An Islamic Monetary Theory of Value and Equation of Exchange: Evidence from Egypt (696–1517)
An Islamic Monetary Theory of Value and Equation of Exchange: Evidence from Egypt (696–1517)
Adam Abdullah
Introduction
This paper involves an analysis of the monetary system in Egypt from 696 to 1517, a period
of 821 years that stretched from the Umayyad to the Abbasid caliphates before the onset of
the Ottoman caliphate in 1517. During the nineteenth century, the medium of exchange
migrated from bullion (as an asset of the public) to paper money backed by debt (as an asset
of the banks). At the same time, there was a migration in the development of economic and
monetary theory, in order to justify a theory of banking and a theory of interest. The problem
is that this has only been achieved by re-defining money as a commodity that comes at a
price (interest), whereas in Islam, money is “like a mirror, which has no colour, but it reflects
all colours…it is an instrument to lead to all objectives…” (Ihya 4:91-93 cited by Ghazanfar,
2003:33-34; Al-Ghazali, 2004:90-91; Usmani, 1999:81-83). Accordingly, in Islam, money is
an instrument of transfer only, which carries no additional charge or price, associated with its
usage. Interest is the price of debt reflecting the supply and demand of loanable funds, and a
debt, or a loan at interest, is always greater than cash received. This explains the necessity of
increasing the stock of fiat money, which is backed by debt, being the asset of the banking
system, such that the value of goods and services must accommodate this inflationary
increase in the supply of money, the value of which increases at total aggregate interest
(Abdullah, 2014). However, a usury free monetary system based on a bi-metallic commodity
standard can only reflect the quantity and quality of goods and services that a society
produces. Money must have a counter-value (‘iwad) that inherently reflects intrinsic value
(by specie) as opposed to extrinsic value (by tale). Our research develops an Islamic equation
of exchange, where the real economy leads the monetary sector (and not the other way round
as in capitalism). As such, from a classical Islamic perspective, the theory of money may be
more precisely termed a theory of coinage.
A number of Muslim scholars have differentiated between a wider medium of exchange
(wasilat tabadul) and currency (an-naqd). Currency has been defined as: “Nuqud is the plural
of naqd and is composed of gold and silver” (Majallah, Art.130), and referred to by the
fuqaha as meaning that 1 dinar equals 10 dirhams by value (as the Islamic exchange rate in
determining zakat). Due to a shortage of an-nuqud, ‘Umar ibn al-Khattab (r.a.) contemplated
using leather from camels as a medium of exchange, but the sahabah advised against it since
it would create a shortage of camels (Dawud, 1999:145 cited by Haneef, 2006:28); on the
other hand, the inference is that since camels were plentiful in Arabia it would have no doubt
have suddenly created an increase in money supply, but equally it would have increased the
cost of transportation. Hence, man is free to choose a medium of exchange, but there is an
economic impact if it is not to be pure gold or silver.
Naqd also means the payment of a price
in dirhams, as relayed in the hadith of Jabir, “He paid (naqada) me its price” (Muslim
10:3886). In the Sunan of Ibn Majah we discover an important hadith entitled the
“prohibition of destroying dirhams and dinars” in the book of business transactions; “Alqama
b. Abdullah (r.a.) reported on the authority of his father that Allah’s Messenger (s.a.w.s.)
forbade from destroying the coins in vogue among the Muslims without any necessity” (Ibn
Majah 12:2263, also Abu Dawud 23:3442). In Islamic jurisprudence (usul al-fiqh), this aught
to be sufficient evidence to not discard what Islam has intended to be currency.
