What is Money?

Tauheed Ali Bhatti

Some people work all their lives for it. Some people have huge amounts of it, and some have almost none of it. Some steal it, some kill for it. Some men and women marry for it. Some people gamble everything they can, hoping to win more of it and some actually do win, but most lose. Some lie for it, some die for it. Many nations go to war for it. Most of the films we see and a great many of the stories we read are about people who do many of the above things for it. But what is money? The modern world is a complex place. Ideologies and religions swirl, entangle with and wage war upon each other. Politically, socially and militarily the world is in upheaval. Economics, commerce and finance move in their own fashion and move many other forces from behind. The whole makes a strangely compelling but disturbing fabric of interwoven threads. And when was it ever different?

The 1970’s saw the beginning of the Islamic resurgence with works on Islamic Economics, Banking and Finance mushrooming.¹ Yet till today, these merely exist in the theoretical forms or in writings only. The world has yet to see the Islamic Monetary model being implemented and its impact not just on the societies which would adhere to it but across the planet. Contrary to its glorious times, the current Muslim world is characterized by economic backwardness, with increasing disparity in income distribution, poverty etc.

The history of money in Islam started with the use of the Roman Byzantine gold coins known as denarius.² Prophet Muhammad (PBUH) brought in sweeping reforms which transformed the whole Arabic society and fundamentally changed the very core of it with socio-economic changes, but nonetheless the Prophet accepted the Roman denarius and the Persian drachma (silver) coins as the monetary units for Muslims. Indeed, the words dinar and dirham are found in the Holy Quran in the verses Al-Imran (3:75) and Yusuf (12:20).³ Gold and Silver played the role of money throughout Muslim history albeit with some hiccups with copper fulus and with fiat money towards the end era of the Ottoman Caliphate.⁵ To certain extent, Gold remained part of the international monetary system until the breakdown of the Bretton Woods in 1971.⁶ Today all national currencies are fiat, whereby it is neither backed up by gold or redeemable for gold i.e. without any intrinsic value.

Before moving on further it would be helpful to define what fiat money is: fiat money is money that has no intrinsic value of its own such as paper money and electronic money. The worth of paper in paper money, for example, is negligible yet it may command value by the decree of the issuing body that makes it a ‘legal tender’, i.e. it is money by virtue of law and not because people value it for its own sake.⁷

Almost 50 years of global fiat monetary system has brought the world to a unique position. Many countries have faced the economic crisis and the dollar crisis seems imminent. High inflation is intrinsic to fiat money. Fiat money is the root cause of all the problems we see in world today, and also the creation of fiat money is truly a profound and devastating form of riba and most importantly the very reason of impossibility to achieve the objectives or maqasid al-Shariah in an interest-based fiat monetary system.

The global monetary system has gone through an evolution — from using the primitive form of money such as shells, salt, dates, etc. to fiat money like paper and electronic currencies. It is also important to shed some light on how the monetary system has impacted the socio-economic structures of all the societies in history and especially how it has profound implications on today’s materialistic culture.

Riba (usury) has been clearly and explicitly prohibited in the Qur’an and Sunna. Allah and His Messenger, (PBUH), have declared war on those who do not abstain from it. These are some of the relevant verses regarding Riba. Allah says in the Qur’an:

“Those who practice riba will not rise from the grave except as someone driven mad by Shaytan’s touch. That is because they say, “Trade is the same as riba.” But Allah has trade and He has forbidden riba. Anyone who receives a warning from his Lord and then desists, can keep what he received in the past and his affair is up to Allah. But any who return to it will be the Companions of the Fire, remaining in it timelessly, forever.” Qur’an (2:275)

Allah obliterates riba but He makes sadaqa grow in value! Allah does not love any persistently ungrateful wrong-doer. Qur’an (2:276)

O you who believe! Show fear of Allah and forgo any remaining riba if you are believers. Qur’an (2:278)

If you do not, know it means war from Allah and His Messenger. If you turn in repentance you may have your capital, without wronging and without being wronged. Qur’an (2:279)

O you who believe! Do not feed on riba, multiplied and then remultiplied. Show fear of Allah so that perhaps you may be successful. Qur’an (3:130)

Because of wrongdoing on the part of the Jews, We made unlawful for them some good things which had previously been lawful for them; and because of their obstructing many people from the way of Allah, and because of their practicing riba when they were forbidden to do it, and because of their consuming people’s wealth by wrongful means. We have prepared a painful punishment for those among them who reject. Qur’an (4:160-161)

Needless to say, riba is strongly condemned in Islam. However, our aim is to show that the creation of fiat money itself, to be precise, its seigniorage, is profound riba, which in turn prevents the real-life implementation of Shariah, including the establishment of the just Islamic Monetary System.

Muslim scholars throughout the advent of Islam have defined riba, hence our focus remains on its modern form. One of many features of riba is where extra purchasing power is created without taking on any risk. Consider A lending $1,000 to B at 10% interest p.a., that extra $100 earned gives extra purchasing power to A without taking on any risk. This additional “fee” purchasing power is riba. Note that in this case riba is materialized only after one year of accrued interest and only when B pays that interest back to A. Nevertheless, a fact that often goes unnoticed is that the creation of fiat money indeed enthrones the creator with the immediate purchasing power without assuming any risk. Today most money is nothing but electronic records of double entry accounting that provide unlimited purchasing power to the first users of paper money.

