IMF), European central banks and the US Federal Reserve indicates that this time the first world is not going to stand by and watch, says the Financial Times this morning in its review of its Lex-columns of the week.

Who has confidence in government?

Bretton Woods (and the IMF) were repealed on 15 August 1971 by the undisciplined government of the USA, represented by Richard Nixon.

Does a central bank need foreign-exchange reserves to protect the exchange-rate of its currency,
or does a central bank need oil and gold reserves to give value to its currency?

We do not need sovereign (supra-national) institutions (1),
we need the marking to market (MTM) of the gold (and oil) reserves of the central banks.

It is because, as a civil servant, he naïvely believes that government and its institutions are the solution to every (any?) problem that, in his new book “The Birth of the euro” which I criticised in my previous post “Money, gold and anchor” (2), former European Central Bank (ECB) chief economist Dr Otmar Issing does not mention the MTM-ing of its gold reserves by the ECB? (3)

It is through MTM that central banks can achieve independence.

It is the discipline of MTM which forces independence.

Independence has two aspects. Institutional independence forbids instructions from the local government. Personal independence provides for a minimum term of office.

In the European Monetary Union (EMU), article 1.9 of the Maastricht Treaty provides for the independence of the central banks. Historically, European countries have had very different approaches to central-bank independence. Northern European countries such as Germany, Switzerland, and to a lesser extent, the Netherlands, have histories of strongly-independent central banks but countries, such as France, Italy, Spain and the United Kingdom  do not. The central banks in France, Italy and Spain have all been granted independence during the 1990s. It is, however, instructive that in none of these cases did the granting on independence pre-date the signing of the Maastricht-Treaty which committed EU governments to independent central banks. (4)

INDEPENDENCE OF CENTRAL BANKS

Through the creation of the ECB, all banks which participate in EMU became independent.

Central banks must look after the currency.

Centrals banks should stop the practice they had for three hundred years to support commercial banking organisations in enriching themselves by creating money out of nothing and then lending it at interest.
The law should also stop giving its full force to such practices.
Central banks should stop the practice of being lenders of first and only resort.

In his 2002 Charlemagne speech the late Dr Wim Duisenberg, president of the ECB, said that the euro is the first currency to have severed not only its link to gold, but also its link to the nation-state. (5)

That means that in a monetary union the power to formulate the single monetary policy for the single currency area is transferred from the national central banks of the participating Member States to a supranational level, the Union Monetary Authority.

In accordance with the principle of central bank independence, this implies that not only the Union Monetary Authority but also national central banks have to be independent,
at least to the extent that they contribute to decision-making at the supranational level and the implementation of related operations.

By severing the link to the nation-state, the euro has explicitly stated that it is not (no longer?) a sovereign currency. Indeed, it is the first currency which is freely floating and also has freely floating gold reserves. The currency thus has a gold component and a paper component, but puts a “firewall” between the two so that gold’s valuation as a wealth-preserving asset cannot be pulled lower by the inevitable inflation of the paper component of circulating currencies. It is the MTM-ing of gold reserves which provides that wall.

Advocating the marking of these reserves to market is arguing that the accurate price of these reserves can only be found through the actual price of gold and oil on the gold and oil markets.
The opposite of marking to market is marking to model. Marking to model is marking on the basis of guess work, marking on the basis of assumptions, like the US Federal Reserve.

There are indeed other Monetary Unions than Monetary Unions which fit into the IMF-straitjacket.

These other Monetary Unions do no longer consider the currency to be sovereign.

GULF CENTRAL BANKS

As I said, central banks must be independent in order to maintain price stability.

We are being told that the Gulf central banks are not independent.

It is true that the Gulf central banks are not sovereign, that they cannot take sovereign decisions.

Indeed, the dollar peg robs them of this sovereignty and forces them to slavishly follow what the USA Federal Reserve Bank decides.

By this very fact, the robbing of sovereignty, they are however independent from the Gulf governments.

By not matching the USA Federal Reserve Bank interest rate cut (6), the UAE central bank displayed on Thursday 30 October 2008 that it is no longer prepared to slavishly follow what the US Federal Reserve decides.

The UAE’s decision not to follow the US Federal Reserve’s decision is the first step towards re-establishing a monetary system whereby money has some contact with, and is no longer disjoined from, the real economy.

By the same token, it is the first step to establish a halal (7) financial system.

A judgment dated 18 July 2008 by Malaysian High Court Datuk Justice Abdul Wahab Patail concerns the Al-Bai’ Bithaman Ajil (BBA) concept whereby the customer identifies the asset he wants to purchase and approaches the Bank for financing. Under the BBA concept, the Bank will then purchase the asset at cost and sell the same to the customer at cost plus profit on deferred payment basis at the duration and price agreed by both parties payable by fixed instalment. In that way, the parties hope to circumvent the prohibition of riba, interest.

