Interest, Paper Money, and Gold Standard: Here is a relevant excerpt from a discussion on these issues which took place on a forum few years ago. Names have been omitted: Economy of Pakistan: ----------------------------- Interest or Riba is forbidden, but who has made paper currency Haram? Since Gold is fixed, so how do we account for extra economic growth per capita? This means deflation, and economic collapse. Creation of money, and interest are two separate ideas, and shouldnt be confused. Allah has declared war on paper currency ..., really? ZD: ----------------------------- ... The concept of paper currency, its links with interest, its menipulaiton with fractional reserve banking and then the practice of interest are all related into one system of Riba. The system has many brances and paper currency is an integral part of it ... Economy of Pakistan: ----------------------------- I am a humble student of Economics, and have been following Mr. ZDs works for a long time now, and have also studied similar critique on Money and Banking by others. Gold doesnt grow, and a nation grows. But how will a nation grow, if money is fixed - which is similar to blood in a body? Industrial revolution, more than 200 years ago brought with it Great Divergence - unprecedented increases in per capita incomes, which were almost constant earlier. Therefore, Gold in a modern economy can back a currency - in the form of reserves, but can not replace it. Economics is a science like other domains of knowledge and should be studied first to better understand the system and be able to propose remedies to enlighten the world - based on Islamic principles. Calling something Haram, or from Allah, is a big judgement and should be based on deep understanding of Islam. We should always seek truth, which according to Imam Raghib Asfahani, is the unity of words (Qaul) and actions (Fail), and the idea (the thing) should also be right. For e.g. If we believe that Sun revolves around the Earth, and we say it, we are not telling the truth, as the idea itself is wrong - though we believe in it. We should always strive to make all our ideas closer to truth, not 60% or 70%. Today, capital markets in private sector simply work on interest - which is the price of capital and their only incentive. Islam strictly forbids it. But we also have the Government, which can run banks without interest - allocating capital. Creating money (increasing money supply) by government (not by private sector on interest) is the most important function of an economy, and is not against Islam. When a government wants to pay for some expenses (War, infrastructure, health, education, or others), it doesnt have to beg outsiders to give them charity. It creates money and offsets the increased economic activity. With Gold this thing cant work. Economy of Pakistan: ----------------------------- As knowledge advances and fresh avenues of thought are opened, other views, and probably sounder views than those set forth in these Lectures, are possible. Our duty is carefully to watch the progress of human thought, and to maintain an independent critical attitude towards it. - Iqbal [Preface, Reconstruction of Religious Thought in Islam]. Even Iqbal is leaving room for better ideas. Economy of Pakistan: ----------------------------- @A: We are making a huge mistake by keeping our reserves in dollar, and should diversify in Gold, as India and China are aggressively doing - raising the price of Gold. AS: ----------------------------- @Economy of Pakistan Good points. Probably the best and most well thought attempt to discuss the subject. Here are a few cents from my side, for your kind consideration. You said: But how will a nation grow, if money is fixed. Money is only a medium of exchange. Growth of a nation is based on its GDP, and not the amount of money which it has. The misonception of economic science here is to think that money somehow induces GDP growth, which it does not. There is a difference between money and capital, which you, as a student of economics probably know well. Capital induces GDP to grow, noth money. Merely increasing money supply does not mean you are increasing capital. You said: Economics is a science like other domains of knowledge Respectfully disagree. Math/Physics are sciences, whose laws are immutable. Economics is social science, which is not a true science. It is mostly based on opinion, and mainstream keynesian economic opinion is now being debunked by the more sound Austrian School. You said: Calling something Haram, or from Allah, is a big judgement and should be based on deep understanding of Islam. Again agreed. And it is with full understanding of economics, modern finance, quran and sunnah that a large number of scholars all around the world, from all schools of fiqh, are unanimously saying that paper currency is haram. Not because it is made of paper, but because of its fiat nature. This has been proven from fiqh. You said: But we also have the Government, which can run banks without interest - allocating capital. Disagree again. Government in Islam is no more entitled to break the Shariah than a common individual, unlike western governments which consider themselves above the law. Issuing paper currency, if forbidden for a common person owing to Riba and Gharar, is equally forbidden for Muslim government. You said: Creating money.... is the most important function of an economy. This is again an misled opinion. Creating money is devastating for the notion of equiatable distribution of wealth, because the entity that creates money and first consumes it, is being given an artificial benefit over all the others. You said: When a government wants to pay for some expenses (War, infrastructure, health, education, or others), it doesnt have to beg outsiders to give them charity. It creates money and offsets the increased economic activity. With Gold this thing cant work. This is the whole point: to prevent this thing from working. Because the money governments creates is basically an indirect taxation on its people, which is most often abused for unjust wars, suboptimal health and education facilities, and politically motivated infrastructure projects. In Islam, both the individual and the government, must maintain a balanced budget, otherwise cut the expenses down. You cannot eat your cake and have it, neither logically, nor economically. Money creation is merely a facade of indirectly extracting other peoples wealth to finance things which they willingly would never pay for. Islamic Shariah hits at the root of the problem, by