The Dollar Explained!

 
Imagine a large building full of about 50 people in a remote area, not accessible to other human beings.

Each person would need to have his basic needs - food, clothing, shelter and so forth, met. In doing so, each person would have to develop skills to go about earning his livelihood to support his needs. But it would be nonsensical for every person to develop each skill that is needed to survive. What would happen in reality is that each person would develop a few key skills and use these as his source of living; for example one person may specialize in growing crops and rearing animals, whist another may specialize in plumbing and carpentry.

Now these people would have to trade with one another to benefit from one another's skills. For example, the farmer may trade 10 chickens with the builder in exchange for him renovating his room, or a cleaner may trade half a day's cleaning in return for a knitter to knit two woollen jumpers for him.

As the number of skills or trades in the house (offered by the people resident there to one another) will be quite numerous, it would not only be very difficult and complex to keep track of all the exchange ratios between different goods and services, but also extremely impractical for day-to-day living.

Enter the use of a paper currency, which would remove the difficulties faced in exchanging goods and services with one another. From now on, for example, one hour's worth of cleaning could be assigned a value of one unit of the currency, a woollen jumper as five units, one chicken as three units and so on.

So instead of the farmer dragging around a number of goats with him to obtain building services from the builder, he now simply needs to take with him the appropriate amount of currency in his wallet to obtain this service.

Now imagine all the 50 people in the house working away hard to earn a living through their particular skills - except one. This individual, let us refer to him as the central banker or just banker for short, instead of learning to lay bricks, learning to treat people, learning to cook or develop any other skill the other people in the building needed to trade with and survive on a day-to-day basis, does something different and unique.

What this individual does is to print and control the currency being used in the building. On the surface, this may look innocent enough, but look at the consequences for him and the rest of the people in the building.

As mentioned previously, instead of trading goods and services directly, the residents now trade with one another through the use of this currency. So if the cook needs some medical attention, instead of having to bake a number of cakes there and then, he now simply offers the doctor in the building the necessary amount of currency. This currency the cook has earned, which he is now using for his treatment, may have been earned by him for example in the previous week by selling cakes to the farmer.

But what does the banker need to do if he falls into a similar predicament? Does he spend hours working away providing a service or days making a product in order to save up for his treatment? No - he does not need to; the banker simply prints some of the paper currency which the people in the building trade in and exchanges this for his treatment. And he does this for whatever goods or services he may require.

The net result is that while the other 49 people in the building have to work (producing physical goods or providing tangible services) to earn their paper currency and therefore purchase other goods and services through the use of this currency, the banker needs not engage in any real work.

All he needs to do is simply ensure that he has the means to print the currency he may require and further ensure - through force if necessary - that the other people in the building will use his paper money for all the transactions occurring in the building. And this leads to a very important conclusion at this point - that effectively the banker is obtaining the goods and services he needs to survive absolutely free from the rest of the residents (minus of course his cost of printing the paper notes, which is negligible).

To maintain this privileged position the banker will resort to force or intimidation to make sure that only his currency is used in the building at all times. Effectively, the behavior of the banker is more akin to that of a gangster.

This arrangement will remain to be the case as long as the rest of the people trade in his currency and the banker can print this currency freely without any restriction - that is, he does not have to back up the currency he prints with any material substance of value such as gold or silver (for example, for every 1,000 units of currency printed he would have had to have one ounce of gold in reserve.)

So the question arises, if the banker's currency is not backed up by gold or silver, why is it worth anything, considering that at the end of the day it is just bits of paper? As illustrated above, paper currency will have value as long as there are people who will trade goods and services using it.

It is interesting to note the effects on the price of goods and services as currency is printed and fed into circulation. Let us assume that in the above building there are a total of 5,000 units of currency collectively amongst the 50 people living there and that the price of an adult cow is 400 units as currently sold by the farmer. Further, at present, there is only person interested in buying this cow at this price.

