Odd Lots - 63: This Is How Monetary Policy Works in The Islamic State

Episode Date: January 20, 2017

The Islamic State is mostly discussed in terms of its threat to the safety and security of the world. But as a geopolitical entity, its leadership has to deal with mundane considerations such as operating a financial system. So how does it work? On this week's Odd Lots podcast, the first in a series on money, markets and crime, we speak with Graeme Wood, the author of a new book about ISIS, about the monetary system and how it fits into ISIS ideology. We also discuss how ISIS uses the internet to promote its ideology and to recruit.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation Distributor. Hello and welcome to another edition of the Oddlott podcast. I'm Joe Wisenthal. And I'm Tracy Alloway. So Tracy, we're doing one of our first series of the Odd Lots podcast, one of our first sort of sub-series where we're going to do a string of thematic episodes. Wait, I mean, it is the first, right?

It's our very first series. Yeah, you're right. I don't know why I said one of the first. I think this is our first thematic episode. You need to play it up more, Joe. This is a momentous occasion. Exactly. This huge new endeavor we're taking on a three-part series on money, markets, and crime.

Ooh, pause for effect. Okay, I'm excited. Me too. So normally we talk about markets and finance and money in the sort of legal world, the regulated world. But of course, all of these same phenomena exist in the illegal world and off of exchanges and outside of. official industries. Well, more than that, right? Because you could argue that in the absence of legitimacy, money is kind of the thing that drives

crime and makes it happen and makes the criminal world go round, so to speak, right? You could probably argue that. For our first episode, we're going to talk about what may be what might be considered to be the largest criminal entity in the world right now. And that is ISIS or the Islamic State. Ah, okay. Well, I mean, this is a topic that's pretty close to home for me right now, which is Abu Dhabi, and obviously a topic of great concern.

It's interesting to come at it from a monetary angle. What exactly are we going to be talking about there? Well, I mean, so they've established this new geopolitical entity. It's a few years old by now. But it's always sort of, I've always been curious, like how money, really works because any new geospatial entity, just like any other nation state, has to kind of, you know, have a currency and taxes and all that kind of stuff. And so I think we should talk about how it all really works. So with us today in studio here is Graham Wood. He is a lecturer

at Yale. He is at the Atlantic. And he has a new book out titled The Way of the Strangers Encounters with the Islamic State. I recently read it. It was phenomenal, so I wanted to bring Graham in. So, Graham, thanks for joining us. Good to be here, Joe and Tracy. So your book is, now, just to be clear, your book is not even really about the operations

of the Islamic State, specifically. What you did is you went around the world. Well, describe what your book is. I'll like you do it. My book is an exploration into the mental world of the Islamic State, and there's physical territory that they control. And then beyond that, they have this network of supporters that's worldwide that's in the caliphate itself, Syria and Iraq, but that's also in places like Tokyo, Melbourne, the United States, Western Europe.

And it's a whole vision of what the universe is, what the best way to organize a human society is. And this, of course, includes how to actually administer a state that includes aspects of finance and economic policy that people were willing to describe to me in pretty great detail. So one thing I've learned from living in the Middle East is the Islamic faith is open to significant interpretation. And while a lot of it is based on the Quran, a lot of it also revolves around people trying to interpret the Quran and figure out how to apply it to modern life. So I guess my question is, if you think that the Islamic State is fundamentalist when it comes to Islam, how are they interpreting? Islamic treatment of monetary systems. Well, in some ways, the Islamic State's view of finance, of economic policy is pretty orthodox within Islam. Like, you have a burgeoning Islamic finance industry that tries to get around, for example, the charging of interest, which is called Ribba in Islam, and traditionally has not been

permitted. And the Islamic State, of course, it outlaws that. It falls into line with kind of orthodox readings of what's permitted. as tools or instruments of economic policy. So that's part of what you see there. You also see, though, a much broader adoption of some of the early practices of Islam as the Islamic State reads it, and that includes things like getting rid of fiat currency, getting rid of a whole range of other economic instruments that exist and that are used in a place like even Abu Dhabi,

but that the Islamic State, because their pretensions to purity, has tried to get rid of. What do they see, you know, they try to practice extreme fealty to the sort of letter of the law. They go back to, you know, how the profit lived. Where in the Quran or elsewhere is fiat currency outlawed? Yeah, so the profit is said to have said this, that that's the form of currency that we should follow. That was what was instituted during, I believe, his own lifetime. was the use of a gold dinar, and then discussion of silver and copper as well. So that's a perfect example where the Islamic State, they have this kind of holier-than-thau attitude.

