Riba Resolved (Part 01)

Introduction

One of the main demands of the religious scholars [Ulema] and Muslims is the elimination of Riba in the Islamic Republic of Pakistan. According to the Quran, Riba is prohibited, which has been defined by scholars  as: “all forms of interest are Riba and hence prohibited”. The Islamic finance contains many other prohibitions as well, such as on consumption of alcohol, gambling, uncertainty, etc. The word “Riba” literally means “excess or addition”, and has been translated as “interest”, “usury”, “excess”, “increase” or “addition”. The movement started with activists and scholars such as Abul A’la Maududi, Muhammad Hamidullah, Anwar Qureshi,Naeem Siddiqui in the late 1940 and early 1950s.They believed commercial banks were a “necessary evil,” and proposed a banking system based on the concept of Mudarabah, where shared profit on investment would replace interest, thus the concept of Islamic banking and finance emerged.^[1] In 2019, the total assets of global Islamic banking amounted to about 1.99 trillion U.S. dollars.^[2] The total value of global Islamic banking assets was projected to continue to increase.

Surprisingly even in the present Interest based economic system, [considered as ‘Riba (usury) based’ by most Muslim scholars] there are 26 countries (Kafirs) with Zero Interest rates^[3] [or Riba free], and 29 with less than 1% interest rate. In Pakistan interest rate is near 7% while inflation is around 10% in 2021, which keeps fluctuating. The interest rates and inflation, both affect the creditor and debtor, which will be briefly analysed in the light of the Quran. “The Riba Resolved” is “A Solution” to the complex issue, in prevalent environments in Pakistan, not “The Solution”. The proposed Riba free  solution can also be applied universally by the Muslims privately if not enforced through the law of land in Muslim or non-Muslim countries.

The Riba issue has been resolved on the basis of guidance from the Quran^[4],the final criterion to judge right and wrong^[5], which has clarification of everything^[6], guidance and mercy and glad tidings for the Muslims. Quran^[7] is the Only, Last, Complete, Protected Divine Book of Guidance without any doubt^[8], all other books^[9], are human efforts, none can claim to be complete, free from error^[10] and doubt, however may be consulted as they contain wisdom & explanations but under  the shadow of Quran. The perverse hearted, who do not believe in Supremacy of Quran, and blindly prefer the opinion of their religious lords,^[11] will not benefit but, it will add further to their perversity.^[12] They may continue to remain hostage in a perpetual state of delusive sin and guilt.

The Religious Lords

“They have set up their religious leaders and scholars as lords, instead of GOD. Others deified the Messiah, son of Mary. They were all commanded to worship only one god. There is no god except He. Be He glorified, high above having any partners”. [Quran;9:31]

“They have set up their religious leaders and scholars as lords, instead of GOD”, the Holy Prophet himself explained its true significance. According to a Tradition, when Hadrat `Adi bin Hatim, who was formerly a Christian, came to the Holy Prophet with the intention of understanding Islam, he asked several questions in order to remove his doubts. One of these was: “This verse accuses us of taking our scholars and monks as our lords. What is its real meaning, sir? For we do not take them as our fords.” As a reply to this, the Holy Prophet put him a counter-question: “Is it not a fact that you accept as unlawful what they declare to be unlawful, and lawful what they declare to be lawful?” ‘Adi confessed, “Yes, sir, it is so.” The Holy Prophet replied, “This amounts to making them your lords.” Incidentally, this Tradition shows that, those who themselves set limits to the lawful and the unlawful without the authority of Allah’s Book, assume for themselves the rank of Godhead, and those who acknowledge their right of making laws take them as their Lords [Shirk, Polytheism]. 

It should be noted that they have been charged with (1) attributing sons to Allah, and (2)giving the right of making laws to others than Allah. These are to prove that their claim, that they believed in Allah, is false, even though they should believe in His existence. But such a wrong conception of Allah makes their belief in Allah meaningless. Most Muslim Religious Lords, ignore following verses:

you are entitled to your principal; do no wrong, and no wrong will be done to you. (Quran;2:279)

No one can change His words, and you shall not find any other source beside it. (Quran;18:27)

Nor shall you obey one whose heart we rendered oblivious to our message; one who pursues his own desires, and whose priorities are confused.(Quran;18:28)

Scope

1. The study is limited in scope, for the common people, focused on finding the simplest, easiest, practicable Riba free solution without much changes in the prevalent monetary system on the basis of guidance from the Quran.
2. Changing the monetary system^[13] , monetary policy^[14] is a big decision with larger implications, which can only be taken by a government after thorough deliberations and input from religious and monetary experts [not done so far in over seven decades].
3. The government, experts, intellectuals and concerned Muslims should continue exploration and debate to “agree” on some suitable, “workable” options for Riba free Pakistan, which will be a great service even if done in this century. However till they find a solution, “Riba Resolved” may be implemented, with Islamic Finance and Banking after working out the details by the experts.

