Inflation: How Fiat Money Feasts on Your Savings
Capitalist economies, including Canada’s, are experiencing the consequences of COVID-19 stimulus policies. These policies led to a massive influx of money created by central banks, causing inflation to spiral out of control. As a result, there has been a sharp increase in prices. In Canada, inflation reached 8.1% in mid-2022, significantly higher than the Bank of Canada’s 2% target rate.
Why do Capitalist economies experience inflation? In sha Allah, we will explore this question and look at the Islamic solution as well.
What Happened to the Gold Standard?
When looking at the problem of inflation, we must look at the post World War II environment that brought into the world the Bretton Woods agreement. The agreement established the US dollar as the world’s international reserve currency, and it was backed by gold at a price of $35 per ounce. All other countries had their currency pegged to the US dollar at a fixed exchange rate. In return, they could redeem their US dollars for gold, just like a gold certificate. After the agreement was signed, America was the only country with the ability to print dollars – assuming it held the requisite amount of gold in its vaults.
Due to America’s spending on the Vietnam War and domestic programs, the US printed more money than the $35 to 1 ounce of gold ratio allowed. France recognized this discrepancy and converted $150 million of its dollars into gold. If France and other nations had kept doing this, it would have depleted America’s gold reserves. Consequently, the then US President Nixon “closed the gold window” on August 15th, 1971. France, or any other country, could no longer redeem their US dollar holdings for gold.
Fiat Currency: All Paper and No Substance
With this move, Nixon introduced the US, Canada, and the world to fiat currency. Fiat currency is money that is declared legal tender by government sanction but not backed or convertible into gold or silver. This type of currency is vulnerable to government manipulation, who can print paper bank notes without a limit. And this is what happened during the COVID-19 pandemic. Money was created out of thin air, resulting in the inflation that we are currently experiencing.
The way to think about inflation is like that of a ratio. That is, if the amount of goods and services is fixed, and the volume of currency increases, then the price of those goods and services will increase. For example, if there are 100 cars in the economy and then there is $1,000,000 in currency, then the price is $10,000 per car. If the central bank prints another $1,000,000, then the price will rise to $20,000 because the amount of currency in the economy has doubled, but the number of cars available for sale has remained the same.
Inflation Silently Steals Our Savings
Someone who has saved their money will have less purchasing power. For example, if someone had saved $10,000 to buy a car, they would no longer be able to do so because the price has doubled. Conversely, they can only buy half of what they used to be able to afford. In a sense, the central bank’s printing of money has stolen the wealth of the society because it devalues the savings one holds.
The Hukm Regarding Currency
When it comes to exchanging a commodity with a specific monetary unit, Islam has guided us to the gold and silver standard. It has restricted the Khilafah State to using this standard when engaging in transactions.
This hukm is deduced from several matters:
1. When Islam prohibited the hoarding of wealth, it was specifically related to the hoarding of gold and silver despite the fact that wealth includes any property that can be owned. The prohibition in the verse refers to the hoarding of money, as it is the common way to trade, and hoarding money causes the problem of limiting its flow i.e., it is the monetary medium of exchange – gold & silver – which Allah (swt) has prohibited us to hoard.
Allah (swt) says:
“And those who hoard gold and silver and do not spend them in the way of Allah, let them know that a severe punishment is awaiting them” [TMQ 9:34]
2. Islam has linked gold and silver to a set of fixed rules. In his letter to the people of Yemen, the Prophet (saw) was reported by An-Nisai to have said: “The blood money for one soul would be 100 camels…and for those who deal in gold it would be 1000 dinars.” [Bukhari]. With respect to theft, it was reported on the authority of Aisha (ra) that the Prophet (saw) also said: “The hand is cut for the theft of one-quarter dinar and upward.” Therefore, the fact that Islam has linked the Shari’ah rules (related to money) to gold and silver by text, demonstrates that the currency is solely restricted to gold and silver.
3. The Prophet (saw) has determined that gold and silver be used as money, and exclusively made them the monetary measure to evaluate goods and services. He (saw) ensured that all transactions were conducted with them as their basis. All trade and marriage transactions were conducted in gold and silver, in their quality as money, and this has been established in the Sahih Ahadith.
4. When Allah (swt) decreed the Zakat on money, He (swt) made it obligatory in gold and silver. As with the other fixed rules in Islam, Allah (swt) determined the Nisab (minimum wealth amount) for the Zakat in gold and silver.
Advantages of the Gold and Silver Standards
When the Khilafah state adopts the bi-metallic standard, it settles foreign and domestic transactions in gold or silver. It can use paper notes or other mediums, but the notes/medium must be fully backed by gold or silver.
Consequently, it would remove the problem of inflation, as gold and silver are scarce commodities. The money supply cannot be increased at the will or whim of a government. The prices of goods and services may still increase as a result of gold coming into the local economy due to a high level of exports. This will lead to economic growth, which would mean more locally produced goods and services being available, which would counterbalance the extra gold coming in. As long as the state allows the free circulation of gold (i.e., import and export) then there will be financial and economic stability, in sha Allah.
Our Deen Has Been Perfected
It is only the Khilafah State, carrying the ideology of Islam that, will adopt such a standard. Moreover, the Shariah has made it an obligation to implement the gold-silver standard. In sha Allah, when the Khilafah State returns it will adopt the bi-metallic standard.
As Muslims, we need to not only inform ourselves but to teach others of this Deen that Allah (swt) has perfected for us since it is not only a mercy for the Muslims but for all of mankind. Allah (swt) says:
“This day, I have perfected your Deen for you, completed My favour upon you, and have chosen for you Islam as your Deen.” [TMQ 5:3]
In Ibn Kathir’s tasfir he explains:
“This, indeed, is the biggest favor from Allah to this Ummah, for He has completed their religion for them, and they, thus, do not need any other religion or any other Prophet except Muhammad. This is why Allah made Muhammad the Final Prophet and sent him to all humans and Jinn. Therefore, the permissible is what he allows, the impermissible is what he prohibits, the Law is what he legislates and everything that he conveys is true and authentic and does not contain lies or contradictions.”
Therefore, Islam is a complete system and Allah (swt) has provided solutions and guidance for all of man’s problems, including those related to the economy. Only with Islam which is from the infinite knowledge of The Creator – Al-Alim – can man implement a system that will take care of all his affairs in a comprehensive and just manner. Consequently, we should go out of our way to make the Ummah and the wider Canadian society aware of how Allah (swt) solves inflation and all our problems in a comprehensive and just manner.