The monetary system prevailing in the world today has existed after several evolutionary periods. The monetary system that has been in effect during the time of the Prophet Muhammad is bimetallic standard where gold and silver (dinar and dirham) circulate continuously. When the second Caliph of the Umayyads (41-132 H / 662-750 AD) the ratio between the dinar and the dirham was 1: 12, and when the Abassyiahs were in power (132-656 H / 750-1258 AD) the ratio reached 1:15 or less . Due to the continually decreasing ratio of the dinar and dirham, the exchange rate between the dinar and the dirham has fluctuated widely on the time difference and in different parts of the Muslim country. The ratio drops very low until it reaches 1:35 and even 1:50. According to al-Maqrizi (d. 845 H / 1442 AD) and his student al-Asadi (died after 854 H / 1450 AD), this instability was made possible by the replacement or release of a bad coin circulation with a good coin, where the phenomenon is then on The coming 16th century is known as Grasham law /Gresham’s Law . The United States adopted the bimetallic in 1792. Then in 1873 the United States withdrew silver from the circulation of money due to price fluctuations between gold and silver. In 1880 the international standard and the majority of countries from bimetallic and silver monometallic switched to the gold standard by making gold the basis of their currencies. Under this standard, the value of a country’s currency is legally determined by a fixed weight of gold, and the monetary authority is obliged to convert domestic currency demand into gold that has been legally determined (Karim, 2007)
The monetaryism movement that emphasizes monetary functions began with Milton Friedman and was followed by economists from the Federal Reserve Bank of St. Louis, Brunner and Metzler. This movement was originally the reaction of this group to the failure of economic stabilization policiesmacro that was carried by Keynesian in the 1960s against the crisis experienced by America and Western Europe. Monetaryism’s rejection of Keynisian was triggered by their statement that monetary policy was ineffective in neutralizing the economic crisis. According to the monetaryism group, there is a close and relatively stable relationship between changes in money supply and changes in the national level. They also reject government intervention so that according to them what needs to be done is to urge that economic policy be concentrated on monetary policy (Chapra, 2000).
In the next journey, the monetarism group’s movements and propaganda became more intense, both through the central bank and the academic world. Academically, their efforts were made by writing economic textbooks so that finally their axis of thought to this day mastered the paradigm of world economic decision making. The occurrence of the American crisis and the cancellation of the 1971 Bretton Wood agreement by President Nixon, was the beginning of not being backed up by the dollar with gold. Since then, none of the countries in the world has backed up their currencies with gold. So that the applicable currency is fiat or decree and this is called the term managed money standard.
There are two phenomena that have occurred since the implementation of the managed money standard system, namely high inflation rates and unstable exchange rates. The fall of the Bretton Woods system in 1972-1973 opened opportunities for foreign exchange trading and the activity has developed spectacularly. Volume traded on world markets increased from USD 5 billion per day 1973 to over 900 billion in 1992, most transactions were speculative and less than 2% were used as trade payments.
Historically there are three types of currencies of the gold standard: the gold coin standard when gold coins are active in circulation, the standardbullion gold ( the gold bullion standard ) when the coin-coin gold is not in circulation but the monetary authorities have taken to selling gold bullion against the local currency and the standard of pertukaan gold ( the goldexchange standard ) or known as the Bretton Woods system when monetary authorities are required to exchange domestic currency with US dollars that can be converted into gold with a fixed parity. This system ended in August 1971 because the US deficit in the aftermath of the second world war led to a continuous decline in gold holdings and an undetermined ability to maintain the conversion of the US dollar into gold.
Since the end of the Bretton Woods System , the world monetary system has adopted a new system which is a full fledged managed money standard that absolutely has nothing to do with gold . This system was officially implemented after the ratification of the second amendment to the IMF agreement article in April 1978. After this system was put in place, the world economy faced a high level of inflation and the effect of instability in the exchange rate. One of the main causes of high inflation is the rapid expansion of the money supply during the 1971-1990s by more than five times the industrialized countries and this is almost 12 times in the world (Sakti, 2007)
Whereas instability in the exchange rate occurs because of the adoption of the floating exchange rate regime in March 1973. However, to stabilize the exchange rate in a floating exchange rate system requires discipline for both fiscal and monetary policies. There is no specific text from the Koran and as-Sunnah that can explain that a system based on bimetallic standards that prevailed during the time of the prophet Muhammad SAW and the history of the first Islamic or even fullbodiedmonometallic standards applicable then is an obligation for Muslims to use them continuously – keep going.
This is clearly illustrated in the historical fact that the Caliph Umar ibn Khatab had thought to introduce camel skin as a currency which then brought reflection to the writings of Jurists’ (Jurists) through Muslim history. For example, Imam Ahmad bin Hambal (w 241H / 1328M) has observed that there is no damage in the adoption of other currencies in generalaccepted by the community. Ibn Hazm (w 456H / 1064M) also found no reason for Muslims to limit their currency to dinars and dirhams. Ibn Taymiyyah (w 505H / 1328H) felt that the dinar and dirham were not cool for their own sake because of his ability to help become a medium of exchange.
However, this does not mean that a person can issue a currency in any amount. The Jurists’ in the majority have emphasized that currencies must be issued by the authority and must have a stable value, able to show the efficiency of its functions as a measure of value , a medium of exchange , and a store of purchasing power . The stability of the value of money is a top priority in the field of monetary management because the stability of the value of money will be able to help the realization of other objectives such as meeting the needs, the distribution of wealth and income, the optimum level of economic growth, full employment and economic stability (Karim, 2007)