Common Terminologies

Interest: It refers to the fee a creditor charges when he allows the debtor’s business to borrow money. Most creditors calculate interest based on a percentage of the amount debtor owes on the loan.

Usury:^[15] refers to interest that is higher than the maximum rate that the state allows lenders to charge.

According to another view; “Interest” is a general term that can refer to any percentage fee charged by a lender for his services, regardless of whether it is Usurious. Usury, on the other hand, is a specific type of interest that isn’t fair to the borrower. While the law permits lenders to charge interest, lenders can’t require borrowers to pay interest at usurious rates. In fact, there may be legal repercussions for lenders who commit Usury.

Riba:^[16] is a concept in Islamic banking that refers to charged interest. It has also been referred to as Usury, or the charging of unreasonably high-interest rates. There is also another form of riba, according to most Islamic jurists, which refers to the simultaneous exchange of goods of unequal quantities or qualities.^[17]

According to traditional Muslim scholars, any interest or profit on money lending is Riba, forbidden in Islam, they don’t distinguish between interest and usury. However modern scholars don’t agree and consider that under the present financial system, normal interest is fair, not Riba, but consider excessive interest as Riba (usury), which is forbidden.

Quran Forbids Riba & Injustice

Quran condemns Riba in several different verses (3:130, 4:161, 30:39 and  Quran;2:275-2:280):

1. O you who have believed, do not consume Riba (Usury), doubled and multiplied, but fear Allah that you may be successful. (Quran;3:130)
2. And [for] their taking of Riba (usury) while they had been forbidden from it, and their consuming of the people’s wealth unjustly. And we have prepared for the disbelievers among them a painful punishment. (Quran 4:161)
3. And whatever you give for Riba to increase within the wealth of people will not increase with Allah. But what you give in zakah, desiring the countenance of Allah – those are the multipliers. Quran (40:39)
4. Those who consume Riba cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like Riba.” But Allah has permitted trade and has forbidden Riba. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in Riba or Usury] – those are the companions of the Fire; they will abide eternally therein. (275) Allah destroys Riba and gives increase for charities. And Allah does not like every sinning disbeliever. (276) Indeed, those who believe and do righteous deeds and establish prayer and give zakah will have their reward with their Lord, and there will be no fear concerning them, nor will they grieve. (Quran;2:275-2:280)
5. If, however, you repent even now, you are entitled to your principal; do no wrong, and no wrong will be done to you. (Quran;2:279), No one can change  His words, and you shall not find any other source beside it.(Quran;18:27)^[18] Nor shall you obey one whose heart we rendered oblivious to our message; one who pursues his own desires, and whose priorities are confused.(Quran;18:28)^[19]
6. Therefore, establish Balance in the society in absolute justice. And never belittle the Scale of Justice in the community and in all your transactions with your own ‘Self’ and with others (Quran;55:9)

Very Important: It’s shocking that important verses of the Quran are totally ignored by almost all traditional scholars, so that they can keep 1.5 Billion Muslims hostage to their wishes and exploit their faithfulness by keeping them in a perpetual  state of delusive sin. These verses are:

1. you are entitled to your principal; do no wrong, and no wrong will be done to you. (Quran;2:279), No one can change  His words, and you shall not find any other source beside it.(Quran;18:27) Nor shall you obey one whose heart we rendered oblivious to our message; one who pursues his own desires, and whose priorities are confused.(Quran;18:28)
2. O my people! Give full measure and weight in all^[20] fairness. Do not defraud people of their goods and do not spread mischief in the land.” (Qur’an;11:85).
3. “You shall not take each others’ money illicitly, nor shall you bribe the officials to deprive others of some of their rights illicitly, while you know.” [Quran 2:188]^[21]

Ignoring Verses of Quran, pick & choose are like Deniers and Rejecters:

1. Woe unto every fabricating impostor, the one who hears GOD’s revelations but  ignores arrogantly, grievous punishment awaits (Quran;45:7-8)
2. Who are more evil than those who are reminded of their Lord’s verses, then disregard them, without realizing what they are doing. Consequently, we place shields on their hearts to prevent them from understanding it (the Quran), and deafness in their ears. Thus, no matter what you do to guide them, they can never ever be guided.(Quran; 18:57)
3. Those who deny the revelations, will suffer a dreadful doom. (Quran;45:11)
4. Who disbelieved in Quran, are doomed (Quran;90:19)
5. And none but the Zalimun (polytheists, wrongdoers) deny Ayat (Quran;29:49)
6. And be not like those who said, We hear, and they did not obey (Quran;8:21)
7. Ponder over its verses, and that those endowed with understanding may be mindful.(Quran;38:29)
8. Those concealing revelations of Quran are cursed by Allah (Quran;2:159)
9. O you who believe, if a wicked person brings any news to you, you shall first investigate, lest you commit injustice towards some people, out of ignorance, then become sorry and remorseful for what you have done. (Quran;49:6)
10. The example of those who were entrusted with Torah, and did not apply it in their daily lives, is that of a donkey who is carrying books and does not know what is in those books. Bad is the example of those who deny the revelations of Allah. Allah does not guide the wrongdoers (Quran;62:5)
11. “ The worst of creations in the Sight of Allah are those deaf, those dumb who do not use their intellect [Quran 8:22, also 2:18), 16:76]^[22]

Quran: The Ultimate Source of Guidance:

Hazrat Ali bin Abi Talib (رضی اللہ) said, that he heard Allah’s Messenger (PBUH) say that: And, if anyone seeks guidance in something other than it (Quran), then Allah will leave him astray. It (Quran)  is Allah’s (firm) strong rope. It is the wise reminder. It is the straight path. It is whereby desires cannot divert and tongues cannot be confused. (Extract from Jame’ Tirmidhi, Hadith # 2906)

The Holy Prophet (PBUH) said in his last Hajj sermon: I have left among you the Book of Allah, and if you hold fast to it, you would never go astray. (Sahih Muslim, Hadith # 2950)

Summary- Quran on Riba & Justice

1. Do not consume Riba, doubled and multiplied (Quran; 3:130)
2. Consuming of the people’s wealth unjustly is forbidden. (4:161)
3. Riba to increase within the wealth (40:39)
4. Riba is Satanic, forbidden & great sin (Quran; 2:275-2:280)
5. Injustice forbidden”(Qur’an; 2:279)
6. Full measure and weight in a^[23] fairness. Do not defraud.”(Qur’an;11:85).
7. Don’t take money illicitly. [Quran 2:188]^[24]

Aim

The Quran forbids Riba. In this paper without going into the controversial debate, effort has been be made to focus on the prevalent monetary, financial system with a view to:

1. Highlight the interrelationship between “Currency notes, Inflation, Interest rates” and identify Riba in this system.
2. Identify injustice if any, to the creditor or debtor in the monetary/ banking system.
3. Through analysis, suggest measures to eradicate them in conformity with the teachings of Quran without causing any harm or injustice to anyone. [Riba free Pakistan]

“ The worst of creations in the Sight of Allah are those deaf, those dumb who do not use their intellect [Quran 8:22, also 2:18), 16:76]^[25]

“Allah gives you another example of two men. One of them is he whose faculties of speech and mind are totally disabled. He cannot do anything of his own accord and he is totally dependent on his care-provider, unable to bring forth any good in any way. Can such a one be considered equal of the man who is fit, enjoins justice and himself walks the Straight Path? (Allah expects you to use your faculties to the best of your abilities)”[Quran; 16:76]^[26]

This paper is in four parts as follows:

PART-1

1. The Monetary System
   • Commodity money system
   • Commodity-backed money
   • Fiat Money
2. Pakistan: Monetary policy and growth
3. The Gold
   • Classical gold standard
   • Dollarisation & Gold
   • Gold Remains as Currency in Current System
   • The U.S. dollar’s relationship to Gold
   • The fixed exchange rate is a system
   • Gold as Currency & Risks
   • When and Why Do Gold Prices Plummet?
   • Must Money Be Limited to Only Gold and Silver?
   • Gold & Silver not the only money in islamic Law
4. Fiat Money
   • The influence of  Dollar System on Pakistan
   • References:
   • The Author:

PART-2

• Currency Printing
• Basis of Currency Printing
• Inflation Control
  • Hyperinflation
• The Shariat Appellate Bench of Pakistan 1999 Judgement & Hyperinflation
• We cannot print unlimited money.
• Printing a large number of notes increases inflation.
• Printing in Financial Trouble
• Decrease in Worth & Purchasing Power
• Indexation
  • Indexation & Shariat Appellate Bench of Pakistan 1999 Judgement
• What Is Real Saving /Capital
• Special Considerations for Investing to offset Inflation Effects
• Why Interest rates change?
  • The Fisher Equation
  • Pakistan-Excessive  Currency Printing
  • Pakistan – GDP Factor

PART-3

1. Pakistan: Impact of Currency Printing and Inflation
2. Case Study-1 National Savings Schemes [NSS]
   • Net Increase in Inflation
3. Case Study-2 House Building Finance Corporation [HBFC] Loans
4. The Essence
   • Quran on Riba & Justice
5. Why are Heavy Loans Written Off?
   • Intellect & Worst of Creations
6. 53 Kafir (infidel) Countries: Riba Free
   • Countries with Zero Interest Rates:
   • Negative interest rate