Now imagine that the banker prints an extra 1,000 units of currency. With this extra currency, he loans part of it to some of the other people, say 400 units each to two people (each of whom help the banker exert his dominance in the building). Now suddenly these two people are also interested in purchasing the cow, since they now have the funds to do so.

However, the farmer is now faced with a total of three people all wishing to buy his cow for 400 units. As a result, the farmer increases his price to 480 units, which results in only one of the people still managing to stay in the bidding to buy the cow. This may well be the original bidder, but now he has to dig deeper into his savings to pay for this product.

Essentially, what has happened in the building is the process of inflation, which has caused the prices of goods and services to rise substantially. This has happened simply because there is now more paper currency in circulation chasing the same number of goods and services.

So far, we have just examined the effects of this currency arrangement on one large household. Imagine now a small community of 10 such buildings, each with about 50 people residing in it and living in a similar fashion. They too would have their own currencies circulating in their respective households.

However, our banker from the first building has designs on these other buildings as well. If he could get the occupants of these neighboring buildings trading in his currency then its purchasing power would increase.

For example, imagine in one of the other buildings the main product which was produced there was paraffin oil, and this was an essential but costly item for day-to-day living in not just that building, but all the other buildings. If the banker himself wished to buy this product, then he would for once have to offer a tangible physical product or service as opposed to just exchanging his paper currency for the goods.

But rather than actually having to work to pay for this valuable commodity, the banker has a better solution for himself - to simply get the other building to trade in his currency as well.

How does he achieve this? The banker identifies in the paraffin-producing building, and brings into dominance, a family living there who will agree to make their whole building trade in the banker's currency. In return, the banker will provide physical assistance to the family to stay in power and help legitimize their position. In addition, the banker will support the family's claim that the paraffin produced in the building is their property, and that the other people resident in this building have no claim to it (even though they have a right to).

So just as with the occupants in the banker's building, the occupants of the paraffin-producing building will now also be trading in the banker's currency. The effect? The value of the currency will go up, since the residents of the banker's building can now go and purchase paraffin from this other building using the currency they have been earning.

And further, the effect of this will now be felt across the entire community of buildings. Since they all need this essential and costly item of paraffin oil, to purchase it they will also be required to trade in the banker's currency. To earn this currency, they will have to offer physical goods and services to the banker in return for his currency. This will further drive up its value. 

 Thus under the above equilibrium, the banker's currency and hence the banker's wealth will flourish. However, if ever the other buildings stopped trading in his currency and set up their own ones, particularly the building which drives the micro-economy in the community (namely the paraffin-producing one), the banker's influence and wealth will shrink drastically.

If the banker could not persuade the other buildings to continue with his currency, especially the paraffin one, whether politically or commercially, then the banker would end up using force (as a criminal) as a last resort to make sure that they do not switch over to their own currencies.

This entire scenario may sound like a fantasy when considering reality. Yet it is not a fantasy - it is happening right now and on a global scale. The banker is called the USA and the currency in question is of course the US dollar.

At the close of World War ll, the US had managed to place itself in the position where its currency was effectively the reserve currency of the world via the Bretton Woods agreement, but was still linked to the gold standard. It was not until 1971 that the Bretton Woods agreement between the major world powers was abandoned on America's initiative. From this point onwards, the US dollar was no longer backed by the gold standard; that is, unlike prior to this, on demand one US dollar would now not yield its supposed value in gold.

The thinking behind the Bretton Woods agreement, enacted in 1944 in the US, was to ensure that all the major currencies in the world would be backed by the gold standard, thereby theoretically assuring that no country would be able to print its currency freely. But as the other powers in the world declined in their influence, and as the US simultaneously gained further hegemony globally, the agreement was broken at America's behest.