And so you can actually see the videos that they've put out in their propaganda saying, hey, look at this beautiful new coin that we have minted and that once we're really up and running, this is the only thing we're going to use. I think Tracy was just watching one of these videos, weren't you? Yeah, so I quickly Googled one of these right before we, no, I should say, I've been doing my research for many, many weeks, and I came upon this video ages ago, and I looked at it and interpreted it and analyzed it for many, many hours. ISIS has amazing production values on their videos.

That's one thing. And they put out a video about money, essentially, and there's all these references to Breton Woods and the Federal Reserve System. And, yes, there are pictures of some very, very, very... shiny new coins, and it's essentially a propaganda video for their money, which is pretty amazing. Yeah, from my perspective, I watch these videos all the time. And, you know, first of all, it's nice to have one that has no bloodshed in it, and this is one of them, where they take the coins. And, you know, it's a gold, shiny coin. So you get good lighting, you get a good camera,

and you've got quite the image of a guy at a Bureau of Change, you know, in the middle of the Islamic state fondling this new coin, and then talking about it. talking about how, wow, no longer do I have to deal in paper currency with pictures of the White House on it. Instead, we've got something that is purely Islamic, gets back to the prophetic model. That's the vision that they try to put forth with everything that they do. And in this case, you know, they actually do have historical precedent and scripture that they turn back to. It's, you know, it looks good. The fact that they don't actually use the DNR for very many, you know, day-to-day transactions in the Islamic State is beside the point.

The theory is there, and this is, again, the mental world of the caliphate is thinking that whether they're actually doing it, they're on the right track. Well, so I was just going to ask about that. What is the gap between their idealized vision of a system based on these beautiful gold dinars and what they're actually using day-to-day most people to say buy things? Yeah, I think day-to-day you'd find them using local currencies. you'd find Iraqi dinars, Syrian pounds, and then you would find U.S. dollars probably used as well. Now, there is some use of the Iraqi dinar, excuse me, the Islamic State Dinar as well. We know about that because of some recently revealed documents that prohibit the export of the Dinar, the Islamic State Dinar.

So apparently they're out there in circulation, and some coin enthusiasts somewhere is going to get one of these and it's going to be really valuable. but what they're actually using in day-to-day practice is probably something that actually resembles a fairly normal economic system. And I should just point out that's really interesting because monetary regimes throughout history that have been based on gold have always had this export problem, that they want the currency to circulate within the economy, but there's the problem of why not just take the gold and get it out of the economy. So kind of fascinating that they're experiencing something on that or trying to progress. prohibits something that regimes have dealt with for hundreds of years on this. And this really shows that the Islamic State exists in the world economy despite itself. You know, they are subject to the same pressures, the same inflows and outflows of capital.

And, yeah, the rules of economics, they do not cease to apply just because you want to live back in the seventh century. Well, I was going to ask, so how much is the hatred of fiat currency down to, whatever the prophet says in the Quran versus how much of it is down to the idea that fiat currency ultimately is associated with our modern monetary system and associated with Western economies, which presumably ISIS is not a big fan of. In my experience, you could ask people for the reasons for favoring one policy or another, and they'll always start with the principled reason. They say, well, this is what the prophet said we have to do, so we'll do it.