PART-4

• Riba Free Pakistan
  • Protecting the Value of Money
  • Pak Dinar
  • Recommendations
• Conclusion
  • The Crux
  • References / Related / Links
  • Author

PART-1

THE MONETARY SYSTEM 

The common reader may not be aware of the system of money management at government level, through the monetary system. The monetary system is a system by which a government provides money in a country’s economy. Modern monetary systems usually consist of the national treasury, the mint, the central banks and commercial banks.

o Commodity Money System

A commodity money system is a monetary system in which a commodity such as gold or seashells is made the unit of value and physically used as money. The money retains its value because of its physical properties. In some cases, a government may stamp a metal coin with a face, value or mark that indicates its weight or asserts its purity, but the value remains the same even if the coin is melted down.

o Commodity-Backed Money

One step away from commodity money is “commodity-backed money”, also known as “representative money”. Many currencies have consisted of bank issued notes which have no inherent physical value, but which may be exchanged for a precious metal, such as gold. (This is known as the gold standard.) The silver standard was widespread after the fall of the Byzantine Empire, and lasted until 1935, when it was abandoned by China and Hong Kong.

Another alternative which was tried in the twentieth Century was bimetallism, also called the “double standard”, under which both gold and silver were legal tender.

o Fiat Money

The alternative to a commodity money system is fiat money which is defined by a central bank and government law as legal tender even if it has no intrinsic value. Originally fiat money was paper currency or base metal coinage, but in modern economies it mainly exists as data such as bank balances and records of credit or debit card purchases, and the fraction that exists as notes and coins is relatively small. Money is mostly created by banks when they loan to customers. Put simply, banks lending currency to customers creates more deposits and deficit spending.

1. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
2. Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system.
3. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system.
4. And the households and companies who receive the money created by new lending may take actions that affect the stock of money they could quickly ‘destroy’ the money or currency by using it to repay their existing debt, for instance.
5. Central banks control the creation of money by commercial banks, by setting interest rates on reserves. This limits the amount of money the commercial banks are willing to lend, and thus create, as it affects the profitability of lending in a competitive market. This is the opposite of what many people believe about the creation of fiat money. The most common misconception was that central banks print all the money, this is not reflective of what actually happens.

Today’s global monetary system is essentially a fiat system because people can use paper bills or bank balances to buy goods.^[27]

Pakistan: Monetary policy and growth

Monetary policy is a key element of macroeconomic management and its effectiveness is an important issue in economic policy analysis. According to Dr Muhammad Javid, senior research economist at the Pakistan Institute of Development Economics (PIDE), in the context of Pakistan, monetary policy management is one of the primary roles of the State Bank of Pakistan (SBP). In line with SBP Act, the monetary policy has to be supportive of the dual objective of promoting economic growth and price stability. The SBP conducts monetary policy by using money supply (M2) as an intermediate target.

M2 is a calculation of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds, and other time deposits. These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits.^[28]

The SBP uses short-term interest rate as an instrument of monetary policy to control inflation. It pursues a monetary target regime with broad money supply (M2) as a nominal anchor to achieve the objective of price stability.

The SBP also sets a target of M2 growth in line with the government’s targets of inflation and growth. This framework is based on two key assumptions first, there is a strong and reliable relationship between the goal variable (inflation or real GDP) and M2; and second, the SBP can control growth in M2.

In its meeting on November 22, 2019, the Monetary Policy Committee (MPC) of the State Bank decided to leave the policy rate unchanged at 13.25 percent for the next two months because of obstinately high inflation caused by increases in food prices.

According to the SBP projection, average inflation for FY20 remained broadly unchanged at 11-12 percent. The monetary policy mainly relies on the interest rate channel. Therefore, the critical question is the effectiveness of the interest rate channel as a transmission mechanism. Judging the effectiveness of the monetary policy is difficult because it is not always easy to isolate all the other happenings in the economy, such as fiscal policy, external shocks, market idiosyncrasies, in order to come up with a causal relationship between a monetary policy instrument and an objective.

In developed countries, which have more sophisticated financial systems, there is a general consensus on the use of indirect instruments, particularly a short-term interest rate to effect the monetary policy. Indeed, widespread empirical evidence has shown that in those countries, the short-term interest rate is an effective tool for controlling inflation and influencing output growth.

In developing economies, the transmission of the monetary policy operates differently because of weak institutional frameworks and shallow financial markets. The conventional view is that monetary policy is ineffective in developing countries, largely because of weak institutions, underdeveloped financial markets, and uncompetitive banking systems.

