Money, Purchasing Power, Wealth Measurement and Riba- II

Those who argue that it was so mandated as gold and silver coins were common medium of exchange during Ahd-e-Risalat (period of the Prophetﷺ) should note that these constituted common medium of exchange only due to preference of the people that was only due to universality and stability of their purchasing power based on their…

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Those who argue that it was so mandated as gold and silver coins were common medium of exchange during Ahd-e-Risalat (period of the Prophetﷺ) should note that these constituted common medium of exchange only due to preference of the people that was only due to universality and stability of their purchasing power based on their special physical and chemical properties; that is,it was their nature that allowed these to be universally accepted as common medium of exchange and to serve as measure of value of everything.

Clearly, Shari’ah relies on purchasing power determined with highly stable and appropriate measure of purchasing power where it is required to do justice. Change in quantity of gold/silver in dinar/dirham changes the value/purchasing power of these coins proportionally and that is clearly prohibited. Thus, it is clear that no benefit allowed to be derived by reducing gold/silver content of dinar/dirham. Not only this, in case weight of the coins differs, these must be exchanged on the basis of equality of weight only. Further,Shari’ah provides special provisions for gold and silver that are known to enhance their purchasing power stability and raise the quantity of these that can be minted–as coins and our Fuqaha have strictly disallowed melting of the coins to produce gold/silver for other uses.

Clearly, Shari’ah applies special provisions for gold and silver coins to raise their supply and to stabilise their purchasing power to let these establish just prices for various goods and services. It ensures that profit motive leads to efficient allocation of resources, economic growth and wellbeing. It follows that monetary manipulation that leads to continual reduction in purchasing power of common medium of exchange is a crime manifest. It leads to failure of market to determine just prices. HifzurRab (2009) has shown that long-term stability of purchasing power of the common medium of exchange is an essential requirement for just determination of prices and that is essential for economic justice and efficient allocation of resources and that is essential for our wellbeing and economic growth.

 

Prevailing fiat money that is freely floating fiat money has no reality except what it buys. It derives purchasing power from the link that it develops through market with the national product basket due to fiat of the government mandating its acceptance as a payment. Quantity of this money equivalent to national product basket is determined by the market and is primarily governed by quantity of national product and money supply. Prevailing fiat money has no reality other than the national product basket it buys and quantity of the national product basket determines the purchasing power of fiat money just as the quantity of gold and silver determines purchasing power of dinar/dirham.

Strict analogy (Qiyase Tam) between these (HifzurRab 2006, 2015, 2017, 2020) shows that the hadith mandating exchange of given quantity of gold/silver only with equal quantity of these will require that dues in fiat money must be settled with such amount of money that is equivalent to same quantity of national product basket that was due. This makes no difference in case of transactions that are settled in a short period and unless inflation is high (10% or more) even transactions that are settled on quarterly basis may not be corrected. However, in case of long term transactions/contracts accounting must be done in real terms and Riba prohibited in Shari’ah is real interest in case of freely floating fiat money. Wallahu Alam.

The Prophet ﷺ is reported to have said, “Dirham for dirham and dinar for dinar, and there should not be increase in their exchange except in case of weight (i.e., only if the weights of the coins differ, their number will differ to ensure that weights are equal).” Ibn Majah: KitabutTejarat, Hadith No. 2256

Thus, if someone borrows gold dinar weighing 4.25 gm but pays back the loan with gold dinar weighing say 2.125 gm, only then the borrower will have to return twice the number of dinars borrowed. Manipulation of FFFM is strictly analogous to reduction in quantity of gold of a gold coin and thus, this Hadith confirms that compensation for monetary manipulation is obligated by Shari’ah. Regarding FFFM, a majority of our contemporary scholars may not be aware of its reality and the real cause responsible for continuing fall in purchasing power of money.

In view of its being the common medium of exchange, it is subject to Riba. In case a currency is symbolising quantity X of national product basket today and quantity half of X say five years later then in quantitative terms in that Shari’ah defines Riba currency of denomination 50 today is equivalent to currency of denomination 100 five years later. In such scenario a person who has lent 50 today will be entitled to receive 100 five years later. Thus, Riba is excess in quantitative terms and is same as nominal interest or simply interest in real money system but in case of FFFM/monetary manipulation (Riba) is real interest (HifzurRab 2008, 2015, 2017).

It is agreed that bank notes have replaced gold and silver currency almost completely but these are no reliable measure of value or unit of account. It may be noted that proper measurement is mandated by Shari’ah and it requires the unit of measure to be a precisely (or at least as accurately as practical) defined quantity of what it measures. There is no compulsion to hold that nominal/ face value of bank notes must be used as unit of account of wealth/value. Holding so does lead to some simplification but the Mufasid (harms) are colossal (HifzurRab 2011, 2014,2017).

Those who hold that this can be done on ground of Maslaha (public good)are not aware of this being one of the major causes of economic marginalisation of the Ummah and its institutions as well as of justice and righteousness;HifzurRab (2009,2010,2014), Meera, AK Mydin (2004).

Further, freely floating fiat money continues to lose purchasing power as the quantity of the equivalent national product basket that is only reality that it has is consistently reduced. Reducing quantity of gold/silver in dinar/dirham is not permitted even if there are problems and therefore this manipulation of currency is also not permitted.

Salami MM has reported that the resolution of the Islamic Fiqh Academy No (9) D/3/07/86 states that banknotes are considered currency. They have all the attributes of currency and are fully valid as a unit of pricing. They also qualify for the application of all the legal rules established for gold and silver with respect to usury, Zakah, advance payment sale (salam) and similar transactions.

Here we find an example of juridical analogy. The parallel case is the banknotes, the original case is gold and silver currency; the legal cause is being a unit of currency and the legal rule is prohibition of usury in both, as well as the levying of Zakahon them and the legality of using banknotes as capital for advance payment sale (salam). Then the resolution generalised the legal rules to include currency-exchange, dormant partnership (mudaraba), lease, reward (ja’ala), partnership and all other types of transactions in banknotes.

Author has discussed the resolution in his work (HifzurRab 2015, 2017, 2020) and clearly explained that it is based on supposed complete analogy between freely floating fiat money and dinar and dirham that doesn’t exist.  Government fiat does force people to accept fiat money as payment that has resulted in fiat money replacing dinar and dirham as currency but analogy ends there and it doesn’t make fiat money equivalent to dinar/dirham as universal measures of purchasing power/unit of account.

Shari’ah requires dues in dinar to be cleared by payment of equal number of dinar only if the quantity of gold in dinar that is due equals the quantity of gold in dinar that is paid; therefore, to claim analogy regarding use as a unit of account, its votaries have to establish that quantity of national product basket that impart purchasing power to fiat money is held constant.

Governments can do that by linking currency with some fixed quantity of national product basket, but don’t do that and cause it to consistently fall by following inflationary monetary and fiscal policies (Younkin EW 2002). Thus, part of the declaration regarding use of consistently depreciating fiat money as a unit of account that leads to gross injustice and other massive Mufasids (harms) and has pulverised the economy of the Ummah and its institutions must be discarded. Solution of the problems that it addressed has been discussed.