The Rise of Banking and the Demonetization of Silver and Gold
Introduction
In February 2010 the VPRO, a Dutch broadcasting organization, aired an investigative documentary called ‘where is the rage’. In the aftermath of the financial crisis that had swept across the globe after 2007, the makers of this documentary wanted to find out what bottom-up initiatives were being taken to create an alternative to the current debt-based, and apparently unstable, financial system. One of the initiatives covered was the reintroduction of the gold dinar and silver dirham by local entrepreneurs in Indonesia. One of the initiators of gold and silver money, Zaim Saidi, explains: ‘It is sunnah to use money that has the same intrinsic value as the goods bought with it”. Sunnah means that by using gold and silver as a medium of exchange, we are following the example of the prophet of Islam, Muhammad, peace and blessings be upon him. By following the Sunnah of the prophet, we are following the Sharia, God’s Will for a just and righteous society on earth.’ The fiat currency of Indonesia is named the rupiah. The name rupiah is derived from the Sanskrit term rūpya which means impressed or stamped and actually refers to the coinage of silver coins, but according to Saidi it has no real value whatsoever. He exclaims: ‘The huge inflation the Indonesians have been experiencing is actually a form of theft. Bankers are criminals who hold all the actual wealth like gold, silver and all other assets(as collateral). We want to reverse the process where the bankers give people paper in exchange for real wealth by returning the paper to the banks and getting the gold and silver back.’ In 2012 the popularity of Saidi’s and other communities like his suffered a major blow, as the central bank of Indonesia announced that business transactions were only allowed using rupiah(legal tender law). Indonesia is a Muslim country and its central bank considers it one of its primary objectives to enable the Indonesian banking sector to take a leadership role in Islamic finance. If using gold and silver as payment is considered to be sunnah, why would this central bank discourage the use of gold and silver as a medium of exchange?
On the First of September 1752 the Dutch East Indian Company, de facto ruler of current day Indonesia, opens the ‘Bank-Courant’, a bank of circulation. A bank of circulation was allowed to issue bank paper that could be used as money. The real money had always been coined precious metals, though copper and tin coins had been used for small transactions. In the Dutch East Indian colonies silver was the primary medium of exchange. To entice people to bring their silver and gold to the bank, interest was given on the money deposited, but this would only be done if the depositors agreed to accept the paper certificates in exchange for their precious metals. This allowed the bank to again lend out the gold and silver deposited, in the form of paper certificates, this way increasing the amount of money in circulation, creating a temporary economic boom. Over time, instead of being equity, a growing percentage of the money supply would become debt, as the ‘Bank-Courant’ created and lend more paper certificates than it had real money (gold and silver) in its vault.
Interestingly this was one of the first experiments with a central bank and paper money. When inflation struck and people found out there were more silver certificates then actual silver in the vault, confidence in the paper money was lost. The paper money drove out the silver and gold in circulation as people hoarded or exported the money with intrinsic value and used the paper money for domestic exchanges. In 1794 this private bank was rescued by the Dutch government and its activities curtailed. The debt remained though, and by 1827 the value of the assets on which the debts were pledged had shrunk. The governor exclaimed: ‘On the one hand there is a total lack of capital, on the other hand, everything is mortgaged or done on credit.’ 8 In the described episode one witnesses the beginning of the transition from currency with intrinsic value, to arbitrarily created debt currency. Though the people were told the paper was convertible to physical metal, only insiders were aware to what extent the paper money issued exceeded the number of precious metals with the bank.9
Experiments like these involving central banking and fiduciary money laid the foundation of the current global financial consensus based on the creation of debt. The Javasche bank still exists and is now called Bank Indonesia, the central bank of Indonesia. The debt created and brought into circulation as fiduciary money by the predecessor of Bank Indonesia would eventually replace gold and silver as legal tender, and today this is the Indonesian rupiah. If gold and silver were to be reinstituted, would Bank Indonesia and the commercial banks with whom it creates and controls the money supply, become obsolete?10 The institutions that issue debt currency might then consider money with intrinsic value, e.g. gold and silver, rivalry. The growing popularity of Islamic finance does indicate there is a discrepancy between the current financial consensus and the way Muslims believe they should conduct their financial affairs.11 Islamic financial institutions use the same money as conventional financial institutions though, but what if the money used (and created) by Islamic financial institutions is not sharia compliant?