The tight monetary policy stance has become under fire from the business community and many interested observers. It is argued that the monetary policy has failed to curb inflation on the one side and has stymied economic growth on the other. While there is a certain element of truth in these arguments, policy measures taken to subdue the twin deficits had a profound impact on economic activity during the FY19 (SBP). Real GDP growth slowed to 3.29 percent in FY19 as compared to the target of 5.4 percent. Agriculture and industrial output slowed to 0.85 and 1.4 percent as compared to targets of 3.7 and 5.8 respectively.

The fallout for the industrial sector was quite severe and similarly the agriculture sector fared poorly as a whole. There are clear signs that in the foreseeable future the economy will witness low economic growth and high double digit inflation – classical characteristics of an economy in stagflation. The supply shock may have partially contributed to the stagflation among other factors. The SBP has acknowledged that a high discount rate has a negative impact on credit to the private sector which further worsens the supply bottleneck.

Higher interest rate increases the cost of borrowing for the private sector which discourages the demand for private sector credit. When the demand for private sector credit decreases, the level of private investment falls which adversely affects economic growth and employment. Since a major source of stagflation appears to be supply shocks, part of the solution may lie in boosting supply by removing the supply side bottleneck.

The other important concern in this regard is government borrowing from the SBP at a high interest rate. The question is whether the increase in interest rate acts as a deterrent to increased government borrowing from the SBP. The answer to that is: no. During the FY19, government net borrowing from the SBP increased from Rs3691.6 billion in July 2018 to Rs6679 billion in June 2019 which is 81 percent. Borrowing from the SBP injects liquidity in the system through increased currency in circulation. The impact, therefore, of a tight monetary policy stance is diluted with this automatic creation of money which increases the money supply. The high interest rate would cause high interest payments on government debt which would cause an even higher fiscal deficit.

The SBP acknowledged in its monetary policy statement that food prices are behind inflation outturns. According to the ‘Inflation Monitor’ September 2019 issue, the weighted contribution of food and energy (housing, water, electricity, gas & other fuel) group in overall inflation is 72.7 percent. These are essential items and demand for these items may not be curtailed due to high interest rate.

In the current situation, it seems that high interest rate is neither slowing down inflation nor appears to act as a deterrent to government borrowing from the SBP but only adversely affecting the private sector. In this scenario, the possible reason for high interest rate might be the stabilization of the exchange rate. If this is the case, then it is important to make a clear distinction between exchange rate management and monetary policy management. It is now well established that it is not possible to simultaneously achieve exchange rate stability, monetary independence and free movement of capital.

Dr Muhammad Javid concluded that the economy continues to be devilled by supply shocks while macroeconomic stability remains elusive. The current monetary policy stance has not been helpful in either ensuring macroeconomic stability or reviving growth in the economy. Indeed, it only further squeezes the private sector and discourages private investment which is already facing an extremely difficult situation. In the current scenario, the appropriate approach is prudent monetary management to spark private sector revival. [The News 29 December 2019]^[29]

The Gold

The money matters cannot be discussed without talking about Gold. Throughout human history, gold has been used as a money-form in one way or another. In the early Islamic era gold and silver coins were used as currency. Before the arrival of Islam, Arab, Persian and Roman gold and silver coins were used in Mecca and Prophet Muhammad (pbuh) used these coins as well. Caliph Umar was the first ruler that issued coins in Islamic history. In 640 A.D. 18 years after Hegira.^[30] Thus in the Islamic sharia calculations of eligibility to pay Zakah and other calculations are determined on the basis of Gold and Silver.

The first dated coins that can be assigned to the Muslims are copies of silver Dirhams of the Sassanian ruler Yazdegerd III, struck during the Caliphate of Uthman. The gold Dinar^[31] is an Islamic medieval gold coin first issued in AH 77 (696–697 CE) by Caliph Abd al-Malik ibn Marwan. The weight of the dinar is 1 mithqal (4.25 grams).

Banknotes^[32] called “jiaozi” have been used in China since the 10th century. These banknotes were rectangular pieces of cardboard featuring the emperor’s seal. Although the fifth Mongol Ilkhanate ruler Gaykhatu printed banknotes in 1295 and ordered his subjects to use them instead of silver and gold coins, they did not use these banknotes. İzzeddin Muzaffer, Sultan of Azerbaijan, attempted to print banknotes, but the public did not accept it and even killed the sultan in a rebellion. Gold and silver are regarded as currency until doomsday in Islamic law. Although it is lawful to use copper and nickel mangırs and banknotes, gold and silver backs the money. In the Ottoman Empire, the first banknote, called “qaima,” was circulated in 1850.