With this in the background, we will now discuss how maqasid – al shariah is impossible to attain in the presence of the current monetary system.

One must understand the basis of shariah, which entails the wisdom and welfare of the people in the world and the hereafter. As per Al-Ghazali’s objective of Shariah is to protect five things which include: Faith (Din), Life (Nafs), Posterity (Nasl), Property (Mal) and Reason (Aql)

What is Seigniorage? It is the value given to fiat money (that practically costs nothing to produce and has negligible intrinsic value). Seigniorage is the gain to the one who issues fiat money. It’s the benefit one derives from the first use of fiat money. In today’s interest-based fiat money system, the bankers create money through multiple credit creation and lend this out at interest. Money created through this fractional reserve banking system and the interest charges thereupon are basically also seigniorage. Most governments get the benefit of seigniorage from the issuance of their respective national currencies (paper notes and coins) but the seigniorage of credit money and interest charges go to the bank.⁸

Now that we have defined the terms, we will be looking at three main features of the current monetary system which are pertinent to our discussion. 1) Fiat money, 2) Interest, and, 3) FRB (Fractional Reserve Banking). FRB is the process which is least understood by the masses, including even many who are trained in economics, banking and finance. These three are fundamental to the process of money creation by the banking sector. It’s critical to understand FRB. Consider the following example: If the reserve requirement is 4 per cent, an initial deposit of $1,000,000 can bring about a total deposit of $25,000,000, i.e. an additional $24,000,000 being created in the form of loans. This is exactly what’s commonly referred to as “creating money out of thin air”.

Money is created for the first time by the bank when it extends loans. Hence money in most part takes the form of accounting entries or computer electronic records. This simple accounting entry that carries with it purchasing power created out of nothing is the seigniorage of fiat money. An important fact to note is that all this new money is introduced into the economy predominantly as loans. It is important to note here that the Islamic banks, operating within the fractional reserve banking system, also do create money in this form, but focuses on the use of this newly created money according to Sharī’ah principles.

The credit card system also increases the money supply. This is because in every credit card transaction one account gets debited while another credited. The credit entry is, nevertheless, interpreted as a deposit and, thus, that makes possible further money creation through the fractional reserve system.

Since most money is created through multiple credit creation, money and debt are, therefore, balance sheet counterparts. This debt would show up in the aggregate economy in the form of private sector and public sector debt. In most countries, bank money (loans) is the dominant money supply that comprises of simply accounting entries. A much smaller portion is paper money and coins issued by the government.⁹

Credit money, nevertheless, has a number of serious economic implications. An important implication is that loans are non-repayable in aggregate and that makes loan defaults as a system default in the current monetary structure.

In the aggregate analysis, default is for sure by the mere design of the system. This is fundamentally due to the fact that the interest money which needs to be repaid with the principal doesn’t exist in the form of money.

Endnotes

1. Kepel, Gilles (2006). Jihad: The Trail of Political Islam. I.B. Tauris. pp. 76–77. ISBN 9781845112578. This loose approach prevailed throughout the Muslim world until the 1970s, at which time the total ban on lending with interest was reactivated, in tandem with a general re-Islamization in the cultural and political domains until 1973, when the tidal wave of petro-dollars changed the entire [economic] waterfront.

2. Porteous, John (1969). “The Imperial Foundations”. Coins in History: A Survey of Coinage from the Reform of Diocletian to the Latin Monetary Union. Weidenfeld and Nicolson. pp. 14–33. ISBN 0-297-17854-7.

3. And among the People of the Scripture is he who, if you entrust him with a great amount [of wealth], he will return it to you. And among them is he who, if you entrust him with a [single] silver coin, he will not return it to you unless you are constantly standing over him [demanding it]. That is because they say, “There is no blame upon us concerning the unlearned.” And they speak untruth about Allah while they know [it].QURAN 3:75

4. And they sold him for a reduced price – a few dirhams – and they were, concerning him, of those content with little. QURAN 12:20

5. Stephen Album, Checklist of Islamic Coins, Santa Rosa, CA, 2011, third edition, p. 7

6. Frum, David (2000). How We Got Here: The ’70s. New York, New York: Basic Books. pp. 295–98. ISBN 0-465-04195-7.

7. Goldberg, Dror (2005). “Famous Myths of “Fiat Money””. Journal of Money, Credit and Banking. 37 (5): 957–967. JSTOR 3839155.

8. Fisher, Irving (1997). 100% Money. Pickering & Chatto Ltd. ISBN 978-1-85196-236-5

9. “The Federal Reserve – Purposes and Functions””. Federalreserve.gov. April 24, 2013. Retrieved December 11, 2013.

Bibliography

Fisher, Irving. 100% Money. London: Pickering & Chatto Ltd, 1997.

Kepel, Gilles. Jihad: The Trail of Political Islam. London: I.B. Tauris, 2006.