Embracing the Almighty Dollar: Islamic State’s Currency Debacle

In a post last week, I critiqued a prominent article about Islamic State in the Washington Post, in which Carol Morell and Joby Warrick suggest that, by massacring people in various locales, the group was growing in appeal or “allure.” I argued that there was considerable evidence, on the contrary, that the appeal (or allure) of the vicious group actually is, like the scope of the territory it holds in Syria and Iraq, in severe decline.

The Post article also seeks to refute the plausible suggestion of Secretary of State John Kerry that terrorist attacks like those Turkey, Iraq, and Bangladesh are a sign of the group’s desperation as it is pushed back in Iraq and Syria. It does so with what I consider to be an irrelevant argument, noting that the group has “recently” issued its own currency in the territory it controls.

However, the Post article seems to be wrong about the currency issue as well.

According to the Economist, nearly a year ago (not “recently”), the Islamic State did try to create a currency that it called the “Gold Dinar.” In a 55-minute video, it made what the Economist calls “a bizarre sales pitch” for the new currency.

Covering a dizzying range of topics, from the importance of gold as a medium of exchange to “the dark rise of bank notes, born out of the satanic conception of banks”, it argues America has been able to avoid hyperinflation and maintain its military hegemony largely thanks to the petrodollar system. Islamic State hopes that with the introduction of what it is calling the dinar, all oil will be paid for with gold instead of being priced in dollars, which would “mark the death of this oppressive banknote” and bring America “to her knees”. Charts showing the gradual increase of the American money supply and the devaluation of the dollar are provided as evidence of the dangers of printing money.

The Economist found the whole scheme Quixotic, outlining “three rather obvious problems”:

First, its yellow currency is no different to any other version of the gold standard. The dinar’s worth will be determined by the supply and demand for gold, exposing the currency to fluctuations in the price of the yellow stuff. A fall in the gold supply would be like a tightening of monetary policy; it could cause a recession.

Second, a coin backed by a terrorist organisation has obvious credibility problems: aside from the fact that its coins cannot be traded legally, few would presumably use this currency to trade oil if it was only available in coin form, or other forms that relied on trusting Islamic State.

Finally, ending the petrodollar system would first require Islamic State to seize a far larger share of oil production in the Middle East and then persuade countries to agree to trade with it. Even if Islamic State were successful in becoming a major oil exporter, the strength of the dollar depends on far more than its use in the oil trade.

The conclusion: “American capitalism seems safe for a while yet.”

However, more recently, Islamic State seems to have scrapped its fanciful new currency and is now relying on US dollars. All utility bills, extortion payments, fines for dressing improperly, and inducements to obtain the release of detainees must be tendered in that “oppressive” and “satanic” currency.

In other belt-tightening, not only have salaries been halved, but the regime no longer supplies free energy drinks and Snicker bars to its followers. It looks like hard times. One of their top leaders has attempted to cheer the legions up by arguing that “a drowning person does not fear getting wet.” Not a terribly reassuring way of putting it I should think, particularly to people with diminished salaries who now have to pay for their Snicker bars with the enemy’s currency.