This research will deal with one of the most basic components of the economy, namely money. Money is a medium of exchange as well as a store of value. Aristotle explains that money was introduced to satisfy the requirement that all items must be comparable in some way, so it also functions as a measure of value. He identified four characteristics that good money should have: durability, portability, divisibility and intrinsic value. 12 It is the first and especially this last characteristic that the money currently in use lacks. Intrinsically fiduciary or fiat money is worthless, as its perceived value is based on trust and legal tender laws. With its counterpart commodity money, the actual value is contained within the medium of exchange itself. That’s why over thousands of years the value of gold and silver money has been remarkably stable.13 Gold and silver are considered natural money as the free market or the convergence of individual choice decided its characteristics were most suitable to function as a medium of exchange and the common measure in which goods and services were valued. 14 To many Muslims there is an added incentive to use precious metals as money as they’re convinced it is codified in their primary sources.15
Islamic scholars like Ibn Rushd(1263-1328) and Ibn Tamiyya(1263-1328) agreed gold and silver had been especially created to serve as money, and the economic system based on it was considered the natural situation. 16 Many contemporary Islamic scholars tend to indiscriminately substitute gold and silver mentioned in the primary sources for fiat money, though. 17 This seems logical since ruling out the use of fiduciary money would instantly disqualify the Islamic economist his contribution and would forbid Muslims from partaking in almost all economic activity, as fiat money is used in every country in the world. On the other hand, there are some scholars that argue that there is merit to the idea that Muslims are obliged to use gold and silver as money and might be prohibited from using fiduciary money. 18 They claim the failure to reinstate gold and silver as money is the main reason why Islamic finance has not been able to attain the goals of the sharia. 19 The question this master thesis is supposed to answer is as follows:
What did the economic system based on precious metals (the natural situation) look like in the Muslim world and did the evolution toward fiat money violate the commandments concerning riba? To answer this question a detailed investigation of the primary Islamic sources is necessary in order to find out what the sharia prescribes. To be able to interpret the rules pertaining to money, knowledge of the economic system at and after the time of the revelations is necessary. Next the transition from precious metals to fiat money will be described and the efforts of Islamic finance to deal with the current monetary system is outlined. Finally the research results will be discussed with a selection of Muslims to gauge their opinion.
Literary review
Money is a measure of value and a medium of exchange, facilitating economic activity, but also a store of value or capital. Capital also includes other assets that have value like buildings, machines etc. In the current financial system most capital is collateralized and leveraged. This means the assets are pledged to a borrower (typically banks) who provided a loan in return.20 As explained in the introduction, this is how the money used today is brought into existence, namely as a debt by central and commercial banks. Over time the current financial system has become debt based instead of equity-based. 21 Fox and Ernst in their book “Money in Western Legal Tradition: Middle Ages to Bretton Woods”(Fox and Ernst, 2016) wrote a history of monetary law from the High Middle Ages until the twentieth century. In it they describe: ‘the general transition from a monetary system consisting of intrinsically valuable coins to one where the value –or indeed the existence- of some material substance is no longer relevant to the status and value of a thing as money’(Fox and Ernst, 2016).22 The writers identify five different stages, and while describing the first stage they use the work of Ibn Rushd to highlight the ‘entrenched’ position of Islamic Law (fiqh). Ibn Rushd claims, based on the primary Islamic sources, Islamic law requires coins to be weighted rather than counted, this way codifying the intrinsic value component of money.23 The rest of the ‘evolution story’ by Fox and Ernst asserts Europe first moved away from coins with intrinsic value to coins with nominal value. As Europe sees a gradual dematerialization of money through the appearance of bank money, paper money and finally fiat money that would be adopted globally, it becomes obvious why the money in use today might be considered problematic from an Islamic point of view. 24
