Concept of Money in Islam

Evolution of the banking system in the world

Summary of Previous Lecture

1. characteristics of Socialism and communism, such as their definition, ideas, economic system, social structure, freedom of choice, ownership of private property, and means of control etc.

2. A comparison of the major economic systems in the world, i.e. Capitalism, Socialism, Communism, and Islamic economic system.

Learning outcomes

After today’s lecture you will be able to

•understand the concept of money, how it evolved from representative money to fiat money.

•Role of money in the economy and its usage as a tool to create debt.

Money in Islam

• Commodities with intrinsic value can be used as money in Islamic economic system.

• Gold, silver, dates, wheat, rice, barley, salt, etc. can used as money.

• Paper money can be used only if it is backed by gold or silver or it is a representative money.

• Gold and silver coins remained official currency until the fall of the Caliphate.

• Since the fall of the caliphate, dozens of different paper currencies were made in each of the new postcolonial national states created from the dismemberment of Dar al-Islam.

Currencies in Islamic Economy

• Paper money since then has evolved through three major stages, these are:

1. A promissory note backed by gold or silver.

2. A process of unilateral devaluation leading to a complex set of problem like exchange rate, inflation, interest rates etc.

3. A piece of paper not backed by any specie, whose legal value is determined by the compulsion of the State Law (fiat money)

Fiat Money: any money declared as legal tender by the government without having any intrinsic value.

Evolution of Paper Money

Abandonment of Gold Standard from the World Economy

• After the second world war (1944) many countries fixed their exchange rates relative to the US dollar based on a gold exchange standard under the Bretton Woods system.

• Initially the official exchange rate of $35 per ounce was set. All the currencies pegged to dollar had a fixed value in terms of gold.

• In December 1971 under the Smithsonian agreement dollar was devalued to from $35 to $38 per ounce of gold (with the motive to increase exports).

Abandonment of Gold Standard from the World Economy

• In October 1973 the price was raised to $42.22 per ounce.

• In October 1976 the US government officially abandoned the practice of having gold as standard and from there onward international monetary system shifted to pure fiat money.

Implication of Fiat Money

• Credit Creation

• Inflation

• Unjust wealth appropriation

• Deposit multiplication

Deposit Multiplication Deposit = 100,000Fractional Reserve Requirement = 10%

Reserve = 10% Loan = Deposit10,000 90,0009000 81,0008100 72,9007290 65,6106561 59,0495904.9 53,1445314.41 47,8304782.969 43,0474304.6721 38,7423874.20489 34,8683486.784401 31,3813138.105961 28,2432824.295365 25,4192541.865828 22,8772287.679245 20,589- -- -100,000 900,000

Video

Money as debt

• Evolution of banking system

• Credit Creation

• Inflation

• Unjust wealth appropriation

• Deposit multiplication

Summary of the Lecture

• In this lecture we discussed the concept of money in Islam and the conventional economic system.

• Watched the animated documentary about the evolution of conventional banking system and role of money as debt.