By: Imad A. Ahmad.
Minaret of Freedom Institute, 4323 Rosedale Avenue
Bethesda, Maryland 20814, (301) 656-4717
2. REQUIREMENT OF A HARD CURRENCY MONETARY POLICY
The oft-debated question of interest is only sub-issue of the more general matter of monetary policy. It is disturbing that modern Muslim economists have overlooked the fact that a sound money is an indispensable pre-requisite for a sound economy. Although Umar found the issue of ribâ problematical, the necessity of sound money was universally accepted not only by the Prophet and the righteous caliphs, but by every Muslim government in the early centuries of Islamic civilization. The example of the Prophet himself, who never resorted to clipping, debasing, or the issuance of unbacked paper currency, was generally followed by the Islamic society until about the year 1000. Like the Prophet, the society favored the three monetary commodities most appropriate for use as hard currency in Arabia at that time: gold, silver, and hard wheat. The righteous caliphs followed this principle without exception, and it remained the general rule until the Islamic civilization began to unravel at the turn of the millennium.
Significant departures from this principle began to appear only after the tenth century (Cahen 1981, p. 318). In 1294, the vizier of the Ilkhan Gaikhatu sought to deal with the deficit spending of his day by issuing "paper money, modeled on the Chinese paper currency. The experiment was a complete failure, as the people refused to accept the banknotes. Economic activities came to a standstill, and the Persian historian Rashid ud-din speaks even of 'the ruin of Basra' which ensued upon the emission of the new money" (Ashtor 1976, p. 257).
The door to debasement opened in the next century when the silver to gold exchange rate suffered its first serious change since the rise of Islam. In the early centuries of Islam the rate had always been around 20:1. In the thirteenth century changes in the market led scholars to speculate that the rate had changed to 10:1, but the official rate remained fixed at 20:1. "The stocks of silver in the mints decreased progressively from about 1380.... Whereas the exchange rate of the dirham had for 130 years been 1/20 dinar, that of the debased dirham was 1/25 and later 1/30 dinar" (Ashtor 1976, p. 305). The "main reason was the increased demand in Italy, where the value of silver had risen considerably at the end of the fourteenth century.... At the beginning of the fifteenth century the striking of silver dirhams was discontinued altogether" (Ibid.) Al-Mikrizi blames a high court dignitary who tried to "enrich himself by the striking of copper coins" (Ibid.). The monetary crisis was accompanied by famine and a lengthy civil war. High taxes were levied to equip the armies against repeated revolts.
Interest rates rose from 4-8% during the crusades to 18-25% in the fifteenth century (Ibid., p. 324). Although "the supply of gold from the Western Sudan was never interrupted," Sultan Barsbay in 1425 devalued the dinar "for the first time in the history of the Muslim Near East" (Ibid.). Until then the dinar had always been a gold coin of approximately 4.25 grams. With the devaluation a 3.45 gram dinar called al-Ashrafi "remained the gold coin of Egypt until the end of Mamluk rule" (Ibid.). This was the weight of the European ducat, evidence for the swing in monetary standards away from the Muslim world to the rising Christian West.
A discussion of ribâ and interest can only be meaningful within the framework of the more general issue of monetary policy (see Appendix). The main component of the nominal as opposed to real) rate of interest in modern economies is the anticipated rate of inflation and that, in economies using paper currency, this rate is dominated by government's tendency to debase the money supply. Most of the nominal interest could be eliminated by using sound currency, and a study of the legality of interest can center around any residual. Such an analysis, given in a paper before the American Muslim Social Scientists, is presented in Appendix to this paper. Its principle policy conclusion is that a prohibition on all interest may come at the expense of a decrease in the most revolutionary forms of development. This is because profit sharing cannot induce anyone to invest in an enterprise so radically innovative that only its originator can see foresee its impact and profitability. Nevertheless, most capital investment needs can be met by profit-sharing mechanisms. In any case sound monetary policy is a pre-requisite for sustainable comprehensive development. Hard money is the sunnah method for establishing sound money through the natural process of the market.
