Economics Society

The Essence of Dominant Economics

The quality of modern media has been such that many obscene inequities of the globe have been brought to the starkest light. An essential part of this tale has been the failure of dominant economics to bring forth a just social order. Recently, the role of bankers – and their supposed greed – has come under severe criticism in the aftermath of the sub-prime loan scandal in the USA, which has had resounding global implications for markets and economies. Jon Moulton – who was credited at seventy-one in the Power 100 on the dominant people in British business – in a recent documentary on Channel Four in England, entitled ‘How the Banks Bet Your Money’ (18 February 2008), discussed this issue, and he identified the greed of bankers as the essential problem of the whole sub-prime tragedy – I use tragedy here to only refer to those normal people, with no involvement, who will have to essentially pay for the clean-up, through their taxes and lowering social services (as their governments take on the burden of the fall-out). While I accept that greed is, perhaps, the essential malignant disease of dominant economics, one needs to look deeper than Moulton at the manifestation of what is, essentially, a spiritual disorder. For this, one needs to proceed as Martin Palmer did in his ‘Thought for the Day’ on the BBC Radio 4 (7 November 2007), and identify ‘usury’ as the grave sin of modern dominant economics, which – as Palmer says – ‘we are almost all implicated’. Interestingly, Palmer cites the traditional condemnation of usury by Christianity, Daoism and Islam – and he notes that ‘though Islam has wavered in the last few centuries, in recent years many Muslims have returned to the Qur’an and its teachings’ on the topic of usury; and he then cites from a verse of the Qur’an: ‘Allah has permitted trade, and forbidden usury’ (2:275). It is of great importance, therefore, that we explore how Muslim scholars have attempted to apply this Qur’anic law to the modern world; but, of course, this is after we first get a glimpse of what is the dominant economic model.

The name given to the dominant economic method of contemporary nation states is capitalism. Joseph Stiglitz has written in Making Globalization Work: ‘Capital is at the center of capitalism’. The calculation of capital is in the form of fiat money. Why is fiat money the dominant form of transaction, reserve and financial calculation? Stiglitz, again, helps us with his summation of how fiat money replaced gold as such a standard. Historically, gold was replaced as it was found that fiat money (‘pieces of paper’) were more convenient as a means of financial exchange, with it being possible for the paper to be ‘converted into gold’. Stiglitz continues: ‘At first, it was thought that there had to be full backing – for every dollar of fiat money issued, the government or the central bank had to hold a dollar’s worth of gold. Then it was discovered that this was not necessary; all that was required was confidence in the currency.’ This explanation shows the what, but it does not satisfactorily show the why. For the latter, we can turn to another great American economist, John Kenneth Galbraith – who, like Stiglitz, can be placed in a neo-Keynesian tradition, as opposed to the Chicago School free-marketers tradition.

The dominant features of the modern banking system, which is fuelled by the notion of paper money, are the notions of wealth creation and interest. Galbraith notes, in his Money: Whence it Came and Where it Went, that ‘the discovery that banks could so create money came very early in the development of banking’. Hence modern banks – and here we are primarily talking of the early eighteenth century onwards – saw the reward that could be gained by not only holding people’s deposits of money, but also lending that money onto others at interest, in the hope that all of their depositors would not make a ‘run on the bank’ and thus request the immediate refund of their deposits. The former-Justice Taqi ‘Uthmani, in his Historic Judgment on Interest: Delivered in the Supreme Court of Pakistan, explains that this ‘money creation’ or ‘fractional reserve lending’ means: ‘to loan out more money than one has as a reserve for deposits’. As banks became more reliable, customers in the West were less prone to such ‘runs’. [Interestingly, Martin Wolf, in the Financial Times (17 February 2008), noted that the run on the Northern Rock bank in England by customers in September 2007 was ‘the first since the 19th century’.]

Furthermore, as also highlighted by Galbraith, this apparent wealth creation – which is only illusionary, for it is simply an increased financial circulation that does not correspond to the actual wealth in the banks’ reserves – was additionally utilised to the banks’ advantage by their charging interest on the loans issued forth by them on the created sums that had a rough correlation to the actual wealth deposited with the bank. Moreover, with the eradication of any notion of a ‘gold standard’, banks have been left with wide powers for ‘wealth creation’, despite being still constrained by certain inflationary and national-state legislative factors. The reality of ‘wealth creation’ now has been highlighted by Taqi ‘Uthmani, in his Historic Judgment: ‘the net result [of the ‘legalising the creation of money by private banks’] is that the modern banks are creating money out of nothing’, whereas they previously had to produce money in relation to their gold assets and its relative value, even if restricted (and not a ‘100 per cent reserve requirement’ – a term mentioned by Ahamed Kameel Mydin Meera, in his Theft of Nations: Returning to Gold). In this regard, ‘Uthmani further states in The Historic Judgment:

    ‘They [modern banks] are allowed to advance loans in the amounts ten times more than their deposits. The coins and notes issued by the government as a genuine and debt-free money have now a very insignificant proportion in the total money in circulation, most of which is artificial money created by advances made by the banks…The spiral of loans built upon loans is now the major part of the money supply. Taking the example of UK according to the statistics of 1997…the original debt-free money remained only 3.6% of the whole money supply while 96.4% is nothing but a bubble created by the banks…[i.e. it] is nothing but numbers created by computers, having no real thing behind them.’

‘Uthmani points out that ‘interest-bearing loans have no specific relation with actual production’ and the ‘serious mismatch between the supply of money and the production of goods and services…is obviously one of the basic factors that create or fuel inflation’.