From gold coins to paper notes backed by the gold standard, only recently has money moved to a fiat system that is not backed by a physical commodity. Since then, inflation and a declining dollar has meant rising gold prices. By purchasing gold, people can also shelter themselves from times of global economic uncertainty.

Classical gold standard

During the classical gold standard (1817-1914) currencies were pegged to gold, and the elasticity of the currency was determined through it. A gold standard impels governments to be responsible: Investors that hold bonds can redeem gold if politicians run unsustainable deficits^[33] writes Zain Raza.

At the end of the gold standard, there was an increase in financial instability and inflation. During multiple stock market crashes in the first decade of the 21st century, the price of gold began to rise again. The idea of returning to the gold standard became more popular at that time. Admittedly, there were inherent problems with the gold standards implemented in the 19th and 20th centuries.

Dollarisation & Gold

With the European and Japanese manufacturing base all but shattered after World War II, the United States emerged as an export leader accumulating 2/3 of the world’s gold. In 1944, 44 countries established the Bretton Woods System in which it was agreed to peg currencies to the US dollar, and make it redeemable for gold at $35 an ounce. From 1959 to 1971, Gold reserves in US Vaults depleted by 50% due the costly Vietnam War and the Great Society Program. In addition, in1971, the US incurred its first ever current account deficit of $400 million. Nervousness spread across the globe and trading partners of the US scrambled to redeem dollars for gold. As the US did not have enough gold to pay all claims, on August 15 of 1971, President Nixon shocked the entire world by announcing unilaterally that the dollar would no longer be convertible to gold. With millions of dollars held as reserves all over the world, the international community had no choice but to accept the dollar as the world’s reserve currency. This is known as the FIAT monetary system in which money is established by government decree and is independent of gold.^[34]

Gold Remains as Currency in Current System

Many people fail to realize that gold is a currency^[35] under the current system. Gold has often been thought of in relation to the U.S. dollar, mainly because it is usually priced in U.S. dollars. There is a long-term negative correlation between the dollar and gold prices. These factors must be considered when we see that the price of gold is simply an exchange rate. Just as one can exchange U.S. dollars for Japanese yen, a paper currency can be exchanged for gold. Gold also played an essential part in the origin of money.

Gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets. Therefore, it is an important metal to follow and analyze for its unique ability to represent the health of both local and international economies.

The U.S. dollar’s relationship to Gold

The U.S. dollar’s relationship to gold prices is a result of the Bretton Woods System^[36], it created a collective international currency exchange regime that lasted from the mid-1940s to the early 1970s. International settlements were made in dollars, and the U.S. government promised to redeem them for a fixed amount of gold. The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire USA. Thus, the name “Bretton Woods Agreement. Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value. The Bretton Woods System effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.

Countries were then free to choose any exchange arrangement for their currency, except pegging its value to the price of gold. They could, for example, link its value to another country’s currency, or a basket of currencies, or simply let it float freely and allow market forces to determine its value relative to other countries’ currencies.

The fixed exchange rate is a system

The fixed exchange rate^[37] is a system where a currency’s value is tied to the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold. A fixed exchange rate system can also be used to control the behavior of a currency, such as by limiting rates of inflation. However, in doing so, the pegged currency is then controlled by its reference value. As such, when the reference value rises or falls, it then follows that the value(s) of any currencies pegged to it will also rise and fall in relation to other currencies and commodities with which the pegged currency can be traded. In other words, a pegged currency is dependent on its reference value to dictate how its current worth is defined at any given time. In addition, according to the Mundell Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy to achieve macroeconomic stability.^[38]

While the Bretton Woods system ended in 1971, the U.S. remained a global power, but it created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank, both institutions have withstood the test of time, globally serving as important pillars for international capital financing and trade activities. In the twenty-first century, the IMF has 189 member countries and still continues to support global monetary cooperation. Tandemly the World Bank helps to promote these efforts through its loans and grants to governments. [Also act as a tool of the USA and West to control third world countries with corrupt leadership to keep them under their thumb].

It is also important to remember that gold and currencies are dynamic and have more than one input. The price of gold is impacted by far more than just inflation, the U.S. dollar, and wars. Gold is a global commodity and therefore reflects global factors, not just sentiment in one economy. For example, the gold price declined in 2000 when the U.K. government sold a large part of its gold reserves.

Under a free market system, gold should be viewed as a currency like the euro, the Japanese yen, and the U.S. dollar. Gold has a long-standing relationship with the U.S. dollar, and it generally moves in the opposite direction in the long run. When there is instability in the stock market, it is common to hear talk of creating another gold standard. Regrettably the gold standard isn’t a perfect system. Viewing gold as a currency and trading it as such can reduce risks to paper currency and the economy. However, one should be aware that gold is forward-looking. If one waits until disaster strikes, the gold price may already have risen too high to offer protection.