Though great thinkers like Locke, Ricardo, Smith and Keynes have contributed to the philosophical validation of this ‘dematerialization trajectory’, it can’t be regarded as a smooth transition as it required surreptitious debasement, secrecy regarding vaulted gold, legal tender laws and government enforcement to overcome resistance. 25 This transition not only met popular resistance, fierce intellectual debate raged as well about the nature of money and what the government and bankers role should be in the creation and distribution of the lifeblood of the economy. The work of the brilliant economist John Maynard Keynes is seen as pivotal in giving the fiat money advocates the upper hand, dubbing gold and silver ‘barbaric relics’ implying the same for the proponents of their use.26 Though we can still find economists and philosophers that consider themselves ‘metallists’, their influence has become negligible. They argue that if people were given the freedom to choose, gold and silver would again reign supreme and the situation described in the first stage would reassert itself, where weight and intrinsic value is leading instead of debt based fiat money and government induced legal tender law. 27 Coincidently, these free money advocates reason ‘the natural situation’ is similar to the situation prescribed by the primary Islamic sources.28
Islamic orthodoxy values ‘divine revelation’ over the contributions of ‘great thinkers’. That doesn’t mean great thinkers aren’t revered in Islam, quite the contrary, but these men needed to work within the confines of their religion. According to Islahi (Islahi 2015) in his book “History of Islamic Economic Thought: Contributions of Muslim Scholars to Economic Thought and Analysis”, initially Islamic economic thought was not influenced by any outside elements, the Quran and Sunnah providing enough detailed economic teachings. The broad range of these teachings did require the use of juristic logic (usūl al-fiqh). It also prompted the Muslim scholars, after the example of the prophet Muhammad, to use qiyās (analogical reasoning) and ijtihād (original thinking). 29 This meant that scholars could disagree on certain matters, and in “the distinguished Jurist Primer” Ibn Rushd has gathered the opinions of different scholars to present the range of viewpoints about a specific subject. The book also includes a chapter on the use of gold and silver and how to deal with the obligation to exchange gold for gold on the spot (riba nasi’ah) and weight for weight (riba al-fadl).30 It gives a good insight into how these scholars reasoned, but it also demonstrates these forms of riba are quite clear and unambiguous.
Apart from a legalistic approach, reading through the different scholarly opinions also helps to get ‘inside the head of the believer’. Economics is very much a social science, concerned with the production, distribution and consumption of goods and services. 31 This means there is a large moral component as an optimal outcome for one group might cannibalize on another groups welfare. According to Naqvi(Naqvi, 1994), even though the Islamic prescriptions need to be analyzed scientifically, this doesn’t mean there is no room for value judgments. Quite the contrary, the ethical component of economics is a given and Muslim economists claim to strive for an economy where ‘faith is neither inconsistent with reason nor hostile to a culture of scientific inquiry’(Naqvi, 1994).32 With Islamic jurisprudence or fiqh, if certain rules are clear but they go against conventional wisdom, most Islamic scholars would prefer to stick to the clear rule, as they would feel they just might not be able to comprehend the wisdom or bigger picture, the Hikma, behind these rules send down by their creator.33
The prescription money should have intrinsic value is derived from the prohibition of riba al-fadl, meaning the weight of the gold and silver exchanged should always be equal. Ibn Taymiyya(1263- 1328), an influential Muslim scholar, claimed he was unable to grasp the reason why this prohibition was so important. Regardless, he would respect the rule and proclaim he obviously lacked knowledge.34 So though there might be discussion about the interpretation of certain rules, to Muslims implementation would eventually lead to optimal results or keep away unforeseen harm. Ibn Rushd shows that when ambiguity is encountered or for practical reasons, scholars might become more flexible, but over time in the field of economics it even became possible to challenge straightforward rules, like the prohibition of interest. For example Tantawi, the rector of Al-Azhar university in Egypt, issued a fatwa in the 1980s explaining why a fixed bank interest could be permissible.35 Also, Rauf A. Azhar, a renowned economist and Islamic scholar, put a lot of effort in explaining a moderate interest rate might not be a bad thing on the individual level, arguing the total prohibition of interest is an exaggeration. 36 He also links his argument to the arrival of fiat money, stating: ‘The classical position has become practically irrelevant due to the replacement of commodity (or real) money -the essential ingredient of the classical discourse- with paper money.’. 37 This makes his position more understandable as fiat money is prone to inflation and interest offsets this, but what if it turned out paper money could never have been introduced if the prohibitions on riba al-fadl and riba nasi’ah had been observed. Other Muslim scholars might partly agree, but still favor the prohibition as in their reading of the sources, the prohibition is unequivocal. Or they might argue the current situation where most people and countries are in debt, leading to a loss of (personal) sovereignty, is exactly the thing their creator warned them against.38 To most Western scientists this would go against the belief that scientific inquiry should be free from religious dogma.39 This would be one of the hallmarks of the modern age, and it is the confrontation with ‘modernity’, in combination with the dominion of the colonial powers over most Muslim lands that would have a profound effect on the Muslim world.