Now who suffers from such inflationary fluctuations, which result in raised or lowered interest rates? Invariably, it is the poorer sections of society, including the middle classes, who suffer, not to mention the greater suffering of the poorest sections of society. Here, let it be remembered, we are only talking about the state of affairs in the West! ‘Uthmani quotes extensively from Michael Rowbotham’s Grip of Death: A Study of Modern Money to prove the disastrousness of the cyclical alterations to interest rates, which, although designed to correct future loaning tendencies, actually hit harder the people who have already borrowed sums of money; Rowbotham states:

    ‘The fact that, by this method, people and businesses with outstanding debts can be suddenly hit with huge extra charges on their debts [:]…an injustice quite lost in the almost religious conviction surrounding this ideology…Many past borrowers are rendered bankrupt; homes are repossessed, businesses are ruined and millions are thrown out of work as the economy sinks into recession.’

Rowbotham continues to illustrate the fact that this method of economic control is part of an endless ‘cycle’, because once ‘inflation and overheating are no longer deemed to be a danger, borrowing is discouraged and the economy becomes a stagnating sea of human misery’; this then leads to ‘the problem of lack of demand, so we must reduce interest rates and wait for the consumer confidence and the positive investment climate to return’. Then setting the cycle back in motion.

The ability to control ‘wealth creation’ has led to the situation as described by Taqi ‘Uthmani, in his appended essay to his father Mufti Shafi’s The Issue of Interest:

    ‘The result is that resources of the entire nation end up controlled by a handful of capitalists who start playing with the destiny of the nation on the strength of resources available to them. Every thing from world politics to the economies of the nations are at their mercy and they rule the political, economic and social life of the entire universe, with complete spirit of selfishness and personal aggrandisement.’

‘Uthmani states in The Historic Judgment: ‘It needs no expertise in economics to realize that this [state of Pakistan’s huge foreign debt] is an alarming situation which is leading us constantly towards slavery of the whole nation in the hands of our lenders’.

Central to this global control of nations’ wealth, in the opinion of so many people, are the World Bank and the International Monetary Fund (IMF). Joseph Stiglitz – a famed author, winner of the Nobel Prize for Economics 2001, and former Chief Economist at the World Bank – has made a successful alternative career out of laying bare many of the injustices of the present system that he perceived whilst working at the World Bank, and one can read his Globalization and its Discontents for his portrayal. Stiglitz’s account of IMF policies lead him to conclude that they were driven by ‘a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiling special interests’. In the process, the IMF, in his opinion, would ‘prescribe’ measures on ‘developing’ countries in ‘crises’ that only exacerbated the social pain already being felt by the people of those countries in general. He states that such punitive measures ‘failed’, and its ‘structural adjustment policies’ only ‘led to hunger and riots in many countries’; while in those countries where such measures were not so negative, he contends that ‘often the benefits went disproportionately to the better-off, with those at the bottom sometimes facing even greater poverty’. What is also fascinating about his account is the portrayal of the IMF’s handling of post-Communist Russia in the 1990’s – a country that many would align with the ‘West’ or ‘North’: he blames the IMF’s aggressive liberal capitalist stipulations upon Russia for the destruction of the currency and the subsequent social chaos, poverty and misery. If true, it shows that the bankers’ search for profit finds no friends, just clients and the smell of profit in their ideological and financial battle.

We can now be said to live in the age of the ‘dollar standard’. Robert Wade, professor of political economy at the London School of Economics, has written of the ‘dollar standard’ age:

    ‘Under this arrangement the US dollar is the main global currency, and the US Federal Reserve can create dollars without a supply-side limit (such as convertibility into gold). Provided US trading partners are prepared to accept payment in dollars, the US can run almost unlimited deficits just by printing the dollars or treasury bonds with which to pay for them.
    ‘The dollar standard contains no mechanism to correct trade imbalances between countries. The US current account deficit has increased almost without interruption since the early 1980s. These deficits have enabled the US to enjoy both guns and butter at the same time (rising military expenditure and rising consumption), financed by increasing amounts of domestic and foreign debt.’ [Quoted from Wade’s debate with Anatole Kaletsky, entitled ‘Is Global Finance Out of Control?’ in which Wade argued yes to Kaletsky’s no, in Prospect (December 2007).]

[Noreena Hertz, in her I.O.U. The Debt Threat and Why We Must Defuse It, writes that the US ‘owes $3 trillion, around 10 times what Africa owes’. Moreover, it is interesting to read Stiglitz, in Making Globalization Work, when he discusses the weakening of the reserve system where countries would gather reserves in the dollar. Due to the growing weakness of the dollar, countries have increasingly started to increase their reserves of euros; yet Stiglitz does point out that ‘virtually all reserves today are held in dollar-denominated assets, sometimes dollars themselves but…more likely U.S. Treasury bills’. Nevertheless, Stiglitz argues that the very nature of being a reserve currency is that it is ‘self-defeating. The reserve currency country winds up getting increasingly into debt, which eventually makes its currency ill suited for reserves’. This is due, in Stiglitz’s words, to the ‘special problem of inadequate demand in the reserve currency country’, which, in practice, leads to ‘imports exceeding exports’, as the reserve currency country essentially borrows from an outside country; and this ultimately leads to economic problems, which naturally affect the population in an adverse manner. Furthermore, when a currency is widely held as a reserve currency, the reserve currency increases in value; thus leading to less exports and more imports. Such a scenario also can mean a lack of jobs at home as the demand for and cost of homeland products is made less advantageous from an economic view.]