Gold as Currency & Risks

Under a free market system, gold should be viewed as a currency^[39] like the euro, the Japanese yen, and the U.S. dollar. Gold has a long-standing relationship with the U.S. dollar, and it generally moves in the opposite direction in the long run. When there is instability in the stock market, it is common to hear talk of creating another gold standard.

1. Gold has a price, and that price will fluctuate relative to other forms of exchange, such as the U.S. dollar, the euro, and the Japanese yen. Gold can be bought and stored, but it is not usually used directly as a method of payment. However, it is highly liquid and can be converted to cash in almost any currency with relative ease.
2. It follows that gold acts like other currencies in many ways. There are times when gold is likely to move higher and times when other currencies or asset classes usually outperform. We can expect gold to perform well when confidence in paper currencies is waning, during wars, and when stocks suffer significant losses.
3. Investors can trade gold in multiple ways, including buying physical gold, futures contracts, and gold ETFs. Investors can also participate in the price movements without owning the underlying asset by purchasing a contract for difference (CFD).
4. By purchasing gold, people can shelter themselves from times of global economic uncertainty. Trends and reversals occur in any currency, and this is true for gold too. Gold is a proactive investment to hedge against potential risks to paper currency. Once the threat materializes, gold’s advantage may have already disappeared. Therefore, gold is forward-looking, and those who trade it must be forward-looking as well.
5. Unfortunately, a gold standard isn’t a flawless system. Viewing gold as a currency and trading it as such can reduce risks to paper currency and the economy. However, investors should be aware that gold is forward-looking. If one waits until disaster strikes, the gold price may already have risen too high to offer protection.

When considering gold as a currency, many people support moving back to some form of the gold standard. There were various problems with earlier gold standards.

1. One of the main problems was that the systems were ultimately reliant on central banks to play by the rules. The rules required central banks to adjust the discount rate to maintain fixed exchange rates. Fixed exchange rates sometimes resulted in high interest rates, which were politically unpopular. Many countries chose to devalue their currency against gold or the U.S. dollar instead.
2. A second problem with the gold standard was that there were still short-term price shocks, despite long-run price stability. The California gold discovery of 1848 is an excellent example of a price shock. This gold find increased the money supply, which raised expenditures and price levels, creating short-run economic instability. It should be noted that such economic disruptions did occur under gold standards. Also, every attempt to maintain a gold standard ultimately failed.

When and Why Do Gold Prices Plummet?

1. While gold is often seen as a safe haven investment and store of value, it is also a produced commodity and subject to those same economic forces.
2. Gold’s most pronounced price fall in the past decade happened between October of 2012 and July of 2013, nine months during which the metal lost over a quarter of its value. The price continued to fall to a low of $1,054 per ounce in December 2015 before rebounding.² As of March 2021, the price was $1,726 per ounce.³ Classical economic theory would blame a bear market on either an increase in supply, which we’ve already determined is unlikely, or a decrease in demand.
3. When gold miners produce an excess of gold relative to demand, the price will experience downward pressure due to the laws of economics.
4. Speculators that accumulate or let go of gold in the market can create temporary imbalances that lead to rapid price changes.^[40]
5. A wise investor is one who recognizes gold’s place in the market, without attaching too much or too little significance to it.

Must Money Be Limited to Only Gold and Silver?

A Survey of Fiqhi Opinions and Some Implications: This paper attempts to provide a survey into the issue of money in Islam. Specifically, it looks at the views of Muslim scholars (primarily past fiqh scholars), on whether money has to be limited to gold and silver or not and discusses some implications of the findings of this brief survey on present day opinions. In this connection it discusses some general points on gold and silver as money, from a historical and ‘contextual’ perspective, followed by some points that are agreed upon by the majority of scholars. It also compares the views of scholars who take the position that only gold and silver can be used as money and the evidence given to support their stand with the views of those who do not limit money to only gold and silver, together with their evidence.^[41]

Gold & Silver not the only money in Islamic Law

Money, according to Islamic law, cannot be restricted to gold and silver. Instead, anything that is generally accepted among the people as a medium of exchange and measure of value may be considered money.^[42]

The second Caliph, ‘Umar, had decided to make currency out of the skins of camels but the Companions of the Prophet (peace be on him) prevented him from doing so. They argued that this would totally eliminate camels, hence he abstained from it.

Mālik in al-Mudawwanah al-Kubra, a famous book of the Māliki school, says: “If people adopt skin as money and it becomes prevalent among them, I consider its exchange with gold or silver on credit unlawful”.”

