Nature of Money Has Been Defined By its Functions:
Conclusion:
Both the theory of Riba and the concept of Deception describe the nature of money in Islamic economic system to be well described and time-invariant money.
Nature of Money has been defined by its
functions and methods whereby money is
being created. Through out the human history money has been used to perform
prime economic functions such as Money of exchange, Money of unilateral
payments, money of deferred contracts [legal tenders], money of accounts. Out of these monetary functions, money of
exchange and money of unilateral payments took greater weight in economic
discussions about money. Money of exchange come into existence due to market behavior in which market participant find it easier to
trade with monetary objects such as gold, silver, copper etc to buy goods and services.
Chartals As Money [Money of Account]
On the other hand, money of unilateral payments
[they are also called state money, or chartals]came into existence due to role
of state in a society. In this form of money, the state issues currency, coins,
notes, tokens etc as unilateral payments for goods and services and the state
never pay its debt. Through different legal procedures, The state money is made enforceable in market transactions.
(Knapp State theory of money )
Money of Account and Money of Exchange Distinguished
The
distinction between these two theory is essential. In the classical theory of
money of exchange, the moneyness and its
relative price is determined in a general market equilibrium and remains a
tangible commodity. The money is simply a commodity with its scarcity value. In
this classical case many commodity simultaneously can act as money such as
Gold, Silver, Salt, Copper etc. In simple terms market mechanism cannot evolve
an abstract object as money. In chartalism, State has authority to create and
define abstract objects as monetary objects. Whether written, engraved, embossed,
marked,coined, shaped on objects such as gold, silver, copper, wood, plastics,
paper, or in electronic chips, it creates abstract monetary objects. The word
dirhams or dinars or rupees are abstract construct of state and their value is
defined in a monetary exchange of goods and services.
Money of Account is Anterior to Money of Exchange:
Economic historian often consider that money of
account or token money of state is anterior to the money of exchange. Market
came into existence much later than economic society and therefore the need for
state finance originated much earlier as compared to need for money of
exchange. From pragmatic point of view these two types of money often coincided
in a market economy with the presence of a state. The state issued currency
i.e. money of account is generally used as money of exchange. The economic
agent often ignored the two side of the currency. They considered the coining,
shaping, stamping, engraving, embossing, printing, scribing merely as to
authenticate the intrinsic value of the coin. For example, roman dinars were
considered as depicting best intrinsic value of gold they contain as compared
to gold coins of other origin. Romans were notorious for punishing any attempt
to counterfeit its currency. So economic agents considered for example stamping
to denote the quality of the content being stamped and their economic value is
ascertained in a market exchange.
State tried to Befuddle Market Participant Using Monetary Policy:
There was temptations on the part of state issuing
currency to debase, alloy making – greater use of cheaper metals, rebranding
etc to meet the increasing need of state finance. The new state defined money
decirculate the old money. Economic agents soon adjust to the new intrinsic
value of the coins by separating the inferior metals with expensive metals
contained in the coin. In the extreme case where state completely stripped the
names from its content such as the word dinar representing an abstract object
written on a paper or wood or inferior metal, economic agent soon adjust to the
new abstract currency. So the process remains state defining money and economic
agents uncover its economic value.
The Three Face of the Coin:
So there exist three face of the money. The face
value written or marked on the coin, the intrinsic value i.e. amount of gold or
silver or other metals contained in the coin, the economic value determined in
the market economy reflecting demand and supply conditions. An abstract
currency would have only face value and economic value. Economic value of a
money is always established against other objects in the economy. Economic
value is highly subjective in nature and its statistical properties can be
studied using standard statistical methods such as its distribution.
the Nature of Money in Islamic Economic System:
What could be the nature of money in an Islamic
economic system? Money was not defined during Prophet times and his caliphate
period. All kind of money was accepted including Persian dirhams of silver
coins and roman dinars of gold coins. The nature of money in Islamic economic
system can be derived from the quranic verse on riba. The quran specifically
prohibits riba as source of income and
encourages bai.