In summation, Max Weber’s Protestant Ethic provides an interesting parting note for us, as it deals with the ‘spirit’ of capitalism. Weber, in chapter two of The Protestant Ethic, uses Ferdinand Kurnberger’s satirising of the words of Benjamin Franklin to illustrate the nature of the ‘spirit of capitalism’, and Weber makes the following summation of that ‘spirit’:

    ‘The peculiarity of this philosophy of avarice appears to be the ideal of the honest man of recognized credit, and above all the idea of a duty of the individual toward the increase of his capital, which is assumed as an end in itself. Truly what is here preached is not simply a means of making one’s way in the world, but a peculiar ethic. The infraction of its rules is treated not as foolishness but as forgetfulness of duty. That is the essence of the matter. It is not mere business astuteness, that sort of thing is common enough, it is an ethos.’

Weber continues to inform us: ‘Capitalism existed in China, India, Babylon, in the classic world, and in the Middle Ages. But in all these cases, as we shall see, this particular ethos was lacking.’ In the course of The Protestant Ethic, Weber goes on to try and prove that this ‘spirit of capitalism’ was part of the culture of the people before the advent of capitalism, and he identifies it with various Protestant theories, in particular Calvinism. Nonetheless, one should be careful to understand what Weber really meant by this latter concept. He is simply speaking about ‘the spirit of hard work, of progress, or whatever else it might be called, the awakening of which one is inclined to ascribe to Protestantism’; and not that the ‘old Protestantism of Luther, Calvin, Knox…[and] Voet’ was directly calling for such definitions of the individual as understood in this modern ‘philosophy of avarice’. Indeed, he further writes that these individuals and their thought ‘had precious little to do with what today is called progress. To whole aspects of modern life which the most extreme religionist would not wish to suppress today, it was directly hostile.’ In a way, one could argue that modern capitalism has turned Protestantism on its head as Marx had done to the idealist philosophy of Hegel (as Engels claimed), i.e. the basic structure of the thought is present, but it has been transformed in meaning and application. Nevertheless, such an infraction has managed a convincing feat of beguilement – and a world stands dazed and numbed in the beams of its high voltage lighting, which is currently outshining any other attempt at providing an alternative method of trade and financial valuation

Andrew Booso

About the author

Andrew Booso

Andrew Booso

Andrew Booso is originally from London, England and is a graduate of law from the London School of Economics and Political Science (LSE). He has taken religious instruction from Shaykh Iqbal Azami and Shaykh Muhammad Akram Nadwi, as well as numerous students of knowledge. He is currently on the Advisory Board of the England-based Spring Foundation, which is a scholarship charity for students of the Islamic sciences.

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  • Assalamualaykum,

    JazakumAllahu Khair for the informative piece. I have been reading a lot about the fraudulent economic system of the world today and pose this question:

    How are Muslims supposed to work within such a corrupt system without perpetuating it, and how can we slowly enact change, including at the level of nations?

    Do Muslim nations need to adopt their own currency that is rooted in some commodity such as gold, silver, etc? Do 3rd world countries need to demand payment for their exports (tea, cotton, wood, etc.) in some other commodity instead of depreciating fiat currency (relative to their own semi-worthless currency?

    I believe that Islam came to change the status of economic corruption and exploitation, but we have little to no scholars discussing such relevant issues to the majority of the world! We talk a lot of politics, but is not economics at the core of politics?

    Surat-al-Mutaffifeen was a Meccan surah dealing with fraudulent trade and threating those who seek corruption in their business policies. Hence, although tawheed and imaan were the crux of the early message, understanding and criticizing fraud in economics was also part of the message.

    Can Sheikh Suhaib or yourself please elaborate on these topics? Perhaps tafseer of ayaat or hadith about economics that will change the way Muslims view the current world and make us awake and aware of how to deal with it.

    May Allah reward your efforts.

    Osman Umarji

  • Wa alaykum as-salam wa rahmatullah

    Thank you for your comment.

    With regards to how one contributes to eradication of injustice, there are already worthwhile economic causes of a just nature – even if they might be missing certain vital perspectives. The Jubilee debt relief campaign for the developing world is one very prominent example.

    Of course, many people are aware of the ‘Islamic banking’ sector, and their attempts to improve the situation. This method is largely one that seeks to find an ‘Islamic’ niche within the current system. Therefore banks, paper money, etc. are accepted as norms, and the desire to eradicate financial transactions containing interest, stark injustice and prohibited chance and risk (gharar), and other fundamental Islamic law stipulations are the goals. This alternative, and its method, is perhaps best represented in the wealth of work done by the Islamic Foundation, Leicester, England.

    The interesting alternative to the ‘Islamic banking’ sector can be seen in the proceedings of the 2002 International Conference on Stable and Just Global Monetary System: Viability of the Islamic Dinar, Kuala Lumpur, Malaysia. This conference was led by numerous academics from the International Islamic University Malaysia (IIIM), as well as others – and the IIIM has published the papers. Although different suggestions were put forward, the running theme was that a ‘return to gold’ was a better economic option.

    One of the main academics at the IIIM who has written on this dinar stance is Ahamed Kameel Mydin Meera – who I referred to in my article, when quoting him from his Theft of Nations: Returning to Gold. He told me that his stance is a ‘paradigm shift’, and such changes must be ‘done slowly and gradually’. For those in England, Meera did recommend Tarek El Diwany – the author of The Problem with Interest – to me. El Diwany gave a forthright presentation on the issue – from his perspective – at the last JIMAS conference, which can be heard on the JIMAS website.