taking this shariah outside the realm of political debate, and making the very practice impossible to engage in owing to its prohibition of Riba and Gharar. Also visit our website: dinarwakala. We are the first company in Pakistan to make the Islamic silver Dirham available for purchase in lahore. Economy of Pakistan ----------------------------- @AS, Thanks a lot for your elaborated comments, and let me share my views: Regarding growth of a nation and role of money: When we measure GDP we take it in real terms, based on inflation adjusted basis, keeping the money neutral – which is nothing but a generally accepted good. The context was what happens if we take money out of a system – money supply contracts, or it’s not enough to settle the growing demand? The economy simply collapses. We have seen that a nation can handle low or moderate inflation, but a little deflation leads to downturns – recessions and depressions. Money is also a capital, though financial. Most economists agree that ‘in long-term money is neutral’, but in short-term it does create growth, and that why we have monetary policy to stabilize the economy by controlling the flow of money. In downturns we increase money supply to stimulate economy, and vice versa. The wealth of a nation doesn’t mean piles of precious metals – Gold or Silver, as was once understood. It’s based on real economic activity. This means if we suddenly find a mountain of Gold in some country, it won’t necessarily make them rich, rather the international Gold prices will simply fall to make the necessary adjustment. Gold-only currency in a modern growing economy will lead to deflation, and calamity. But, keeping Gold as reserves to back a currency is perfectly fine, and is desirable. Regarding Economics as science and Austrian School: Science is study of nature – understanding the cause-and-effect relationships. It’s a systematic study – not any study, based on observation, experimentation, and hypothesis. Its essence is induction, and this scientific method was introduced by Muslims against the deductive Greek thought, which liked to remain in the world of ideas alone – keeping reality out. Economics is simply one of the most interesting, complex, and challenging of sciences, studying human nature and activity – involving many variables, and needing higher mathematical complexity. I too respectfully disagree: Nothing in science – Physics or in others, and its language - Math, is absolute – settled for eternity. Laws of science are our present understanding of nature, and with the ascent of human thought we are continuously coming to better and better view of nature by reforming the laws. From Aristotle, to Newton; from Newton to Einstein, no one claimed their views to be perfect and new ideas to be impossible. From Cantor and Gödel, we have come to know that even the foundations of Mathematic are not absolute, and will never be – making the so-called ‘theory of everything’ impossible. Nature, according to Iqbal is a ‘Habit of God’ and the manifestation of his attributes, which are boundless. Therefore, here we are trying to capture infinite, and our mind slowly traverses through it in serial time. Now, Austrian School – a set of conjectures, despising empirical data and inductive reasoning, is not even science. Their ideas are generally the soul of conspiracy theorists and their documentaries, without any consideration for a formal scientific analysis. Unfortunately these concepts have plagued our internet generation, which take superficial-exciting fun, and leave depths of knowledge. Austrian – like Marxian School, is more like a philosophy, than science. Regarding if paper currency is permissible: Which scholars and Fiqh are we talking about here? Have we consulted Mufti Taqi Usmani, Dr. Tahir-ul-Qadri, Jamia Al Azhar, and other authentic schools of Islam. If there is an ‘Ijma’ of Muslim scholars we need to show the opinion of all the established scholars – not ABCD internet based, for and against, and then say that what is the majority, or consensus view. So far the ‘Haram’ voices are mostly from those people who are watching the videos of Austrian School, and spend more time on Facebook, than on the corridors of an Islamic University. Regarding government-run banks: Banks are institutions which take deposits, and loan money for investments. How is this breaking Shariah if a government bank loans money without asking for interest? It is simply incorrect. Regarding creating money: In economics we study Equity-Efficiency tradeoff. Markets are efficient but dont promote equity. The economic role of govt. is therefore extremely important - maximizing equity. Government corrects market failures, and redistribute income from Rich to Poor by taxes and spending on public programs. Money creation by government is thus equity enhancing. However, a govt. - like any system, can be misused and that money could end up in the pockets of the rulers. Regarding balancing budget: It should be the priority of government in the long-run, but open economy and markets are uncertain and subjected to business-cycles - up-turns and down-turns. Balancing budget in the middle of a recession can only lead to depression and death of an economy. Therefore, govt. uses fiscal policy to stimulate it by lowering taxes, and increasing spending. The role of government is extremely important in long-term growth, and short-term stability. Where is Riba in all this? In the middle of a War or other hard times - which are not always in our control and many times imposed from outside, its much better to mange our own currency, than mortgaging our sovereignty to others by asking for interest based loans with disastrous conditions. Why are we continuously confusing interest to Governments creation of money? Its obvious that money supply can be increased by private commercial banks - based on interest, and is forbidden. But increasing money supply by a government by settling its expenses has nothing to do with interest. The Prophet (pbuh) has asked us to refrain from Ghulu - exaggeration. We should be careful in making things Haram, which are not. I really appreciate your efforts regarding Islamic finance and wish you all the best. I dont know if you have already, but if you get time do read Reconstruction of Religious Thought in Islam by Iqbal. The challenges before us are great - for having true understanding of Islam. ---------------------------------------------------------------------------------------
Posted on: Tue, 02 Sep 2014 12:04:52 +0000
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