Islam’s Gold Standard of Economics Outshines Capitalism’s Fiat Fiction
With 2021 coming to a close, as Muslims we cannot help but notice the turmoil the current financial system of the world is currently in. From rising cost of food and essential goods, to the sky-high rise in the cost of housing and transportation we can feel the crunch of making our ends meet for our day-to-day survival.
We can see the signs pointing to the inflation inherently caused by the Fiat money system, when the Capitalist states are at liberty to print money seemingly to increase spending for the public good but in actuality devaluing the wealth of its citizens.
Furthermore, we see the creation of digital currencies by private enterprises driven by the inherent instability of the Fiat money system and the fervor amongst some in society for financial gain. We can see that the Fiat money system is built upon people believing in what is not real i.e. Fiction and therein operates two economies: the ‘real economy’ and the ‘virtual economy’.
Does Islam have a say in this fundamental aspect of society and does Islam have a true example: a Gold Standard for mankind to measure to?
The problem we see today in the world is that the Capitalist system which dominates the world today has become the de-facto standard for economic pillars and fundamentals that shape the world.
While we find Islam and its pillars and conditions for organizing economies absent on the world stage due to the Ummah not implementing the Islamic Economic System and the Khilafah System Allah (swt) has ordained in the Muslim lands.
Reality of the Problem
Every state must adopt a currency. Currency is defined as “something that is in circulation as a medium of exchange”. This medium of exchange is what is used by society to trade goods and services.
The Capitalist system utilizes Fiat money. Fiat money is a type of money that is not backed by any commodity such as gold or silver, and derives its value solely from the trust that people place in it. Inflation is a perennial problem in the Capitalist system because it uses Fiat money which is intrinsically useless as it is not backed by anything of value. Its value is derived purely from the money supply and the demand for it.
Because it lacks an intrinsic value, Fiat money is extremely flexible, allowing those who have a monopoly over it to influence its supply by printing more of the currency at any given point in time.
In doing so, they gain access to vast amounts of unsubstantiated capital, albeit in exchange for harsh monetary inflation with no real growth in economic output.
We can trace back the birth of the current Fiat standard to the year 1971, when US President Nixon ended the Bretton Woods system established after World War II. That system had the US dollar as the “gold standard”: where $35 US would be redeemable for one ounce of gold.
All other currencies would be pegged to the US dollar, resulting in fixed exchange rates. However, in the years leading up to President Nixon’s fateful decision, America was spending too much on the Vietnam war and essentially cheating on its promise to maintain the gold reserves necessary to prop-up the volumes of dollars it was printing.
The Europeans figured this out and began to cash in their dollars to beef up their gold reserves, and that is when the US decided to openly declare the death of the Gold standard. Although the Fiat standard is bad for everyone, in the long run, it works well for the US in the short term. It gives the US immense power on the world stage.
Here are some of the problems caused by the Fiat money system:
1. Fiat currency makes it easier for the government to steal the wealth of its citizens openly. Governments can at will abandon currencies that are in circulation. For example, when India demonetized the 1,000 and 500 rupee notes they were in effect saying, “we are going to wipe out your savings” – which resulted in many suicides.
2. Fiat currency allows the government to steal from its citizens in secret. The government can take your wealth from you through “quantitative” easing: printing money. This goes back to the issue of the ratio. By printing money, the government creates inflation, as the supply of dollars increases, but the amount of goods and services in the economy remains the same.
If there are 10,000 units of an item for sale and there are 100,000 dollars in the economy; then the price would be $10/unit. If the government prints 200,000 dollars, there are 300,000 dollars in total but still only 10,000 units. This means each unit now costs $30/unit or $20 more.
If you had saved $100, then you could have bought 10 units before the “quantitative easing”. However, after inflating the money supply – one can only buy 3 units.
Some have seen the rise of crypto currencies like Bitcoin as the solution to the glaring problem in the current Fiat system. However, these digital currencies do not have some of the key features required by the Islamic Standard for currency:
- 1. It is a basis to evaluate the goods & services, i.e., it was a measure for prices and wages.
- 2. It is issued by a central authority which undertakes the responsibility of issuing the dirhams and the dinars and it is not an unknown authority.
- 3. It is widespread and easily accessible among the people and it is not exclusive to a group of people only.
- 4. It is based on the Bimetallic standard, Gold and Silver.
Allah (swt) says in the Qur’an:
“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.” [At-Tauba: 34]
The prohibition in the verse refers to the hoarding of money, because it acts as the generally accepted medium of exchange, and because the hoarding of money is the matter that produces the effect of the prohibition. That is, by hoarding the gold and silver, the medium of exchange is taken out of circulation and will cause prices to fall.
We also can see that the Prophet (saw) used the bimetallic standard for Zakat where the nisab (threshold) is determined by gold and silver. Also for Blood-money in the case of murder he (saw) said:
“The blood money for one soul would be 100 camels…and for those who deal in gold it would be 1000 dinars.” [An-Nasai].
We can see that in utilizing Islam’s monetary policies, governments cannot manipulate the supply for short-term gain and that prices are kept stable in the long run.
Hence something that is a pillar of society’s business transaction is stable and consistent. Also, people are not led to throw away unreliable Fiat currency in exchange for crypto-currencies which function more like commodities that present inbuilt Gharrar (which is buying into an unknown).
It was narrated that Abu Hurairah said:
“The Messenger of Allah forbade Gharar transaction and Hasah transactions.” [Muslim]
The “Hasah sale” was when for example the seller would say to the buyer “I will sell you the land that the pebbles (hasah) I toss fall on” — i.e. what is being sold is unknown.
Islam has defined a solid structure that leads to economic prosperity for the people and prevents the elites from being able to define and shape the pillars of economy for their benefit.
This is the fruits of an economy being built through the Guidance of the Creator of the universe, Allah (swt).
He (swt) says:
“Have you not seen how Allah has struck a similitude? A good word is as a good tree: its root is firm and its branches grow towards the sky. It brings its fruits at all times with the will of its Lord. Allah sets forth the parables for the people, so that they may take lesson. [Ibrahim 25-26]
As Muslims, we need to be callers to the Gold standard of currency which is based on the Islamic Guidance and we need to expose the fictitious system the Capitalist elite seek to maintain and grow its dominance in the world.
This requires us to be aware of the Islamic ideas and solutions to society’s problems and work according to the way of the Prophet Muhammad (saw), which is to be part of a politically organized group that works to make the Deen of Allah (swt) superior.
“It is He who has sent His Messenger with guidance and the Deen of truth to manifest it over all Deens, although they who associate others with Allah dislike it.” [At-Tauba: 33]