    To change anything, one must first understand what one wants to change, and then one can work towards that goal in whatever way one can. The above ideas are just some options – I’m sure that there are plenty more.

    This article was taken from some larger research of mine. It is my hope that God will give me success in presenting some more specifics on the discussions regarding current economics and its future, from both Muslims and non-Muslims. Maybe those will answer some of your questions in a more satisfactory way.

    Nevertheless, it is safe to say that there isn’t a simple option of merely jumping from one system (such as banking) to another (such as a gold-based currency). This is firstly due to the fact that a strong enough public will does not currently exist – even in the Muslim world – for a gold system. Secondly, I’m not aware of anyone who has put forward an elaborate program for such a radical shift towards gold. Therefore one is forced to operate within the current system as best one can. For instance, who of us could exist without a bank account and paper money? Exceedingly few is the answer.

    fi amanillah

    Andrew Booso

  • Correction: of course the acronym for the International Islamic University Malaysia is IIUM, and not IIIM (as in my reply above).

    Andrew Booso

  • Assalamualaykum Andrew,

    For those of us wishing to take part in this field what advice can you offer us in terms of acquiring the knowledge and education needed to branch out in to Islamic Banking.

    For many Islamic banking is simply banked cleverly disguised to mask the other wise interest in the form of fees. Tarek El Diwany on writes an interesting article highlighting the most common form of Islamic contract murabahah and labels it a contractum trinius which was a legal trick used by European merchants in the Middle Ages to allow borrowing at usury. And many more in which the current theme is to produce islamic banking products that look give the some out put as traditional bank only to have the names changed. The true concept of profit sharing is not captured by today’s banks ask they perceive the risk to be to great.

    The current system has to operate in the realm of the international Global markets that still use interest so from the beginning it was not going to be easy and there was some doubt over how “Islamic” Islamic banking would be, but in the sprit of trying to move forward is it worth our time to start a career in this or would we be moving in the wrong direction?

  • Wa alaykum as-salam wa rahmatullah

    Dear Sherif Mahmoud

    If one is determined to enter the Islamic banking sector, then my personal advice would be that they follow the advice and teachings of Shaykh Taqi ‘Uthmani. He is a conventional Islamic scholar of high repute, who has dedicated a great deal of time and effort to the cause of producing banking products that he considers to be lawful.

    Your final question is a testing one. The anti-Islamic banking sector have many valid points. Even Shaykh Taqi ‘Uthmani, in the end of his Introduction to Islamic Finance, acknowledges certain failings of the Islamic banking method, which need to be corrected in his view.

    I’m in favour of a dual approach. Firstly, supporting the efforts of scholars like ‘Uthmani to produce products that he thinks are lawful within the current system. This is so as to facilitate the investments and wealth of religious Muslims. Secondly, investing time and effort in developing proposals for the improvement of the system on a grand scale, and then disseminating those findings. One proposal worth investigating is the gold option being propagated by academics like Meera.

    To accept the current direction of Islamic banking on the whole as an end is, perhaps, short-sighted. Shaykh ‘Uthmani’s identification of the current problems are a sufficient critique, and cause for worry. And the points of the ‘return to gold’ people are of much value and truth.

    Nevertheless, I wouldn’t say that forging a career in Islamic banking is a ‘wrong direction’ or a waste of time. Yet one shouldn’t be idealistic about the field if one joins. If one operates within the instructions of people like Shaykh ‘Uthmani, then I wouldn’t have an issue.

    Now, I’m not saying that Shaykh ‘Uthmani is right in everything he says and does with regards to banking. I’m simply giving my personal opinion that he is the person that I trust on the basis of taqlid (following qualified scholarship) in this area. Of course, people can trust the opinions of whomever they consider to be superior.

    fi amanillah

    Andrew Booso

  • Salaam,

    JAK for the wonderful research. I think you highlight some of the inherent downfalls with the set up of the current economic system. However, I think it needs to be noted that no system created will be ‘perfect.’

    I think you are correct in highlighting that when thinking of creating an alternative system or reforming the current system, we need to focus on what the goal of our changes are. Currently, economic thought is based on efficiency maximization. In other words, what is the most efficient way to distribute ‘scarce’ resources. From this free market theory was born, because it was found through profit-maximization that buyers (demand) and sellers (supply) would come up with the appropriate amount of goods at the appropriate price to arbitrate between the sellers costs and the buyers desire for the goods purchased. It is to be noted, that under a perfectly free market there are no profits, and profits result as a form of inefficiency (economists will explain this through including opportunity costs in their definition of costs.) Economists main concern is efficiency (at least from a micro-economics perspective), and so how the markets play out is less important than how the markets impact society. So in talking about the current economic system, it is important to understand it from this perspective.

    Moving forward, it is important to note the distinction between micro-economics and macro-economics. Micro-economics views economics through a micro-scope, and details the interactions between individuals and entities through market interactions. Macro-economics, which Keynes is probably is the key persona, deals with how governments can manage economies at a macro level to avert severe recessions and depressions. (He is primarily responsible for identifying how increases in government spending can alleviate severe macro-level downturns, and was a major advocate for government intervention in the economy). Now, this is where the Chicago school is important. Identifying how government actions at a macro-level (i.e. through taxation, or debt-financing, etc.) could reshape the way that micro-level markets interacted, this school advocated that government not do much except through monetary policy. This was to minimize the impact that government actions have on the economy. The idea was that through monetary policy alone (i.e. changing the money supply through the manipulation of short term interest rates), the government could stimulate the economy enough to avoid resorting to the fiscal policies advocated by Keynesians, and ensure that the economy remained strong.