The US was fundamentally able to resort to this scenario due to the Organization of the Petroleum Exporting Countries (OPEC) agreeing (in 1971) to trade oil in US dollars. By now, having the sale of crude oil barrels, relatively costly and traded in their millions per day, in dollars, the US currency was now an essential requirement to facilitate trading on an international level. Not only was crude oil now traded in dollars, but other major commodities also followed suit, including gold.

Almost 40 years on, due to a mixture of reckless lending practices, fundamentally flawed trading processes of the likes of short selling, credit default swaps, derivatives trading and so on, the Western banking system has been placed on the verge of collapse due to the gigantic losses the banks have incurred.

Despite dictating their capitalistic philosophy globally (forcing Third World countries to liberalize their markets by removing trade barriers, allowing the privatization of state assets at heavily reduced prices), when their turn has finally come, the Western governments are hypocritically demonstrating that they are not prepared to let their financial institutions collapse by being subjected to the much-advocated force of the free market.

Apart from the plugging of a few holes via various investment means (including getting funds from Gulf nations), the Western banks have been essentially left with no option other than to go with begging bowl in hand to their respective governments and plead for bail-out packages. The governments in turn, having close ties with the elite of the financial world and to avoid a run on the banks and total economic pandemonium engulfing their societies, have in turn been left with no option other than to plough billions of dollars, pounds sterling or Eros into the banks.

Most crucially, if the funds to raid from do not exist currently, then the governments are resorting simply to printing the money and injecting it into the system. Recently, the US government announced a US$700 billion bailout package for its financial sector. In reality, according to some financial experts, the US government is actually pumping a fresh $400 billion a day or $2 trillion per week into the system.

This injection of readily created capital may stave of the banks from collapsing at the moment, but in reality all that has happened is that the problem or debt is being passed from one entity to another. As the money is printed and fed into the banks to avoid them collapsing, the money will then find its way into the economy.

As this is happening, inflation is taking root as ever more paper currency is chasing a static number of goods and services. The result of which will be only one thing - hyperinflation around the world, including Western economies, in the coming months and years. Thus the current deficit problem of the banks is effectively and criminally passed on to the masses.

Make no mistake - this is theft, and a theft on a colossal and universal scale. And it is a theft of a unique nature, not being possible beyond the workings of this model.

There is no need to take possession of the physical sums of money individuals in the society may possess. But rather, whether people's hard-earned funds are placed in vaults or under mattresses, the value or purchasing power of these savings is gradually being siphoned away by those who are the recipients of the newly generated funds, which is to say the banks. The more dollars that are printed and placed into circulation, the more the value of existing dollars (and currencies which are pegged to the dollar, such as the Saudi riyal) are being stolen.

What countries around the world urgently need to do is to ditch the US dollar, particularly the Middle Eastern states. As long as they trade in the dollar, they give it strength. Furthermore, since they, along with the Chinese, have some of the largest reserves of dollars that exist (earnt through the sale of physical assets and services), they are only losing out as America criminally dumps more such dollars into the world.

Even if today the Western world were to revert to some form of a Bretton Woods model, reintroducing, for example, the gold standard with regard to currency, then there still will be no guarantee that this would not again be brushed aside at some future point if any one of these powers gained greater global dominance relative to the others.

The real solution is to deal with the actual underlying capitalistic model that legitimizes such behavior. We must recognize now that, as with the communist system before it, capitalism has proven to be a failure. The world must now search for another model to govern its finances.

We have this in Islam. To summarize, in an Islamic economic system, the gold standard is compulsory, thereby preventing the generation of unsupported paper currency. In addition, Islam does not permit the various aforementioned capitalistic trading practices as undertaken by current day banks, which are effectively bringing down the Western economic system. Moreover, unlike a man-made system, the principles in Islam (the sharia) are unchanging; therefore Islamic rules will remain in effect no matter what the situation.

Asif Salahuddin (asif@evocadrinks.com) is an electronic engineer by profession. He is currently the operations director of an international beverages company based in London, UK.

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