Indeed, the Islamic theory of coinage is evident in the writings of Ibn Khaldun: “A gold
mithqal [dinar] weighs seventy-two average-sized grains of barley (habbahs). Consequently,
the dirham, which is seven-tenths of a mithqal, has a weight of fifty and two-fifths grains. All
of these values are accepted by general consensus” (Ibn Khaldun, 1958, 3:58), and Al-
Maqrizi: “The weight of one mithqal [dinar]…weighed 72 habbahs” of average unshelled
grains of barley whose extremities are cut (Allouche, 1994:57), and “the weight of one
dirham was fifty and two-fifths habbahs” (Allouche, 1994:61). Other than for their use in
transactions generally, the dinar and the dirham as currencies (an-nuqud) also occupy a very
important position regarding an additional Islamic function of money, as a determinant in
imparting justice within the Shari’ah, with respect to, Zakat (poor tax), Jizya (tribute tax),
Kharaj (land tax on conquered territory), Diyyat (blood-money), the minimum amount in the
case of Sariqa (theft), Mahar (dowry), and Sarf (currency exchange). More specifically,
central to the theory of money is Islam, is that the stability of the value of money is an
indispensable objective of the Islamic monetary system, and this is derived from the Qur’an,
which unequivocally stresses honesty and justice in all measures of value (Chapra, 1985:37):
“Give full measure and weight fairly, and defraud not men their things, and do not act
corruptly in the land, making mischief” (Al-Qur’an 11:85). As a store of value function of
money, for money to be eroded in value in real terms, is clearly tantamount to corrupting the
world, because of the adverse affect it has on economic welfare and social justice. If
persistent inflation exists (the effect), associated with a decline in the value of money (the
cause), as a result of an exponential supply of money in relation to its’ demand, it would
imply that money would not be able to reliably perform its role as a reliable medium of
exchange, as an honest unit of account and measure of value, as an equitable standard of
deferred-payment, and as a trustworthy store of value.
This paper is organized into five sections. The first section provides an introduction to the
research; the second section presents a review of relevant literature concerning money and
prices over the long term; the third section details the methodology; the fourth section
presents our findings and discussion; and the fifth section provides some concluding remarks
and recommendations relating to monetary theory and policy, and highlights the impact of
the research on society.
Literature Review
This section reviews orientalist literature, historical monetary and prices, contemporary
articles related to this research including methodology. Numismatic literature derived from
the orientalists, mostly writing in the 1950s and 1960s, strove to prove that Muslims merely
replicated Byzantine coinage (Ehrenkreutz 1959, 1964 also Grierson, 1960, 1961). Ironically,
when also combined with additional data from Brunetti (1950) and Gordus (1974), we
essentially have a reasonably complete picture on the standard of fineness, and thus the
attitude towards purchasing power, of not only early Muslim coins, but of those coins in
circulation at the time of the Prophet (s.a.w.s). Since Islam arrived with the dawn of mankind,
we may further reflect in Allouche’s translation of the Ighathah by Al-Maqrizi, who reported
that, “the first to mint the dinar and the dirham was Adam, who said that life is not enjoyable
without these two currencies” (Allouche, 1994:55-56), and Rasulullah (s.a.w.s.) said, “A time
is certainly coming over mankind in which there will be nothing (left) which will be of use
save a dinar and a dirham” (Imam Ahmad ibn Hanbal, Musnad, cited by Meera, 2002:1):
hence, an-nuqud are ancient coins that will once again be adopted for the benefit of mankind.
For earlier analysis on monetary conditions and prices in Egypt, Allouche (1994), Ashtor
(1969, 1971, 1976), Balog (1961), Shoshan (1983), Schultz (2003, 2008) and Borsch (2005)
provided commentary and data on exchange rates and prices of wheat and other commodities.