An important scholar whose life and work embodies the intersection of the Islamic world with Western oriëntalism, imperialism and modernity that would be so significant during the spread of the contemporary economic paradigm, is Christiaan Snouck Hurgronje(1857-1936). His book “Mekka in the latter part of the 19th Century” is a monumental work filled with irony and sarcasm that might betray a form of haughtiness, characteristic for the 19th century ‘rational Western orientalist’. 40 Still, his writings provide an excellent anthropological insight into ‘medieval’ Meccan society, where modernity seemed far away and the Wahabi conquest had not yet taken place. He gives a sobering account of the holy place, where he discovers many times the compliance of the ‘neighbors of Allah’ with the religious prescriptions seem questionable. For example, he encounters people who to him obviously deal in interest or riba, but who explain it is murabahah which is supposed to be allowed by the hanafi madhab. 41 As time progressed from the time of the Prophet, especially in the hanafi judicial school, many legal stratagems (hiyal) were condoned (though frowned upon) to circumvent financial prohibitions. Nicholas D. Ray states in this regard: ‘Modern scholarship has concentrated on the Hanafi school, which has led to an overemphasis of the role of the hiyal, thus implying a sort of hypocrisy to Islamic law which the traditional Orientalist was happy to classify as one of the characteristics of ‘the Oriental mind’.42 These encounters probably shaped the view of Hurgronje and he goes as far as to declare the Muslim commercial law a ‘dead letter’: ‘... all classes of the Muslim community have exhibited in practice an indifference to the sacred law in all its fullness, quite equal to the reverence with which they regard it in theory’. 43 Hurgronje was also skeptical of the validity of the primary Islamic sources, especially the traditions or hadith which according to Hurgronje had originated in an atmosphere of ‘pious fraud’ and pertained to a specific era, namely the medieval period.44 He argued the so called prophet of Islam had, after a psychopathologic episode, started to believe he was sent by Allah to uplift Meccan society. 45
Hurgronje was very popular among his contemporaries and also today it is more likely scholars would believe Muhammad was a hysteric but brilliant strategist and leader then to acknowledge he was a prophet. This signifies an obvious schism between Muslim scholars and the rest of the scientific community. In a sense the tradition of Hurgronje is followed during this research, taking the primary sources as being the foundation of the religion, no matter if Muslims are actually abiding to these commandments. It is irrelevant whether we believe the primary sources come from Allah, a ‘hysteric genius’ or were invented in the first centuries after the Arab conquest. One takes into consideration a Muslim believes the first, while non-Muslims most likely go for the latter two explanations. Secular modernists believe the dominant European position vis-à-vis the Muslim world can be largely attributed to the shedding of the shackles of religion.46 On the other hand, most Muslims would argue the increasing disregard for the sacred law as observed by Hurgronje is the exact reason why the Muslim world was overtaken. What to one would look like progress, the other would regard as degeneration.47 When trying to find out what the Islamic sources prescribe regarding the use of precious metals, it’s a given the overwhelming majority of Muslims see the primary Islamic sources as irrefutable, so it’s required to try and fully understand the Islamic perspective.