    It is important to note that both fiscal and monetary instruments only have short term effects, and that real economic growth can only be achieved through increasing the productivity of the economy itself. Which is a key point, because both measures only artificially increase the level of aggregate demand, whereas economic growth is fueled by increases in aggregate supply (i.e. if aggregate demand increases aren’t matched by aggregate supply increases, then you get inflation). Now days, macro-economist are concerned with maintaining economic growth as well as maintaining price stability (inflation).

    I think that in addressing our current situation, we should use the lens of macro-economics, and detail the relationship between interest rates and inflation, which are the bases of the current monetary system. It is on this point, I think that the claims made in the article about the current monetary system to be exaggerated.

    First, the idea that the current instability in the value of money is a function of leaving the gold-standard is somewhat dubious. No matter how you denominate money, it is always subject to the forces of supply and demand. The reason being that the value of money is determined by the ratio between the amount of goods being produced to the money supply (i.e. as this ratio changes money can be either more or less valuable). Even gold is subject to this, as is seen in the fluctuations in the value of gold throughout history. It was noted that huge influx of gold after the European discovery of the Americas lead to large decreases in the value of gold. Additionally, as the industrial age arrived, and countries began to grow their economies at an exponential rate, if the amount of available gold didn’t increase to match that, the value of gold would increase exponentially leading to deflation.

    Second, as is noted in a book about the economic thought of Ibn Taymiyyah, historically there was a dual metallic standard, where gold was but one of a number of precious metals used to denominate currency. Additionally, currency was devalued through the addition of other metals into the coins, much for the same reasons money is devalued in this day. So I would put a “gold standard” as an idealistic construct of a time that never really existed. Professor Barry Eichengreen, has a book about the formulation of the current trade system, and details the history of the gold standard as well.

    Third, a fractional reserve system still requires that the loans and money be backed by something, and is not baseless as Mufti Taqi indicated (it probably is based on a societies belief that it can produce valued goods and services, so it’s belief in society’s ability to deliver, which in ways can be quite liberating). Deposits enable the banks to borrow money which they can then lend to make a return on, and in return pass on a portion of the profits to the depositors. This type of banking actually enables people to make better use of the money available in the economy, because the money that isn’t used by the depositor can be borrowed by another individual who does have a use of it, and hence economic activity is furthered. We can deal with the moral implications of this type of set up later, but I think it is important to notice, that again, the prime justification here isn’t to promote an injustice, but in fact to facilitate the use of money and to encourage economic enterprise. (I do not hold the opinion that the purveyors of such a system have altruistic intentions, no I am pretty sure they are trying to make the most of the money they have–i.e. that greed is a main driver; however, this does not mean that the results are undesired).

    Fourth, the assertion that inflation unfairly impacts the poor person is also dubious. The main problem in inflation (from a financial perspective) is that it creates more risk in the loan, through increasing the uncertainty in the return that the borrower will receive for the loan. Since the nominal rate is fixed, inflation will eat into the real rate in the return for the investment. (nominal rate of return = real rate of return + inflation). As is easily validated, increases in the variance of inflation result in more risky investments, because the real rate of return will vary. Also, inflation is a means by which the government can obtain more goods through “taxing” those with stores of money. So the real burden on inflation doesn’t necessarily fall on the poor, it falls on those with stores of money, those with fixed return assets, and those whose incomes haven’t kept pace with inflation.

    Fifth, I think it is important to note that this system is only sustainable if it is maintainable, and hence can not be oppressive and continue to survive. So if the people whom banks loan money to cannot repay their loan, then the bank can not make make money they will not survive. They need to make loans that people are able to repay. They need to make loans to businesses that can repay those loans. They need viable investments to survive. That is why during the mortgage crises you didn’t see many reputable banks making bad loans. I think this is important to note, and that there needs to be a distinction between bad lending and good lending. A good lender will make loans that the borrower can repay, while a bad lender will push loans that can not be repaid. The problem was that many bad loans were made, and the people involved knew that; however, continued because they had short term incentives to do so. I think in dealing with usury and interest, it is important to identify how the relationships are either oppressive or not. (Admittedly, there isn’t much basis for this, and I would like our Islamic ethicists to think about this issue some more). Again, the system is based on the ability of the people to deliver on their commitments. This is quite different from other types of lending relationships where the individual becomes personally indebted to the lender if he isn’t able to deliver on his financial commitments (noted: borrowing does increase ones sense of indebtedness, but this is quite different from being physically enslaved due to debt).

    Holding these reservations to the depiction of the current economic system, I do think there is a significant place for Islam to provide an alternative. However to do this, we need to understand how Islam phrases and deals with economic problems. When dealing with resource allocation does it only concern itself with efficient allocation? Islam needs to address this question through it’s own framework. It needs to pose the questions in ways that are consistent with its ethos. It needs to find the answers through principles that reflect its values. Seeing the purpose of our being here is to be Allah’s viceregents on this earth, would mean that we are here to implement justice. So our concern isn’t efficiency, it’s justice.

  • As-salam alaykum

    Dear Aadil

    Thank you for your highly valued comment.