In his judgment, the learned Judge held that where the bank purchased directly from its customer and sold back to the customer with deferred payment at a higher price in total, the sale is not a bona fide sale, but a financing transaction. The learned Judge also held that the profit portion of such BBA facility rendered the facility contrary to the Islamic Banking Act 1983 or the Banking and Financial Institutions Act 1989, as the case may be. (point No. 69) (8)

“We think cuts are not having the impact on local money markets and it is not meaningful at this point to cut,” one UAE central bank official said on Thursday. (6, again)

[The] right to borrow currency is so valuable to a government that they will never limit themselves with gold. Meanwhile, the road they are on will destroy all value in currency forcing people to gold. Today people value currency, tomorrow they will value gold. In the worst case, the bankers will be forced to use their gold reserves to rebuild. A likely case is that they will use other peoples gold reserves to rebuild the system thus saving the biggest piece for themselves. The system is a sward balanced on a water balloon that is not being held steady. (9)

The UAE Central bank has called a halt to this fraud.

Currency trading is indeed haram (7, again) and if the world shifted back to a gold standard, there is essentially one currency. (10)

No sovereign (supra-national) institutions are necessary to that effect.

Ivo Cerckel
Siquijor, 01 November 2008

NOTES

(1)
CONTRA
Emilie J. Rutledge “Monetary Union in the Gulf – Prospects for a Single Currency in the Arabian Peninsula”, Routledge, 2008, p. 124
The principal lesson the EMU experience provides any economic region considering Monetary Union (MU) is that a strong level of political motivation is absolutely essential
and furthermore that supranational institutions (and the process of institution building) are integral to the success of MU

Joseph A. DiVanna, “Understanding Islamic Banking – The Value Proposition that Transcends Cultures”,  Cambridge, UK, Leonardo and Francis Press, 2006, p. 137
Rutledge also identifies that a critical element in a MU is the need for a single independent central bank and a monetary authority

(2)
Money, gold and anchor October 22nd, 2008 by Ivo Cerckel on this blog

(3)
Otmar Issing, “The Birth of the Euro”, Cambridge University Press, 2008

(4)
Darren Williams and Richard Reid, “The European Central Bank”, in; Paul Temperton, “The euro”, John Wiley and Sons, 1998, 2nd. ed, 123, pp. 126-127

(5)
International Charlemagne Prize of Aachen for 2002
Acceptance speech by Dr. Willem F. Duisenberg, President of the European Central Bank, Aachen, 9 May 2002
http://www.ecb.eu/press/key/date/2002/html/sp020509.en.html
SNIP
The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro.

(6)
UAE decides not to match Fed Bank interest rate cut
by Stanley Carvalho on Thursday, 30 October 2008
http://www.arabianbusiness.com/536598-uae-decides-not-to-match-fed-bank-interest-rate-cut
SNIPS
The UAE, which pegs its currency to the dollar, has decided not to match a US interest rate cut, marking the first time the Gulf state has not followed a Fed move.
+
“We think cuts are not having the impact on local money markets and it is not meaningful at this point to cut,”  said one central bank official said.

(7)
Halal is Islam-compliant, anything that is permissible under Islam. Its antonym in Islam is haram which is used in Islam to refer to anything that is prohibited by the faith, says Wikipedia.

(8)
Sunday, September 7, 2008
BBA judgement by Msia’s Justice Wahab Patail
By Habhajan Singh
http://islamicfinanceasia.blogspot.com/2008/09/bba-judgement-by-msias-justice-wahab.html
SNIPS
The High Court recently ruled that the application of the Al-Bai’ Bithaman Ajil (BBA), a hugely popular Islamic home loan financing contract in Malaysia for the last two decades but much criticised abroad, is contrary to Malaysia’s Islamic Banking Act 1983.
In what is set to be another widely discussed judgement, High Court Judge Datuk Abdul Wahab Patail ruled that the sale element in the BBA is “not a bona fide sale”. He also brought into question the profit portion of the facility.
+
“This Court holds that where the bank purchased directly from its customer and sold back to the customer with deferred payment at a higher price in total, the sale is not a bona fide sale, but a financing transaction, and the profit portion of such Al-Bai’ Bithaman Ajil facility rendered the facility contrary to the Islamic Banking Act 1983 or the Banking and Financial Institutions Act 1989, as the case may be,” he said in his judgement (point No. 69).

(9)
Ender (usagold.com 29 October 2008; 22:11)
http://www.usagold.com/cpmforum/

(10)
The Gold, Dollar, Euro, Islamic Dinar and Endogeneity of Money:
Conceptual Framework and Empirical Evidence
Dr.M. Kabir Hassan
May 29, 2002.
http://islamiccenter.kaau.edu.sa/english/Forum/ABS/2.htm

DiVanna, op. cit., p. 139