The Rise of Banking and the Demonetization of Silver and Gold
From about the 13th century onward financial innovation would come from Europe, though it might be interesting to note that these banking practices were already known in Babylonian and Roman times and curtailed by monotheistic religious influence. 184 Half way the 13th century the letter of credit became common in Europe.185 This would go hand in hand with the proliferation of moneychangers and merchant bankers initially originating from Italy.186 By no means these gold and silver backed letters quickly substituted physical transactions. Coinage made gold and silver very convenient to use, and the letter of credit required trust and coordination on the part of the banks. These banks were usually run by families who were personally liable for the return of the specie once the letter was turned in. Also fractional reserve banking was risky as banking runs meant the end of the bank as the gold and silver was simply not there.187 Despite the profit and power banking provided, its long term success depended on close cooperation among and between the different banking families.188 These banking houses slowly gained power and perfected their services, but it wasn’t until after the reformation the real transition took place in Great Britain and the Netherlands that would lay the foundation for the current financial system. 189 This system gave birth to the fourth stage in the evolution of money identified by Ernst and Fox, paper money.190
This chapter focuses on London as this city maintained its position as the undisputed global financial center until today. 191 It sheds light on how debt issued by the banking system would slowly replace gold and silver as money. 192 The introduction of ‘gold backed’ paper money resulted in the demonetization of silver and the introduction of fiat currency would demonetize gold. 193 The question is if these final two stages violate the religious commandments concerning riba.
3.1 Goldsmith bankers and central banking
The real rise of banking started in the early 17th century. As England witnessed substandard minting and the coin stock had deteriorated, the money supply was insufficient to facilitate economic activity. This gave rise to a system of goldsmith-banking, where interbank clearing started to supersede cash transactions.194 Interbank cooperation and economies of scale were essential to the success of the sector and by the end of the 17th century: ‘The positive returns generated by fractional reserve banking, private banknotes and checkable deposits (often called inside money) would displace commodity money (outside money) in nearly all local circulation. Much of London’s specie did fall into the hands of the goldsmith-bankers.’(Kim 2011)195 The glorious revolution of 1688 brought William of Orange to the throne and the bill of rights he was required to sign made it very difficult for the crown to renege on loans as earlier kings had done on several occasions. 196 This made government bills more secure and greatly increased the stability of the network of goldsmithbankers. Still bank failures plagued the industry and public distrust was high considering the usurious practices and enormous power of these bankers. In 1694 the goldsmith-bankers joined forces to establish a central bank to regulate themselves and in exchange for a 1.2 million loan the government granted a banking charter. Whenever the government was strapped for cash, mainly because of war, the privately owned bank was able to gain more privileges in return for loans, and in 1709 the bank acquired the monopoly on the issuance of bank notes.197 In the next two centuries the banking families that owned the Bank of England would go on to establish private central banks in many other countries, including the Ottoman empire.198
Despite the fact that the central bank holds the monopoly over the creation of notes, most of the money was created by book entries of the commercial banks that lend money to the government and public. Credit expansion led to growth and speculative fever, while credit contraction could lead to a banking crisis. Over its lifetime the central bank was constantly accused by politicians and the general public of working for the banks instead of the general interest. This was, of course, true as the shares of the central bank were owned by these banks, but the central bank would make the legitimate reply an implosion of the banking sector would be most detrimental for the government and public as the banks dominated the economy. These crises led to consolidation as the big players, the joint stock banks, were saved and acquired the smaller banks. 199 The 18th and 19th century could be deemed the era of the Bank of England, the joint stock banks and the East India Company, as these gigantic international entities reigned supreme in the city of London and were the driving force behind the imperial endeavors of Great-Britain. 200 Gold and silver played a central role as a measure of value, but for the banking sector, these metals could be seen as a burden and competitor to the paper money created by the sector. Subsequently, the financial industry played a crucial role in the demonetization of gold and silver.
