Monetary Crisis

Issued by Hizb-ut-Tahrir
This article originally appeared in Arabic on August 16, 1971

On the night of Sunday, August 15 1971, President Nixon appeared on television after a 48-hour
seclusion at Camp David. He announced to the American people that protecting the dollar, fighting
unemployment, and improving the status of the trade balance and the balance of payment are main
elements of a new economic policy. The objective of this policy was to maintain the economy of the
United States as the number one economy in the world. He went on to say, “Whether this Nation stays
number one in the world’s economy or resigns itself to second, third, or fourth place; whether we as
people have faith in ourselves, or lose that faith; whether we hold fast to the strength that makes peace
and freedom possible in this world, or we lose our grip-all that depends on you, on your competitive
spirit, your sense of personal destiny, your pride in your country and in yourself.”

With these words, the American president announced his policy of face the overwhelming monetary
crisis that almost broke the back of the western economy as a whole, including the economies of other
countries led by the west. Nixon’s plan was a slap in the face of the free world. It turned the standards of
international trade upside down and planted confusion in the stock markets of the western world. This
policy caused the currencies of individual countries to drop.

Before looking at the crisis and the plan that saved the American dollar from collapsing, one should first
look into the history of the international monetary system. Beginning from the time it was based on gold
until the time when this basis was changed in 1944 at Bretton Woods and another basis was established.
This new basis was the main reason for the monetary crisis and will continue to be the reason behind all
of the problems and crises which the international monetary system will suffer from. Problems and
crises will continue to occur until the gold standard is brought back into existence. By establishing this
standard, stability will be brought back to all economic relations among nations.

The gold standard (and silver standard) goes back a long time. It was used as far back as when currency
began to be used until the first world war. In WWI, the fighting nations started applying certain policies
which made this system unstable. Some countries stopped accepting gold in exchange for their
currencies, some implemented severe restrictions on exporting gold and others started putting obstacles
in the way of importing gold. As a result the monetary system became unstable and the values of
currencies started fluctuating significantly. Since then, the world’s monetary system has suffered from
many international crises. The monetary system has become a tool used by colonialists and the super
powers of the world to destroy their enemies.

In 1944, representatives from forty-four countries representing the capitalist world met in Bretton
Woods, New Hampshire (USA). In this meeting, they agreed to accept the American dollar as the basis
for determining the values of their currencies. This step was taken after many nations disassociated their
currencies from gold. According to the rules of the international monetary fund, which were agreed
upon at the meeting, the value of any currency should only change within a very limited range. This
range should not exceed plus or minus 1% of its value according to supply and demand. However, if a
country wants to change its currency value as a result of a severe decrease or increase in its trade
balance, it may do so only after consulting with the other countries. In this case the International
Monetary Fund can provide this country, which has 109 member countries as of 1968, with financial aid
as help to recover from such a problem and to bring stability back to its currency.

Based on this system, the ten great industrial countries agreed on establishing fixed values for their
national currencies with reference to the American dollar. Furthermore, the United States agreed on
using gold as a basis for its currency (thirty-five dollars for one ounce of gold). As a result, the relation
between currencies of most of the capitalist world, including the ones in the Muslim world, and the
American dollar was established. Many of these countries used the American dollar as a main asset in
their central bands and as a back up for local currencies in order to protect it. As a result of the crisis
with the dollar, which led to its decline, the nations that linked their currency to the dollar would suffer a
great loss. This loss is because of a decrease in their reserve, which is primarily the American dollar in
addition to some gold and hard currency. Therefore, it was natural that the Japanese yen would suffer
from this crisis. The United States and Europe are considered two main markets for the Japanese
exports. Similarly, this is the case with Germany. This happened after Japan became the second
industrial power in the capitalist world, followed by Germany.

The history of the monetary crisis began during the Second World War when the current monetary
method was established in the capitalist world. It is worth mentioning that a deficit in the balance of
payment of any country can occur without causing any problems. However, the deficit in the American
balance of payment this time resulted in a crisis because Americans significantly exceeded their balance
of payment. The balance of payment is a term referring to the national external expenditure. A deficit in
the balance of payment occurs when a nation spends more than it should, outside its borders. America
continued to spend more than it should from this account fro the past twenty years. Generally, when this
problem occurs, a country will change the value of its currency. However, America can not do that
because the American dollar gets its value from the strength of its nation. This has been the case since
the Second World War when the current monetary system was established. This system has started
shaking and it will fall later, in which case the monetary system with gold as its basis will come back
insha’Allah. People knew that until 1960 they could replace their dollars with gold, thirty-five dollars
for every ounce of gold. However, with the deficit in the American balance of payment, due to
increasing external expenditure, the supply of American reserve in gold started to decline. From 1961 to
1970, the supply decreased to about five billion dollars.