and then they'll go to the more instrumental arguments for it. And they've got a whole slew of kind of warmed over economic conspiracy theories plus crankish views of how international finance does and should work. And they'll start invoking those too. So you'd find people who have almost a maybe a fringy kind of Occupy view of the world and say, look, finance is a corrupt system to such a degree that we need to be. burn it away, and that's, luckily, we have this prophetic model where we can do that. And so they think that if we get the kind of vampiric finance industry off of our backs by getting rid of interest,

by getting rid of fiat currency, then the economy will be unleashed and we can have a big raft of social programs that will be funded by the largesse. It's interesting how, and I don't want people to interpret this the wrong way, but how people with fringe viewpoints across the sort of spectrum often arrive at similar solutions, and you profile, one of the people you profile, or a couple you profile in Texas. And I think the wife, at least in this couple, was a Ron Paul fan. And I'm not saying that Ron Paul fans are the same as ISIS, but you have any stretch. I don't, because someone's going to get really angry and say that I compared Ron Paul. Paul Adirans to ISIS. But, you know, there ends up being this sort of ideological overlap and

monetary policy is a great example. Yeah, it's actually not just the wife, but the husband as well, who is American from Plano, Texas, and is the most important American in the Islamic State today. Both of them huge Ron Paul fans. And yes, I too would like to say clearly that Ron Paul is not a member of the Islamic State. And most Islamic State members are not fans of Ron Paul. And most Ron Paul fans are not members of the Islam. Yes. Those of you who wish to disregard my caveats here, I look forward to your mail. Now, yes, their view of the world economy was one that had kind of conspiratorial aspects to it, even without support for the Islamic State. But they saw, for political reasons, as well as economic

reasons, kind of vindication of Ron Paul's ideas in the rise of the Islamic State. She, by the way, is not part of the Islamic State. She left Syria with their kids. And, yeah, the dad's still over there. is churning out mostly non-economic writing about the Islamic State, but he's out there and working hard. Isn't it amazing that, I mean, on that note, isn't it amazing that decades after we've been living with paper currency and we had the introduction of Bretton Woods and modern monetary systems and all that, like we still seem to have a significant portion of the population

that remains obsessed with gold and silver. and these things that they can touch that they feel have intrinsic value of some sort. It's just like, I mean, it kind of speaks to thousands and thousands of years of human nature, I guess. Yeah, this American that I've named, his name is Yaha'a Abu Hassan. In my book, it's the first time his identity has been revealed. The comparison that I often reach to to previous American traders is Ezra Pound, a poet. Yaha'a Abu Hassan runs a lot of poetry as well. And Ezra Pound, you know, he was a huge aficionado of economic crank theories,

Major Douglas's theory of social credit, views of, you can even see it in his poetry, talking about gold and the wonders of gold. It seems to be a recurring disease that American fascists fall for, where they find some utopia which flatters their negative views of the economic industry that they saw back in their home country. and then they fall for it completely and then go, in the case of Yahyahu Hassan probably, to his death. I want to switch gears, but before we do, I want to ask one more question specifically about the money, and that is ISIS has to interface with the non-ISIS world.

They are not completely self-sufficient on, I believe, food and energy. They sell oil. How do those transactions work? How does ISIS ultimately go to market and sell oil or whatever they have to sell to get money? from the outside world for imports? What are the mechanisms there? You know, I have to guess in some of these cases because the transactions are black market transactions. If you're buying money for buying oil rather from ISIS, then you have to do this under the table. So I'm guessing it's largely bags of cash, to be quite honest. But you're right. The interface between the Islamic

state and the rest of the world is the only way that this group can survive. They need money goods to flow in and out. And that's actually where they get most of their cash. I mean, it's, I think there's a misconception, actually, that most of it's coming from just selling oil. It's mostly just people having privately their own transactions and then ISIS getting its taxed skimming off the top of wealth and income. How does the tax system work? Yeah, so they have, again, a scripturally ordained view of how a tax should be imposed. They believe that there is charity that has to be given by all Muslims who make a certain, beyond a certain cut-off point. So they take that.