This implies that skin or any other thing, if it serves as medium of exchange and measure of value, may be regarded as money and should be subjected to the same rules of ribā which are applicable to gold and silver coins. Thus, the exchange of that thing with gold or silver on credit would violate the rules laid down in the hadith narrated by Ubādah ibn al-Sāmit that:

“Gold for gold and silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, in equal weights, from hand to hand. If these species differ, then, sell as you like as long as it is from hand to hand”.

Ibn Taymiyyah, while explaining the position of dirham and dinar in the Shari’ah, expresses the view that the value assigned to them as “thaman” is mainly because of the custom and usage of the people. Their being thaman is not because they have been created for this very purpose.

Gold and silver have been thaman or money since early ages because they were capable of effectively functioning as a medium of exchange and a common measure of value.

Fiat Money

Fiat money^[43] is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.

In contrast to commodity based money like gold coins or paper bills redeemable for precious metals, fiat money is backed entirely by the full faith and trust in the government that issued it. One reason this has merit is because governments demand that you pay taxes in the fiat money it issues. Since everybody needs to pay taxes, or else face stiff penalties or prison, people will accept it in exchange (this is known as Chartalism). Other theories of money, such as the credit theory, suggest that since all money is a credit-debt relation, it does not matter if money is backed by anything to maintain value.

o Why do modern economies favor fiat money?

Prior to the 20th century, most countries utilized some sort of gold standard or backing by a commodity. As international trade and finance grew in scale and scope, however, the limited amount of gold coming out of mines and in central bank vaults could not keep up with the new value that was being created, causing serious disruptions to global markets and commerce. Fiat money gives governments greater flexibility to manage their own currency, set monetary policy, and stabilize global markets. It also allows for fractional reserve banking, which lets commercial banks multiply the amount of money on hand to meet demand from borrowers.

o Alternatives to fiat money

Virtually every country today has legal tender that is fiat money.

While you can buy and sell gold and gold coins, these are rarely used in exchange or for everyday purchases, and tend to be more of a collectible or speculative asset.

Crypto currencies, such as Bitcoin, have emerged over the past decade as a challenge to the inflationary nature of fiat currencies; but despite increased interest and adoption, these virtual assets do not seem to approach being “money” in the traditional sense.

The influence of  Dollar System on Pakistan

The dollar system influencing Pakistan has been analyzed by Zain Raza, [The Tribune, December 25, 2011] as follows:^[44]

1) The US has the ability to not only tax its own citizens but also foreign countries through inflation caused by deficit spending. When Pakistan exports, the dollars it receives enables it to import goods that are vital for its national interest: These include oil, raw materials, military equipment, etc. In 2011 Pakistan’s foreign reserves total to $16.69 billion. Since the 2008 crisis, the Federal Reserve has continued policies of printing money ($2.1trillion) known as Quantities Easing in an attempt to spur growth. The value of Pakistan foreign reserves and its own currency that expands from its reserves are deteriorating (inflation) due to this.

2) “The flipside of currency with a value inflated by artificial demand is depreciation in the price of goods purchased with that currency. As a consequence of the dollar cartel, the United States has for over thirty years been able to purchase the exports of other countries at a discount”. This passage by Eric Janzen, a macro analyst at Itulip, exhibits how Pakistan is exporting at a discount, not realising the real value of its labour and its resources.

3) During an economic boom currency supply should expand relatively, and during a recession it should contract, a gold standard enforces this process. The central bank of Pakistan however is expanding currency in both, a boom and in a recession, leading to economic misallocations.

4) The FIAT system combined with fractional reserve banking creates currency by issuing more debt. Since 1971, economists report the aggregate global public debt to have risen exponentially to $40 trillion (GDP $63.04 trillion) according to Zain Zia. Pakistan’s public debt stands at Rs11 trillion. In 2011, at Davos, Politicians, business and central bankers agreed to an expansion of credit to $100 trillion to support economic growth over the next decade.

As of December 2020, Total Public Debt and Liabilities of Pakistan is estimated to be about ₨44.978 trillion/US$283 billion which is 98.7% of gross domestic product (GDP) of Pakistan. About ₨24.309 trillion is owed by the government to domestic creditors, and about ₨2.3 trillion is owed by Public Sector Enterprises (PSEs).

Similarly, as of December 2020, external Debt of Pakistan is now around US$115.7 billion. Pakistan owes US$11.3 billion to the Paris Club, US$33.1 billion to multilateral donors, US$7.4 billion to International Monetary Fund, and US$12 billion to international bonds such as Eurobond, and sukuk. About 15% of the external debt which is estimated around US$17.1 billion (6.15% of GDP) is owed to China due to the China-Pakistan Economic Corridor.^[45]

To be continued- Next Part-2 about currency printing and its implications