Allouche’s translation of the Ighathah was an indispensable chronicle of monetary policy in
Egypt. Although, the orientalists, and Ashtor in particular, provided excellent source
material, we found their readiness to dismiss first hand Muslim accounts in favour of their
own interpretation, has led to a number of errors: their inability to tie in numismatic evidence
and differentiate between legal weights, various Egyptian coin standards and Egyptian
weights was the most obvious, by ignoring Al-Maqrizi (Allouche, 1994:68), whilst Balog’s
(1966, 1973) interpretation of surviving glass-weights as a form of circulating token-money
and his subsequent defense (Balog, 1981) from Bates’ (1981) correct interpretation and
dismissal of Balog’s theory, was perhaps the most embarrassing, by ignoring Al-Muqaddasi
(2001:199). Whilst views differed, generally, we learn that by the time of the Mamluks,
although gold was still found to be in circulation, fulus became the dominant circulating coin
and the exclusive measure of value, including its’ use in paying land taxes (kharaj) and zakat
on the profits of merchants. Silver was melted down to make jewelry for the courtiers, or in
the form of bullion, for export in exchange for the import of copper with the Europeans,
specifically the Venetians offered copper from the Netherlands, Hungary, Serbia and Bosnia
(Ashtor, 1976:305), until, according to Al-Maqrizi, silver became almost non-existent
(Allouche, 1994:71), and lost its function of money as a medium of exchange and a measure
of value. The over-production of fulus (Allouche, 1994:55) resulted in a hyper-inflationary
depression (ghummah) in 806-607/1404-1405 that killed half of the population (and all the
livestock), due to poverty, starvation and the plague (Allouche, 1994:51, Ashtor, 1976:305),
including Al-Maqrizi’s own daughter (Tomas, 1996:111).
In recent times, a number of articles have appeared discussing a return to the gold dinar
under a gold standard. These articles are positive towards their analysis of gold, but their data
is rather selective being only derived from Malaysia and only over the short-term.
Nonetheless, in discussing the stability of gold in relation to other assets (returns on gold
were compared to returns on stocks), Mansor confirmed investing in gold coin, such as a
dinar or Kijang Emas, “as a vehicle for preserving wealth in the midst of recurring financial
turbulences during the present time” (Mansor, 2011:88), and also assessed whether money
supply was a significant cause in fluctuations relating to real output and prices, stating that
concerns relating to the “instability effect of money supply are well grounded empirically”
(Mansor, 2006:18). Additionally, by correlating consumer products in dinar and the U.S.
dollar, Sharif showed that the dinar would stabilize price fluctuations (Sharif, 2007:16).
Mansor also showed decisively from 2001-2007, that savers in gold have a “complete hedge”
against domestic inflation, as measured by CPI (Mansor, 2009:373-388). On the other hand,
Zubair Hasan received the Islamic Development Bank’s Laureate Prize in Islamic Economics
in 2009, for expressing the return to dinar under a gold standard as “being devoid of
reason…[and] it is time that we banish gold (dinar) as money from all serious discussions in
economics – mainstream or Islamic” (Hasan, 2008:3,18). It is unfortunate that his paper is
largely absent of empirical evidence and rather short on the correct interpretation of
economic theory, although Hasan does point out that “the difficulty with most of the
econometric excursions is that their results are specific to the period the data cover. They are
found very weak on the prediction front” (Hasan, 2008:13) having pointed out that a lower
correlation between gold and prices existed in the decade prior Mansor’s data.
This research may address Hasan’s criticisms of the selective nature of contemporary articles,
when we consider the 821 year empirical investigation, coupled with that of Abdullah’s
analysis in England, America, Ottoman-Turkey and Malaysia (2013, 2014). In this sense our
quantitative analysis, in developing a grounded theory for an Islamic monetary theory of
value, reconfirms our earlier qualitative review of earlier Muslim scholarship concerning annuqud.
Al-Maqrizi’s insisted that Muslims should return to a bimetallic commodity standard
in the form of the dinar and dirham, being the Islamic currency, as reflected in al-nuqud al-
Islamiyyah (Al-Maqrizi, 1967), and also in the Ighathah (Al-Maqrizi, 1940; Allouche 1994).
Al-Maqrizi argued that when debased gold or silver, cheap fiat money (fulus) or related
monies of account (such as the dirham fulus), circulated such that their exchange rates were
fixed and did not reflect their intrinsic market value, then ‘bad money’ (fulus) would drive
out ‘good money’ (dinars and dirhams): his monetary reform was to simply expose the cheap
money, by allowing Islamic currency to circulate according to its intrinsic value: in this case,
‘good money’ would drive out ‘bad money’, and prices would remain stable and low over the
long term. In this sense, Choudhury is correct in interpreting money in Islam as endongenous,
that it could circulate (he suggested within a gold reserve system) according to real output,
rather than exogenous monetary management derived from fractional reserve banking
(Choudhury, 1997, 2010). He also noticed than whilst Islamic banks had performed well in
terms of profit maximization, they had lagged in terms of providing instruments for socioeconomic
development (Choudhury, 2005). Meera also highlighted the injustices of the
fractional reserve banking system (Meera, 2007), having emphasized importance of the gold
dinar system in retaining its store of value (Meera, 2002), and recommended a multi-lateral
netting and clearance system involving the dinar as a unit of account (Meera, 2004).