It's called Zacat. And then beyond that, there is a low, I think it's single-digit percentage tax of wealth and income that they take beyond that. And then there's certain categories of wealth that, again, because of scriptural requirement, they take. So there's a whole category called Ghanima, which translates. two spoils. And if you're fighting on behalf of the Islamic State and you know, you shoot someone and then you go grab his stuff, that belongs to you, but there is a tax called the Khoms,

which means a 20% tax that reverts to the state. This includes even if you're enslaving women, sex slaves. If you get 10 of them, then guess what? Two of them go to property of the state and they can be sold or disposed of as the caliph desires. So one of the themes that we we talk about in addition to finance and markets that we've hit on several times on this podcast. It's just all the different ways that the Internet is changing society and changing the world profoundly, whether it's how we organize ourselves politically, whether it's the collapse of experts. People have obviously talked a lot about online recruiting and people discovering the Islamic state through the internet traveling to the Islamic state based on information they find.

What is, explain to us sort of what is the role of the internet in allowing ISIS to exist? I think first we have to say what it's not. There is this misconception that the Islamic state, because it has so much successful propaganda, slick propaganda on the internet, that that's the main way it gets people. It's not quite like that. In almost every case, the Islamic State gets people through person-to-person interaction. It doesn't seem to be enough to just say on the Internet that we are the fulfillment of Islam, your buddy has to say it and then refer you to the proper website.

So that's usually what the Internet is used for, is once you've had the person-to-person contact, then a resource that you can go to and have all your fears of discomfort when you get there allayed by images of people having a good time, and then have your ideology corrected when it's, when it's wrong, so you know what you have to believe. The one thing that is really different, though, with the Islamic State and its use of the

Internet, is that it's able to reach women. So unlike Al-Qaeda, which was looking for basically a military force, a military vanguard, Islamic State wants to create a utopia, and you can't have a utopia that's all men. So they are able to reach out to conservative women who, in other cases, would not be able to have interactions outside the House that would allow easy recruitment. and get people from the female sex to come over. So that's like 15% of the recruits right there. And it's a demographic that the Internet alone has allowed them to reach.

So one of Joe's pet theories, which I'm a fan of as well, is the idea that the rise of the Internet is ultimately something that will undermine the nation state. How does that theory apply to ISIS? because in some ways it's a supernational organization, but in other ways it's clearly an organization that is trying to set up an actual caliphate in the Middle East and an actual state.

The differences between the physical caliphate and then the mental caliphate are, I think, really important to spell out. And for some people who have been attracted to the Islamic State, they've spent a long time on the Internet in a kind of fantasy world that remained just that until there actually was a concrete caliphate to go to. So the Internet allowed a community to flourish that was separated by geography beforehand,

but that allowed people to have a sense of belonging. And then, you know, you've got this vacuum of power because of the Syrian Civil War, because of misgovernment in the Sunni areas of Iraq, and then the Internet is made flesh in the form of the caliphate. So it's been extremely important. The other aspect I think that the Internet has really remade in this terrain is, is Muslims view of scriptural interpretation. So there's this long tradition called, well, there's this concept called Idihad, the ability

of a Muslim cleric to create law, to derive law from scripture. And this is something that in the past, you'd have to go to Mecca and Medina and study with great Muslim scholars and get their seal of approval before you can undertake this dangerous process of deriving law from scripture. Now, the internet closes that gap, and it creates a huge threat to the authority of those former imams, scholars who you'd have to go to visit.

So when I would talk to ISIS supporters about theology, they would almost invariably end our conversation by saying, if you want to know more, consult Sheikh YouTube or Sheikh Google. You know, just ask around online, and you'll find people. The people you find, if you just consult Sheikh Google about jihad, are not the mainstream scholars who are in Saudi Arabia urging obedience to the Saudi king. They're not the American imams who, you know, have kind of roles advising the White House.