Riba cannot be the source of income for muslims:
"Those who take riba (usury or interest) will
not stand but as stands the one whom the demon has driven crazy by his touch.
That is because they have said:"Sale is but like riba", while Allah
has permitted sale, and prohibited riba. So, whoever receives an advice from
his Lord and desists (from indulging in riba), then what has passed is allowed
for him, and his matter is up to Allah. As for the ones who revert back, those
are the people of Fire.There they will remain forever. [275]
Riba is a pure increment:
Concept of riba was not
limited to monetary objects albeit Riba is pure increment in any contract
whether contract of deferment or spot economic exchange. for example a loan of
10 gram gold to be paid in one year for 11 gram gold. Here 11 gram gold is more
than 10 gram gold and therefore economic inequality exists. Similarly, a loan
of 100kg Potato of certain kind for six month against 110kg Potato would
constitute inequality and therefore riba. Similarly a loan of 10 byzantine
dinar [khota sikka] each containing 4 gram of Gold to be paid in one year for
10 byzantine dinar containing 4.5 gram of gold would constitute riba. Islamic
economists consider the quranic verse on riba to be applicable only on economic
contracts involving deferment in payment either in kind or in money. However,
Concept of riba can be further elaborated by considering the riba al fadal i.e
increment in economic exchange on spot basis.
The Prophet said, "Sell gold in exchange of
equivalent gold, sell silver in exchange of equivalent silver, sell dates in
exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell
salt in exchange of equivalent salt, sell barley in exchange of equivalent
barley, but if a person transacts in excess, it will be usury (riba). However,
sell gold for silver anyway you please on the condition it is hand-to-hand
(spot) and sell barley for date anyway you please on the condition it is
hand-to-hand (spot)."
Riba al -Fadal:
Riba al fadal clearly
indicates that for example selling one byzantine dinar containing 4.5 grams of
Pure Gold for 6 grams of Pure Gold would constitute riba [Inequality] ,
similarly selling silver coins of Persian origin for more than the silver they
contain would constitute riba [inequality]. This clearly sets the monetary rule
of Islam. Islam did not accept the greater value of coins due to its issuing
authority here Byzantine Empire or Persian Empire. Islam considered the
monetary gold coins or silver coins no more than pieces of gold and silver.
Riba in all its form is prohibited and cannot be the source of income for
Muslims. The theory of riba dictates the theory of money in Islamic economic
system. Money must be defined, described and must not be abstract and therefore
the relation between the face value or marked value to its intrinsic value
should be one- on-one.
The Nature of Money and the Functions of Money distinguished:
The nature of money must
not be confused with the functions of money or the methods by which money is
being created. The nature of money is pertained to the concept of the
differential between face value and intrinsic value. For example a paper money
could be an abstract money or Islamic money based on the relation between face
value and intrinsic value. If the relation is poor or undefined it would be
abstract money and if the relation between face value and intrinsic value is
definite it would be Islamic money. Furthermore Islamic money does not imply a
gold standard. In an Islamic economic system, multiple monetary standards can
be used to meet demand for money such as gold, silver, copper standard. Both
endogenous supply of money and exogenous supply of money can be the source of
Islamic money as long as monetary liabilities can be settled on account.
Concept of Deception and the Nature of Money:
In addition to the concept of riba, the concept of
deception should also be considered in establishing the nature of money. The
deception occurs in monetary assets when there is discrepancy between face
value and intrinsic value. For example a gold coin marked a dinar expected to
contain 4.5 gram of 24 crat gold
contains only 4 gram of 24 crat gold or
4.5 gram of 18 crat gold. In either case the face or marked value is greater
than the intrinsic value. In extreme case where marked value or face value does
not have any relation to its intrinsic value, the state or the monetary
institutions issuing such currency is involved in deception. Islam cannot
encourage an economic system in which money is a product of deception.
