Why ISIS’s Plan to Launch a Currency Won’t Work

The self-proclaimed Islamic State announced on Thursday that it’s going to start minting its own currency. The plan is fairly detailed: The medieval-style dinar will be made of gold, silver, and copper; the purchasing power of each coin will be equal to the weight of the metal from which it’s made. Coins will be imprinted with images that include stalks of wheat, a shield and spear, and a map of the world to indicate the extremist group’s global ambitions. (The group, also known as ISIS and ISIL, now has a Treasury Department, which will be responsible for the currency.)

The scheme aims to bolster the organization’s claims that it’s a legitimate and functioning nation and not just a collection of territory run by a gang of terrorists. But it’s likely to do just the opposite. For a currency to be successful, those who use it need to believe that it’s stable, which requires both the group of users and the entity minting and circulating it to be stable. To be willing to accept a currency in exchange for goods or services, people need to have some assurance that when they, in turn, want to exchange it for goods or services, others will also accept it.  

It’s pretty intuitive that an ISIS currency would largely fail in these respects. The group holds large pockets within Iraq and Syria, but territory frequently passes in and out of the group’s control. ISIS didn’t mention where the dinar will be minted, demonstrating the myriad problems associated with building confidence for a currency issued by a designated terrorist organization that is the target of a massive, international bombing campaign and engaged in a sustained ground war. And, of course, the international community wouldn’t accept an ISIS-backed currency.

In fact, the issues with ISIS’s proposed dinar are so severe that it might not even meet the modern definition of money. In order for economists to consider something money, it must function in three ways: as a medium of exchange, a unit of account, and a store of value.

ISIS’s dinar could actually serve as a store of value — something that holds its worth over time — but only because the organization is directly tying the coins’ worth to the value of the precious metals they’d be coined from. Unlike the monetary magic by which otherwise worthless pieces of paper retain value after the U.S. Treasury has stamped them with the face of Andrew Jackson or Benjamin Franklin, ISIS coins would, if anything, lose value when imprinted with emblems of the abhorred extremist group. The need to launder ISIS money in areas outside its control would incentivize people to just melt the coins down to remove the ISIS stain. And that, in turn, would erode the coin’s other functions as a monetary unit.

The ISIS currency might serve as a decent medium of exchange — a unit through which goods and services can be traded without resorting to barter — within ISIS strongholds. But both ISIS’s shifting territorial control and general international unwillingness to trade with the group would make it virtually impossible to use the coins’ minted form in other areas. Again, using a distinct currency would make it more, not less, difficult to launder money coming from ISIS.

Finally, even in ISIS-controlled areas, the Islamic State’s dinar would at best be a substandard unit of account — a standard against which to compare the prices of particular goods, services, and anything else being exchanged. Users won’t have a great sense of whether one gold ISIS dinar, as a newly established currency, would be about equal to the value of a pair of boots, a Kalashnikov rifle, or 50 barrels of oil. The gold standard would help, but today’s consumers have less of an intuitive sense of the value of a lump of gold than of an established currency. Given that ISIS is generally trying to govern like a real state and not an anarchic horde, it would probably try to use consistent pricing for services, which might help the coin function better as a unit of account. But the scattered and fluctuating nature of ISIS’s territorial control, uncertainty about its broader fortunes, and the currency’s newness would make it much more volatile than would be ideal for a price benchmark.

In short, it’s highly unlikely that the Islamic State’s dinar would ever be a stable or functional currency, or even real money in the technical sense. If and when it’s produced, it won’t demonstrate ISIS’s legitimacy as a state, but rather its illegitimacy.