There should not have been any surprise at the beginning of November when the Islamic State announced the introduction of a new currency. Having its own currency is one of the signs of a sovereign state; and the Islamic State is striving to transform itself from a revolutionary movement into an independent country with a functioning economy, though that process has not been going well.
That requires a currency that people will accept in payment for their services and goods. The Syrian and Iraqi currencies are only colored pieces of paper that have little value within government controlled territory and even less value in Islamic State territory. People use the Turkish lira and even the U.S. dollar, but the lira is not liquid enough to support another economy and it is discrediting to use the currency of your enemy.
As usual, the Islamic State reached back to when an earlier caliphate ruled much of the Middle East and extended into Spain to give historical legitimacy to its actions. The Islamic State wants to present itself as the successor to an earlier powerful caliphate, but it did not revive the idea of the gold dinar. In 2002, Prime Minister Dr. Mahathir bin Mohamad of Malaysia at the Organization of the Islamic Conference proposed the creation of a gold dinar. A separate Islamic economic community was being advocated in order to escape Western domination.
As if it were ISIS that devised the idea, the gold dinar is being presented as the first step in creating that community The Islamic State has been accumulating gold and silver for the new currency for a number of months that will include the 4.3 gram gold dinar as well as the 3 gram silver Islamic dirham.
Acquiring the revenue to finance the daily operations of the Islamic State and the accumulation of gold and silver for the planned currency is forcing the leadership to be creative. Treasury Undersecretary David Cohen Claimed that IS earned during 2014 twenty million dollars in ransom payments for kidnapped victims. During July, IS is estimated to have earned three million dollars per day for exported crude oil, but that was halved by the beginning of November. It has fallen further due to declining oil prices.
Wealthy contributors in the Gulf States, including Saudi Arabia and Qatar have been providing what is a minor part of the IS budgetary requirements. The IS is estimated to have one billion dollars in historical antiquities under its control. The Syrian town of Tell Abiab on the Turkish border has become a trading center for the historical treasures to be sent into the world market.
According to the Russian Federal Drug Control Service, the Islamic State has become of major conduit for the smuggling of Afghan heroin through the town of Nineveh in Syria on the Turkish border. The Russian authorities claim that IS accounts for half of the supply going into Western Europe.
Drug smuggling is old business for intelligence services and revolutionary movements. The newest enterprise in the IS is the harvesting of human organs. Office of the High Commissioner for Human Rights (OHCHR), says the IS sells organs taken from injured prisoners and battlefield casualties. Outside doctors are reported to be operating in an isolated hospital in Mosul and using established black market channels to move the desperately wanted organs to where there are waiting customers.
Drugs, antiquities, and human organs are passing through Turkey to the outside world. All of these activities are to raise funds for the IS, but it does not solve the domestic economic problems. The Islamic State must be able to provide the bulk of the population with essential goods and services. Failing to do so is inviting a rise in internal disorder. Already, there are small units of insurgents in Syria that are picking off members of the Islamic State military forces.
For economic and symbolic purposes, the leadership of the Islamic State is pressing for a gold currency with universal acceptance. It is essential for the management of the society; and it is dangerous, because the value of a gold coin comes from the metal in the coin itself and not from the issuer. Universal acceptance means that the money can be taken outside to be converted into any other currency. In an environment of a worthless paper currency, a questionable banking system, and the possibility that the new regime will collapse, the gold dinar is certain to be hoarded for financial security and taken out of circulation. That will bring the economy to a halt.
What the Islamic State is trying to achieve is financial security for anyone able to acquire the gold and silver coins. Their financial security, though, means creating a money shortage within the overall economy.
It also gives the enemies of the Islamic State a new weapon. The gold dinar can be duplicated in size and weight by a gold-plated tungsten coin that will be difficult to identify as a counterfeit unless the surface of the coin is scraped. If large numbers of counterfeit coins are released into the economy, that will destroy the universal acceptance.
The United States Mint could prove to be a more effective weapon that a squadron of F16s. Here, Gresham’s Law rules. Bad money drives out the good.
The more the caliphate assumes the character of a state the more vulnerable it is making itself. Defeating an Iraqi army with corrupt and incompetent officers is the easy part. Trying to defeat the laws of economics is a loser’s game.