This monetary crisis is basically due to the presence of the American dollar in large quantities in the
world markets, which resulted in a severe decline in the American reserve in gold. The American gold
reserve decreased to about half of its normal level of ten billion dollars. It is also due to the absorbed
American production of gold, which is about fifty to sixty million dollars a year. As a result of this
situation, the relationship between gold and the monetary obligations of the United States towards its
currency began to change. The percentage of the American dollar backed by gold decreased to a third of
its values within ten years, in spite of the pressure that the United States exerted on many countries such
as West Germany to keep its monetary reserve in the form of dollars. In fact, had one country such as
West Germany changed its monetary reserve from the dollar to gold, it would have eliminated the
remaining American reserve of gold.

As a result of this deficit in the American balance of payment, America was no longer able to support its
dollar with gold. Even though America did not announce this clearly, Nixon’s latest actions to save the
dollar showed that it had lost its commitment to all those who had big accounts in dollars in many banks
throughout the world. In fact, this was the reason why America announced this crisis publicly to the
world after it was hidden. Those who were observing the status of the American dollar knew that the
latest crisis was among crises which had occurred in 1964, followed by another in 1965. In that year the
American dollar knew that the latest crisis was among crises which had occurred in 1964, followed by
another in 1965. In that year the American balance of payment faced a severe deficit which forced the
American president, the Johnson, to ask the American banks abroad, especially in Europe, to transfer
back all of the American bands abroad, especially in Europe, to transfer back all of the American dollars
they could in order to cover the deficit. Consequently, at that time this crisis was avoided, for a short
time. Three years later, in November of 1967, another crisis emerged. It came after Wilson, the British
Prime Minister, and the leader of the labor party collaborated with the deGaulle, the French President, to
direct a blow to the American dollar by reducing the British pound and claiming it would stimulate the
British exports. As a result, the transfer between gold and the dollar stopped in all free markets while it
remained possible in all of the official mardets, i.e. among governments and central banks. Obviously
this action implied that the free exchange between gold and the American dollar has stopped completely
since the American government can stop all official requests of exchange after some negotiation with
other governments.

What are the reasons and factors behind all of this? In other words, what are the reasons behind this
current international monetary crisis represented by the global currency, the American dollar? The
answer is:

First: The primary reason is the current monetary system established in Bretton Woods since the second
world war, which connected all the currencies of the world, except some communist countries, to the
American dollar. The American dollar is always facing crises and all other currencies are under the
mercy of the United States, which is the leading colonialist country that is always trying to suck the
wealth of others.

Second: The direct reason behind this crisis is represented in different factors which caused a large
deficit in the American balance of payment and in turn a reduction in the American gold reserve. These
factors are:

1. The Vietnam war, which cost the United States eight billion dollars annually.
2. The foreign aid given to countries around the world to gain their support.
3. The purchase of military bases around the world in order to enforce its military presence and to
protect its investments abroad. Some of these bases are the bases in Alaska, the NATO bases,
and the bases in Southeast Asia.
4. The millions of dollars given in forms of aid or investments abroad and especially to European
countries such as Western Germany to help them stand against Russia.
5. The huge spending in space exploration projects.
6. The large amounts of dollars spent abroad by American tourists.

These large spendings of the dollar, which is the basis of all other currencies in the world, were spent
without being monitored or controlled by a certain international agency. The United States did not take
the responsibility of monitoring this money by keeping equal amounts of gold in its treasury before it
was spent. In fact, the United States owes this money to other countries since these countries are taking
this money and keeping it as equivalent to gold. When the dollar started facing one problem after
another, central banks found themselves forced to help America by giving loans or guarantees to
exchange dollars with gold.

The most important consequence of this crisis is the recession in the international trade and the anxiety
of producers around the world. Producers throughout the world are fearful of the loss that the unstable
currencies might cause. The world will continue to suffer from this despite all of the international efforts
exerted to avoid a monetary crisis.

From the above analysis, one can clearly see the power and glory of Islam. Islam considers gold and
silver as the only monetary standards for currency among Muslims and for Muslims in their transactions
with people outside of the Khilafah region. This is the system that will bring financial stability and
prosperity to Muslims and at the same time will protect them from the control of the corrupt kafir.

August 16, 1971