3.2 The Gold Standard and the Demonetization of Silver
The most important stage in driving gold and especially silver out of circulation has been the introduction of ‘the gold standard’ or paper money, classified by Ernst and Fox as the fourth stage of the evolution of money.201 In a gold standard the central bank issues notes that are convertible into gold.202 By setting the interest rate the central bank enticed the public to turn in their gold, as interest was only given by the joint stock banks on notes, and not on gold. This should be considered riba nasi’ah, as the note represents a deferred exchange of gold.203 The clerk one deposits the gold with is lost out of sight while the person bringing the gold gets a note stating he will get his gold later. This appears like a clear violation of the traditions. Secondly, the only reason people turned in their gold was to gain interest, which is also forbidden in Islam. By raising the interest rate the central bank would make sure more gold would be deposited.204 The interest rate was also used to prevent people from taking back their gold. This was important because ‘the gold standard’ was also done on a fractional reserve basis, meaning there were much more notes in circulation then actual gold in the vault.205 In effect a note would actually represent less gold(weight), so it also involves riba al-fadl 206
Another consequence of the adoption of the gold standard was the demonetization of silver. Silver had always been the preferred metal for small transaction, but to the less wealthy it was also a store of value, hence the term ‘poor man’s gold’. As more and more countries switched to paper money partly backed by gold, the price of silver became volatile and dropped precipitously.207 This not only wiped out the life savings of many people, especially in the peripheral countries like India, it also reduced the stability of silver currency, one of the most important aspects why it is so suitable as currency. Many economists like Milton Friedman view it as a robbery that transferred a huge amount of wealth from the peripheral countries to the core countries, but also from the poor to the rich. Especially after 1873, when Germany, the United states and many other European countries changed to the gold standard, silver prices dropped fast sealing the faith of silver currency.208
India had always been a silver country, and while working in India Keynes witnessed the turmoil this currency devaluation caused. As discontent among the poor rose, London decided to introduce ‘the gold standard’. While the paper money is distributed, Keynes notices there is no gold backing of the currency, though the masses are not informed of this fact. This leads him to the idea that a intrinsic backing of the currency is not necessary, as human intellect is better suited to decide the optimal money supply then ‘the barbaric relics’. 209 Keynes would become the most important advocate of the final stage of the evolution of money in use today, fiat money.
3.3 Fiat Currency and Islamic Finance
Paper money during the gold standard had already only been partly backed by precious metal and Keynesianism further eroded the perceived need for backing of a currency by gold. The central banking system would now be the creator of money(debt). Roberds and Velde explain the workings of the central banking system as follows: ‘The structure of modern central banks follows a well established model. Central bank debt, a.k.a. ‘money’, enjoys a privileged status as a transaction medium (e.g., in terms of legal tender and payment finality), which renders it the most liquid asset in most contemporary economies.’ 211 The dissolution of Bretton Woods severed the final link between gold and the national currencies as the US dollar, to whom the rest of the national currencies were pegged, would no longer be convertible to gold. 212 It was clear this convertibility was already tenuous from an Islamic perspective and fiat currency just goes a step further, totally removing gold and silver, or intrinsic value, from the currency equation. As gold and silver were understood to be natural money in the primary sources, and the different stages that signified the evolution of money saw an increased infringement of the commandments, it might be expected Islamic finance would might regard a return to sunnah money important.
If we look at the experts on Islamic Finance we see that most of the prestigious adherents of Islamic finance have taken well paid positions in Sharia counsels of the major (Western) banking institutions or the influential, Qatar based, Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). They have made tremendous efforts to make Islamic finance compatible with the current financial system. This is logical as these scholars combine their knowledge of the sharia with Western financial education. This proved virtually impossible though, and in countries like Turkey, Malaysia and Indonesia a dual banking system emerged. Still the operations of the ‘Islamic banks’ remain almost in indistinguishable from conventional banks.213 This results in apprehension among Muslims as to the products and services that are most prevalent in Islamic finance.214 Most of these innovations are ‘reversed engineered’ conventional banking products. Because most Muslims expect that Islamic finance actually serves a higher cause such as relieving poverty and lessening inequality, there is displeasure among some Islamic scholars and ordinary Muslims as to the inability of current ‘Islamic finance’ to actually make a difference.215 They would like to see a more fundamental departure from the current financial consensus that is debt based whereas Islamic economics should be equity based.216 In Islamic finance focus lies on avoiding interest, but the term riba incorporates more than just interest. The idea that the use of fiat currency might not be in line with the sharia is hardly discussed among professionals, even despite its obvious relationship with interest. 217