    Inflation can negatively impact any economic system, whether it is based on ‘paper money’ or gold. The ‘gold dinar’ alternative is not to be confused with the ‘gold standard’ famous in the West before the fall of Bretton Woods in 1971. The latter was only nominally, or fractionally, linked to gold, whilst the ‘gold dinar’ option – as articulated by its advocates – is one that is to be a one hundred percent fractional system. Ahamed Kameel Mydin Meera, in Theft of Nations, lists the advantages of the gold dinar over fiat money, and the fact remains: gold was, and is likely to be, much more stable as a basis of currency if implemented by a vast and powerful region (say, for example, in the Middle East and the Far East). Of course, that is not to say that a gold dinar system would be without challenges, including those of an inflationary nature (especially if competing systems sought to destroy it). Nevertheless, its historical stability – not to forget its more just consequences – presents a far more successful record than that of fiat money. [Any arguments on how fiat money has facilitated ‘industrialisation’ and ‘progress’ must, from an Islamic perspective, include an understanding of the essentiality of usury in helping this cause.]

    The use of ‘gold’ to denote a contrasting economic model is not to deny the use of other metals in the system as a means of financial exchange – it is simply to confirm the use of gold as the main basis. Indeed, the Muslims historically used, simultaneously, the gold dinar, silver dirham and copper fulus (a minor means of exchange for cheap goods); and modern advocates of the gold dinar do not oppose such traditional occurrences becoming norms again.

    The gold dinar theory developed by Meera and others at the IIUM, it should be remembered, has been forged in light of realpolitik, and is not some fanciful construction of idealistic dreaming. In the aftermath of the ‘East Asia Crisis’ in 1997 – where speculators (another interesting creature of modern capitalism’s swamp) attacked the various currencies of the region – the then Prime Minister of Malaysia, Mahathir bin Mohamed, proposed the use of the gold dinar ‘for trade between nations’ (but not for ‘everyday use’). Mahatir’s vision was to attain greater stability for his country’s finances, as well as encouraging and strengthening trade between Muslim countries. In the gold dinar – for such purposes and goals – he saw a possible answer. The proposals and arguments are lengthy, so I will not detail them here.

    Whatever one says about Mahatir’s politics, it is to be acknowledged that he was a brave economist. Stiglitz, in Globalization and its Discontents, praises Mahatir as the only leader of the region during the crisis who ignored IMF dictates. Thus leading to Malaysia’s ‘downturn’ being ‘shorter and shallower than of any of the other countries.’ I’ll spare the details here.

    Shaykh Taqi’s comments on the essence of money should not be read in a shallow fashion, for he would not – I’m sure – deny what you are saying about the fractional reserve system being based on ‘something’. Indeed, I acknowledged as much in my article. However, one must understand that ‘paper money’ – as mentioned by Mahatir in a speech in 2002 (included in Meera’s Theft of Nations) – has no ‘intrinsic value’, which is not the case with gold. Hence one finds such disturbing instability between various currencies and the differences in exchange rates. Moreover, the use of the word ‘nothing’ is fair when one is dealing with percentages of less than five percent, as is common in speech, in a figurative – not literal – fashion. All of which supports Shaykh Taqi in the instance quoted.

    There is no exaggeration about the impact of economic recession having a greater impact on poorer sections of society (such as the middle classes). In contrast to the people at the top of the banking tree (or their relatively well-paid employees), one must understand loss in this context in terms of overall personal ratio of assets to losses, and not overall sums. To make the point, I’ll give two pointers (for the sake of brevity). Firstly, see the societal impact of the post-Communist recession in Russia, and compare the lot of the oligarchs and super-rich with that of the middles classes and the rest of society. Secondly, in England, if a person has equity worth one billion pounds and he loses just over half in a banking disaster – is his lot worse than an accountant whose assets of £500,000 (including savings of £100,000) are dramatically compromised when he loses his job due to such a crisis and still has to pay the mortgage on his £400,000 house, which he has only partly paid-off? In terms of the quality of life resulting from people affected in the same crisis as the latter example, there is no substantial comparison between the former person and the latter. Never mind what we would find if we went lower down the ‘petty bourgeois’ tree.

    Naturally, Islamic economists put a limit on the ‘efficiency’ drive, or we could say the ‘monopoly-and-greed’ drive. This is especially so when large numbers of human beings are literally crushed for the luxuries of the narrow minority. Nevertheless, a great deal of stress is still laid upon efficiency and productivity by such Islamic scholars.

    Any sensitivity about discussing contemporary poverty or major indebtedness (whether of an individual or a country) in connection to formal enslavement should, perhaps, pay heed to a psychological profile of people weighed under by both situations, and then list the major differences in terms of mental well-being and quality of life between the two sets. In this instance, if one wanted, one could invoke Malcolm X’s discussion of ‘house slaves’ and ‘field slaves’ to help understand the connection.

    Thank you again for your well appreciated comments.

    In peace,

    Andrew Booso

  • Hey bro,

    “…‘paper money’…has no ‘intrinsic value’, which is not the case with gold.”

    This is not true- as Marx writes in ‘Capital’ vol. I, ‘value’ is not intrinsic to any material substance- it is not a chemical property, it is not at all universal or essential, inseparable from that thing itself. I think what you are trying to say is that the ‘intrinsic’ value of gold has a broader basis of acceptance among human societies (and even then, not a complete one)- for various reasons (Locke), mainly durability, that it can last relatively untarnished etc.