Instead, they're the jihadists. They're the al-laki types, and that's because the Internet has allowed those voices to rise. So this is very similar, in a way, to what happened with the Reformation and the printing press. recently Elizabeth Eisenstein, as a historian, wrote a book about the role of the printing press. And I think everyone can intuit, you know, Martin Luther, he nailed his 95 Theses to the wall, and then it's spread around. So the sort of like the viral aspect of a new communication thing, it's kind of obvious everyone can get the role. Everyone can understand how the new medium allowed it to spread. But the other point that she made is that prior to Martin Luther,

the printing press allowed people to start to read the Bible themselves, see the hypocrisies and the errors and the compromises made by their, you know, the the theologians of the time. And so even before there was a criticism, even before there was a new idea that was spread, the foundations of the old idea, the existing establishment, was starting to crumble thanks to the printing press. And so it sounds very similar, even without the idea of something new like the Islamic State, you still have people learning about, say, things they don't like that Saudi Arabia does or various leaders in the Muslim world, they could start to see the cracks. You got it exactly right with this comparison to the Reformation,

because if you look at what preceded the Islamic State and 20 years before it, there was no shortage of accusations of having been co-opted to, existing scholars. They would say the Islamic States scholars would have would have been saying for a long time, look, you are toadies of major Muslim powers of say Al-Azhar University in Cairo. And they'd say, look, how can we trust you? Our scholars are the ones who have been in prison for their beliefs. They have not been paid off. Your scholars are the ones who are in palaces. Obviously, we're the ones who have integrity. And so, yeah, there is a kind of pre-existing, rot that the Islamic State was able to point to to undercut the authority of those who oppose them.

All right. Graham Wood, the book is The Way of the Strangers' Encounters with the Islamic State. I have to say, it is a must read. I tore through it and really appreciate you coming on. Thank you. So, Tracy, how do you think that went for the start of our money markets and crime series? Yeah, I mean, I'm excited. As you said in the intro, ISIS is probably one. one of the biggest criminal organizations in the world. So I'm struggling to see how we're going to top this one. But on the plus side, for me, it's really interesting.

I mean, yeah, the Fiat versus Gold stuff is always interesting. But the thing that you know I'm obsessed with is the idea of how the internet has been changing the world. And I hate to echo what Graham said, but you're exactly right when you refer to the Reformation and the printing press, because those are the things that essentially started enabling every person to filter their own information and to select their own information that they were interested in. And that was probably the beginning of the balkanization of media that is currently being carried out to extremes. I don't want to, you know, toot my own horn. So let's go back to the money thing real quickly.

I think, but thank you. The point about the law against exporting the Islamic coins, I found interesting because if you read monetary history, and we actually have a guest coming up in a few weeks, we're going to be talking about the monetary history of the French Revolution. If you read any monetary history, every regime always deals with this issue of if the money is intrinsically valuable, why leave it in the country? And so at some point, as Graham noted, some coin collector somewhere is going to get one of these coins, and it's going to be an object of fascination. But just this idea that the sort of trying to reinvent a new currency or a new system ends up with the economic problems of the old systems that we've, for millennia, I think, is hundreds of years at least. It's pretty fascinating. Yeah.

Well, I mean, the obvious point on that is because they're trying to invent a monetary system that is from the middle ages. and they're quite explicit about that, aren't they? Yeah, and it's never going to go away, you know, this idea of utopian or what others might say, crankish monetary policy views that, oh, if we could just have all money be based on hard currency, or if we could get rid of the banks, or if we get rid of the interest rates, there are all these ideas will probably never go away, and they're just going to continue to have adherence in various contexts and various places around the world. That's what continues to amaze me, is that,

gold and, you know, shiny metals seem to have this hold over the collective imagination. And it just, it doesn't seem to loosen. Like, everywhere you go in the world and you encounter people who think that paper currency is in some way fake and we should replace everything with gold. It's really amazing. And you've written about this, right, Joe? Like, just the sway that gold seems to have over people. You know, at some point, my view is we just got to.

accept it. Like, we can argue forever that, oh, like, it doesn't make any sense. It's a barbarous relic, as Keynes called it, but it's not going away. Like, that's just the fact. That gold's not going away. So, I just sort of accept it. All right. Well, this has been another edition of the Oddlots podcast. I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. And I'm Tracy Alloway. I'm on Twitter at Tracy Allo. And you can follow Graham on Twitter at G-Cod, G-G-C-C-E. Please tune in next week when we will be continuing our money, markets, and crime series. We have a lot of bad behavior and economics and finance to get through. Thanks for listening.

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