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic, international and autonomous non-profit corporate body, regarded within the Islamic finance industry as one of the premier authorities on accounting, auditing, governance, ethics and sharia standards.218 To many their stamp of approval means a financial product or service is sharia compliant, though critics question its autonomy and impartiality as many of its members have well paid positions with the financial institutions they write the standards for. 219 They want to put the precious metals into the category of ordinary commodities, while at the same time supplanting the words gold and silver in the primary sources with the paper money used today. On the 1st of December 2016 the AAOIFI announced it had come up with new standards concerning gold and silver. Mohd Daud Bakar, founder and executive chairman of Amanie, a firm that offers Sharia advisory services to the financial industry, helped to draw up the new standards and states: ‘The sharia standard on gold and silver from my perspective is a game changer given the market conditions, given the preconceived idea that we have - even among the scholars themselves - that gold and silver are very restricted.’ He continues: ‘Until now there has been little guidance for products which classify gold and silver as a commodities, rather than a currency.’ 220
This push might be understandable from a practical point of view, as there is concern among Islamic economists about the economic underperformance of the Islamic world. Many feel this underperformance can be contributed to religious rigidity.221 Still, however genuine these reformative efforts are, a look at the primary sources revealed why these efforts might be considered tenuous in the eyes of the ‘rigid Islamists’ or ‘purist traditionalists’ they are trying to engage. 222 However these ‘traditionalists’ enjoy a great deal of popular support as the primary sources are widely available and their content undisputed. In these primary sources anyone can find the specific rules for gold and silver. These rules clearly set the precious metals apart from other commodities and when applied to the different stages in the evolution toward fiat money, this evolution could not have taken place.
Conclusion
This research deals with the question what the economic system based on precious metals (the natural situation) looked like in the Muslim world and if the evolution toward fiat money violates the commandments of the sharia concerning riba, particularly riba al-fadl and riba nasi’ah? These two forms of riba apply specifically to gold and silver, designated in the Quran and Sunnah as natural money. The first stage in ‘the evolution of money’ described by Fox and Ernst is the natural situation where gold and silver are valued by their intrinsic value. This is the only stage that is sharia compliant. This and the logic and fairness of the first stage spawned a combination of public, religious and intellectual pressure to preserve the natural situation. Rulers would comply by keeping the existing coins in circulation in good condition, allowing the right to melt or export, Permitting unlimited mintage free of charge, refraining from debasement and instigating currency reform if the coin stock had deteriorated too much. Though moneychangers could make a valuable contribution to the economy, if the government neglected its responsibilities it could create opportunities to reap huge profits by these precursors of modern banks at the expense of the public welfare.
Fox and Ernst identify a second stage where coins were valued at face or nominal value. Examples of this are scarce and mainly temporary in the Muslim world. Reason for this is the instability this created, but the violation of riba al-fadl which prescribes the exchange of weight for weight, might also have prevented transition to this second phase. Bank money is identified as the third stage, and this is problematic regarding riba nasi’ah as the exchange of gold and silver is deferred whereas the sources prescribe exchange should be done on the spot. The suftāja or letter of credit was actually invented in the Middle East, but was contested heavily, especially by religious forces(forbidden in all juristic schools, except Hanafi where it was frowned upon). Paper money convertible to gold is the fourth stage. This again constitutes deferred exchange of metals, but also riba al-fadl as there is no 100% backing of the notes brought in circulation. It could be seen as an extension of the suftāja, but the banks that issue the paper are now granted monopoly and backing(through legal tender laws) by the government. It would have likely drawn the same religious critique as the letter of credit did. The support of the strengthened nation state for paper currency has probably been instrumental in drowning out critique of the religious establishment, though to establish this more research would be needed.
Fiat money is totally divorced from gold and silver and is always brought into existence as a loan with interest. Islamic finance hasn’t really engaged with the topic of the permissibility of fiat money, but it appears interest in the subject is gaining traction as most Muslims feel that from an Islamic perspective there is something fundamentally wrong with the current financial system. As main stream Islamic Finance is very much an effort to interpret the Islamic precepts so Muslims can take 46 part in the current financial system, this discontent is not readily adressed. A lack of understanding, but also the sheer magnitude and pervasiveness of the current global consensus concerning fiat money discourages many Muslims from engaging with the topic.
(Prof. dr. Mr. M.S. Berger: DOES MONEY MATTER IN ISLAMIC ECONOMICS: GOLD, SILVER, RIBA AL-FADL AND RIBA NASI’AH, Ch 3: The Rise of Banking and the Demonetization of Silver and Gold.
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