    Are you still at SOAS? I go to Senate House pretty often, for books.


  • When people like Mahatir were talking of the ‘intrinsic’ value of gold – as opposed to paper money – they meant the following (in Mahatir’s own words): ‘…paper currency has no intrinsic value. You can print any figure you like on currency notes but in exchange rate terms the figure means nothing…The purchasing power within the country is different from the purchasing power outside the country. Sometimes countries have as many as four exchange rates – one official, one for the domestic economy, one for export and one for import.

    ‘Clearly this situation in terms of international finance is chaotic and anarchic. But since the system benefits the powerful countries they are unwilling to correct it.

    ‘If we want to avoid being short-changed, we must have a currency that has intrinsic value. Gold does fluctuate in price but the fluctuation is minimal. It is not possible to devalue gold by one hundred per cent or one thousand per cent. Nor is it possible to revalue gold by the same percentage. The fluctuation in the value of gold can only be by a few percentages, up or down…

    ‘Gold is a precious metal. There has never been a time when there was no demand for gold. It is also not so plentiful that its price will fall the way paper currency or even other precious metals can fall. Yet it is not so limited in quantity that anyone or any trader can corner and manipulate the price.

    ‘In different countries the price of gold will differ in terms of the currency of that country. That is a function of the currency of the country. The value of one gold dinar is one gold dinar no matter what the exchange rate of a currency is against the gold dinar. If the value of goods or services is expressed in gold dinar, the value remains the same no matter which country is involved in the trade.’

    Such analysis, as above, justifies talking of gold’s ‘intrinsic’ value, and contrasting it with paper money in this respect.

    I haven’t been able to locate your claim that Marx denied that gold has an ‘intrinsic’ value as defined by the proponents of the gold dinar. I did find the Marxian Ernest Mandel discussing Marx’s theory of gold, in which he simply stated that Marx believed money to be the a ‘straightforward application of the labour theory of value’. For Mandel, ‘gold has an intrinsic value’ (see If you have references and quotations from Marx, then they will be of interest.

    I never studied at SOAS – I went to LSE.


    Andrew Booso

  • Dear Br. Andrew,

    I agree with you that fiat currency is much more volatile than gold. However, we must realize that gold, as any other commodity, is subject to the laws of supply and demand. Historically, we have seen both the devaluation and the sudden increase in the value of gold. Most recently is the sharp rise in the value of gold in the late 1970s, where gold was around $1000 oz. (which in our current times would be $1500, and still less than the price today).

    Additionally, because the growth of the productions of economies rise much faster than the discovery of gold, you would have serious problems in increasing the money supply to correspond with growth. Now if you say that we can add other metals (as we discussed earlier) you now introduce other means that threaten the value of the currency. Again, history is a great lesson, because in times when we had bi-metallic/or multi-metallic bases for currencies you still had sharp devaluations when the ratio of the metals that based the currencies were changed. For these reasons, metallic/gold bases don’t ultimately ensure the value of currencies.

    Furthermore, the imbalance of economic power will not be resolved through currency reform alone. I think a more careful review of what happened during the asian crisis is needed (i.e. i’d need to refer back to the various papers that outlined what happened at the time.) Much of the value we see is based on percieved value, and stability, and when those get a shock they can cause a panic which would ruin any system no matter how strongly founded.

    In conclusion, I think we need to rethink what Islamic economics means. Which means that we need Islamic economists (which is a burgeoning field, but would be outside the “traditional” realm of scholarship). Many people phrase it as getting rid of interest, or a return to a gold standard (i’ve heard about this before, so please don’t think i’m picking on you). However, I haven’t really heard a real discussion of what Islamic enomics means at it’s essence. I’ve seen some articles that use economic frameworks, and make slight editions to “islamicize” it; however, this isn’t a real grounding of the foundations in islamic principles. I think that it starts with identifying the goal of the economic system, which in my opinion would be a “just” distribution of scarce resources. This from the outset sets it apart from the way current economics is thought of, because instead of an efficiency constraint, there is this justice component which touches on a whole list of issues that current frameworks don’t address. I think the real challenge is to develop islamic frameworks, that are based on and developed through islamic values.

  • Dear Aadil,

    As you mentioned in your first post, economic systems are not ‘perfect’ constructs – despite the fantasies of the Chicago School free-marketers or classic Marxists. The dinar proposal is simply that it is better. If history is used as the criteria for judging between a pure dinar system (i.e. pre-modern banking) and a pure fiat money system (i.e. post-Bretton Woods), then history favours the dinar.

    When the dinarites discuss their proposals, one has to understand the grand picture, which is the price of gold in terms of gold, i.e. a ratio of one-to-one – as I quoted from Mahatir above. Therefore the historical lesson of the late 1970’s, for instance – where the price of gold reached exponential levels in relation to its price in US dollars – is not wholly relevant. Of course, the price of gold in US dollars, for example, is very relevant in the intermediate stage of transition from a fiat money economy to a dinar system, i.e. when a nation sets out to purchase gold for the transition.

    As noted by me earlier, this transitional stage is a fragile one, where a competing system could adversely affect a group of countries attaining transition: by raising the price of gold to impossible levels – through ‘supply and demand’, as you said, or effective monopoly. However, Mahatir did discuss getting around this particular problem, when he stated how countries who do not have substantial levels of gold – but want it – could trade ‘raw resources to be paid in gold dinars’, thus ‘they can be helped to build up the reserves of gold dinars’. Mahatir acknowledged that there would be ‘problems’, and therefore suggested the initiation of the project between ‘just a pair of countries’ so as ‘to minimise problems and demonstrate whether it works or not’. He added: ‘We will be able to identify the weaknesses and the faults and correct them’. This is an exemplarily example of Mahatir’s usual economic pragmatism that served Malaysia so well.

