An Ottoman Piatsre (Sultan Selim III, 1789) and a Maria Theresa Thaler (later restrike of the 1780 coin). Photo: James Dawson
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When it comes to coins, Isis is clearly not as good as gold

A plan by the terrorist organisation to issue its own currency – in gold – reveals a further attempt to play on the history of the early Caliphs.

A cynic may say that what the leader of terrorist organisation Isis, Abu-Bakr Al-Baghdadi, and Winston Churchill have in common that they have attacked the Kurds but another thing may be the gold standard. It was recently reported that Isis plans to introduce its own currency, issued in gold, silver and copper. Though – unlike Churchill, who shortly will appear on the new £5 note and appears on the still legal tender 1965 five Shilling coin – Baghdadi won’t appear on his currency. The designs, in accordance with Islamic artistic traditions of not showing humans or animals, will apparently depict Arabic writing, mosques, palm trees, crescents and even a world map.

The plan seems to be a currency based on the bullion value of the metals in the coins, in contrast to all present world currencies which merely have a (widely accepted) token value. It is based on Isis’s interpretation of Sharia law and financial systems and deliberately emulates the currencies – the gold dinar and silver dirham – established by the early Caliphs.

The early Islamic Empire initially relied on Byzantine coins or copies of pre-Islamic Persian Sassanid coins. It was not until nearly 60 years after the death of Prophet Mohammed that they started to introduce their own coins. The Byzantines had pointedly placed the image of Christ on their latest issues and so the Umayyad Caliph of Damascus, Abd al-Malik, introduced a new standardised Islamic silver dirham in 691AD. The original coins, flouting any ban on human images, depicted the Caliph himself. It was not until 697AD that coins minted with only Arabic calligraphy were produced. These provided the pattern for most subsequent Islamic coinage. Though as the Islamic Empire fractured local rulers started producing their own money. Italian renaissance coins, issued to more exacting standards, started replacing local monetary systems in the late 1400s. Later silver dollars (Austrian thalers and Spanish pieces of eight) became widely circulated. The most popular Middle Eastern coin became the Maria Theresa thaler, the buxom image of the Holy Roman Empress being more popular with traders than Arabic calligraphy. The coin had a trusted weight set in 1754 at one-tenth of a Cologne Mark and continued to be produced following her death in 1780, its use for trade purposes being confirmed by the Vienna Currency Treaty 1857 (it is still minted today). The alternative coinage of the Turkish Ottoman emperors, who had assumed the title Caliphs of Islam could not keep up. It became debased, produced from billon, an alloy with less than 50 per cent silver. The Ottomans were also late in adopting Western scientific advances – they continued to produce imprecise hammered coins until 1844, only then introducing Western-style mechanically milled coins. Despite still ruling the Middle East, further decline led to the Ottoman Empire defaulting on its debt. In 1881 Ottoman finances were taken over by Western governments and corporations under the Ottoman Public Debt Administration.

Precious metals on the face of it sound like an ideal material for money, something durable that holds its value over time. But experience has proved this wrong, all world currencies now use base metal or paper. Bullion values are dictated by supply and demand, based on the usefulness or desirability of a commodity. Gold and silver do not have many practical uses, beyond jewellery or a perhaps tarnishable sets of cutlery. Their value is not intrinsic and is susceptible to great fluctuations. If the ratio between the value of gold and silver changes then bad money drives out the good as people spend the devalued coins but keep the increased value ones. The amount of coins in circulation is also just a fractional amount of money in an economy, the rest is in bank balances, debts owed or other commodities.

Problems with the gold standard include the finding the metal: greater availability leads to inflation; scarcity leads to deflation, which limits demand and cuts investment. The coins themselves are subject to clipping, people cutting small bits off the edges, and hoarding, as Germany experienced in the lead up to its hyper-inflation in the early-1920s. Harsh punishments will not help bolster the currency as people become wary of handling clipped coinage, avoid all but the most essential transactions or resort to barter. Sooner or later gold and silver currencies have to be debased.

Precious metal was commonly used in all pre-modern currencies but coins were relatively rare only circulating amongst the few. To have a wider cash-based economic system required a different approach. It was Sir Isaac Newton (scientist and habitué of the Bank of England’s last one pound note) who formally established the gold standard, whereby paper currency was backed by gold reserves, in 1717. Other European countries adopted the gold standard in the 1800s, the recently united Germany being one of the last to do so in 1872. However, countries left the gold standard in the First World War. Churchill, as Chancellor of the Exchequer, put Britain back on the gold standard in 1925. Criticised for the deflation that led to 1926’s General Strike and for the disastrous consequences of Britain’s inability to respond to the Wall Street Crash, the National Government took Britain off the gold standard for good in 1931. The Bretton Woods financial system established in 1946 left the American dollar as the only currency backed by gold, with all other major currencies pegged to the dollar. This persisted until the Nixon Shock 1971 when draws on US gold reserves, mainly from France, and the costs of the Vietnam War took America (and the world) off the gold standard.

British coins continued to contain silver for many years after leaving the gold standard. The original 0.925 quality silver in half-crowns, florins, shillings and sixpences was cut to 0.500 in 1920, just enough to still merit the name silver, and our coins stayed this way until the dollar became the world’s reserve currency in 1946. The First World War, Great Depression and Second World War had largely forced other countries to abandon silver earlier. Switzerland continued minting in silver until 1969, but if you visit today you won’t find any 5 Franc coins older than the first cupro-nickel coins issued in 1968. Gold and silver coins are generally only found in commemorative coins issued for collectors.

Coins, as well as a means of exchange, convey historic value. They are metal, mass-produced and therefore survive. The designs portray the issuer’s political and artistic views. If the Isis coinage is produced the best that could be hoped for is that it becomes, after sufficient passage of time to let its memories of its crimes fade, a numismatic foot note. Though it is to be hoped that, like the disgusting zinc coins that were all the Third Reich could afford to produce in the Second World War, they are viewed with as much disdain by collectors.

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.