    [I noted earlier that Mahatir wanted the dinar for ‘trade between nations’ only. Meera, however, is proposing a gradual trajectory towards a complete dinar system.]

    With regards to your desire to see more on the ‘essence’ of Islamic economics, have you read the numerous works published out of Karachi connected to the ‘Uthmani family? The following is a suggested reading list that might be of interest – although they are somewhat basic:

    An Introduction to Islamic Finance, Muhammad Taqi Usmani

    Meezan Bank’s Guide to Islamic Banking, Muhammad Imran Ashraf Usmani

    Distribution of Wealth in Islam, Muhammad Shafi’

    Repelling Poverty in Islam [two books in one], Muhammad Shafi’ and Yusuf Qaradawi

    Of course, these introductory works do not provide all of the answers – not for now, and much less so for the future. If one views the historical development of economic thought in Islam, then one sees how challenging a field it is. Thus the method of ijtihad must be kept alive in this area. The necessity of ijtihad as a collective obligation in every age has been emphasised by Muhammad al-Tahir ibn Ashur in his Treatise on Maqasid al-Shari’ah; and the author refers to the fact that economic details are subject to this necessity.

    Islamic ‘answers’ are often quite simple, but it is often outright rejection of the Sacred Law that propels many a critique – this comment is not, in any way, aimed at you, Aadil. So it is not that an Islamic ‘vision’ is impractical, but rather that people simply don’t want to follow the vision.

    Your brother, with kind regards and peace,

    Andrew Booso

  • Dear Aadil,

    On the subject of the ‘essence’ of Islamic economics, I forgot to mention that there are some publications of the Islamic Foundation (Leicester) that are worth a read (and more advanced, in many ways, than the others that I suggested), such as:

    Islam and the Economic Challenge, M. Umer Chapra

    The Future of Economics: An Islamic Perspective, M. Umer Chapra

    Role of the State in the Economy: An Islamic Perspective, M. Nejatullah Siddiqi

    Shaykh Taqi ‘Uthmani, in The Historic Judgment On Interest: Delivered in the Supreme Court of Pakistan, named Umer Chapra as one of a number of ‘outstanding economists’.

    Even if one can disagree with certain things mentioned by economists like Chapra, their level of discourse is perhaps the most advanced at present; therefore they are a starting point, in some ways, for discussion. [It is to be noted that Chapra is not one for the gold dinar answer to the matter of progressing Islamic economics in the current age – see his Towards a Just Monetary System (Islamic Foundation).]

    Moreover, Chapra – in Islam and the Economic Challenge – does discuss in sufficient detail the notion of ‘justice’ (‘adalah), which he places alongside ‘tawhid’ (unity) and ‘khilafah’ (vicegerency) as the ‘three fundamental principles’ of Islam.


    Andrew Booso

  • Interesting thread. I know its been 2 years since the last comment on this thread, I would like to add some thoughts:

    1. I agree with Aadil about that Islamic economists need to rethink and come up with solutions that are more grounded on Islamic principles. The notion of user fees etc in prominent Islamic banking systems could be classified as riba, even-though it is not compounding interests.

    2. Fiat money has nothing to do with free-market capitalism. Infact, western economists who support gold standard and mostly criticize modern fractional reserve banking are hardline-freemarket economists, as visible in the Austrian School. One prominent politician being Senator Ron Paul of US. Fiat money is a creation of governments, not free market. There is no way a value-less paper money could arise in a free economy, or even if it does will not survive the onslaught by asset backed currency or gold based currency. The reason there is fiat money is because of legal tender laws.

    3. Chicago-school economists (such as Milton Friedman) favour gold standard, but they agree that it might not be practical from where we are now. Given that fiat money and central banks exists, he and Chicago-school advocates for continuous fixed increase of money supply at around 3% to maintain price stability. He is very much against sudden changes in money supply (both coins/notes and bank deposits), done by a mechanical rule, rather than subjecting to whims of politicians and powerful corporate lobbyists. Coincidentally, 3% is also the rate at which world gold supply increases generally.

    4. People like Stiglitz oversaw the bad policies of World Bank etc. He was once a Chief Economist or something like that at WB. Ironically, he advocates replacing dollar with even another fiat currency as a global currency. Obviously, who ever has control over that currency will be extremely powerful in global politics, yet this is precisely what these do-good economists propose.

  • Locally, we initiated a drive to encourage and help people take their money out of corporate banks, and use locally operating credit unions.

    Another thing we try to do is make the issues of the existing capitalist order, its burden on the working class, its social-darwinist view of the poor, and its corrupting influence on public policy, as an on-going education among Muslims and non-Muslims. Make sure everyone knows, in a concise and concrete manner, what the real problems are and how they are being affected. This plants the seeds of change, insha Allah.

    Also, as many in America try to boycott corporate stores and “shop local” with Mom-and-Pop, it’s important for Muslims to make sure that Muslim business are supported with our patronage. We also have to have programs to help Muslims establish their lives in spiritual, intellectual, and material strength, so they can become benefactors of Islam and the community.

    In our education and communications working groups, we make sure these issues are constantly reminded about.
    Wa at-tawfeeq min Allah.

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