Our research goes further in envisaging a physical return to the Islamic currency. Of course,
it would ensure that there would be no ability for credit creation involving debt at interest,
since fiat money would be redeemed for high quality gold and/or silver coinage, and the
opportunity cost of the time value of money is eliminated, when the value of money is stable
over the long term. In restoring ownership to the medium of exchange to the ummah, credit
creation is halted, since it is effectively declaring banks deposits as legal tender and thus
removing them from the balance sheet of financial intermediaries. Importantly, the
sovereignty of the issuance of money is restored to the public mint, but the ownership is
transferred to the private individual. Indeed, at a macro level, the separation of the provision
of finance and the issuance of money, would no longer require any currency commission or
monetary authority to manage the supply money, except for the market oversight office (alhisba)
and the public mint (as-sikka), the latter operating under the auspices of the state
treasury (bayt al-mal), to ensure that the intrinsic value of an-nuqud Islamiyyah is
maintained, thereby ensuring a trusted medium of exchange in domestic and international
transactions. Whereas, at a micro level, profit and loss sharing equity finance requires an
endogenous money supply, circulating by specie according to its intrinsic market value (not
by tale reflecting any nominal face value), and expands or contracts with trade. In this sense,
Islamic banks would evolve into genuine two-tier mudharabah vehicles for the provision of
finance, or become wealth managers. In reality, non-participatory financial intermediation
would revert to direct participatory Islamic equity finance in the form of mudharabah and
musharakah investment contracts involving private individual partnerships or similar
financing arrangements emanating from pious endowments (waqf) to improve socioeconomic
development. Moreover, absent of the interest rate on debt based fiat money, the
purchasing power of gold and silver would significantly increase, such that the impact from
the efficient distribution of zakat in the form of an-nuqud, would also provide an important
contribution to economic growth, especially as wealth is rotated to the poor with a higher
propensity to consume goods and services involving prices, which would no longer
Adam Abdullah
 |
| Islamic Monetary Theory of Value and Equation of Exchange |
Introduction
This paper involves an analysis of the monetary system in Egypt from 696 to 1517, a period
of 821 years that stretched from the Umayyad to the Abbasid caliphates before the onset of
the Ottoman caliphate in 1517. During the nineteenth century, the medium of exchange
migrated from bullion (as an asset of the public) to paper money backed by debt (as an asset
of the banks). At the same time, there was a migration in the development of economic and
monetary theory, in order to justify a theory of banking and a theory of interest. The problem
is that this has only been achieved by re-defining money as a commodity that comes at a
price (interest), whereas in Islam, money is “like a mirror, which has no colour, but it reflects
all colours…it is an instrument to lead to all objectives…” (Ihya 4:91-93 cited by Ghazanfar,
2003:33-34; Al-Ghazali, 2004:90-91; Usmani, 1999:81-83). Accordingly, in Islam, money is
an instrument of transfer only, which carries no additional charge or price, associated with its
usage. Interest is the price of debt reflecting the supply and demand of loanable funds, and a
debt, or a loan at interest, is always greater than cash received. This explains the necessity of
increasing the stock of fiat money, which is backed by debt, being the asset of the banking
system, such that the value of goods and services must accommodate this inflationary
increase in the supply of money, the value of which increases at total aggregate interest
(Abdullah, 2014). However, a usury free monetary system based on a bi-metallic commodity
standard can only reflect the quantity and quality of goods and services that a society
produces. Money must have a counter-value (‘iwad) that inherently reflects intrinsic value
(by specie) as opposed to extrinsic value (by tale). Our research develops an Islamic equation
of exchange, where the real economy leads the monetary sector (and not the other way round
as in capitalism). As such, from a classical Islamic perspective, the theory of money may be
more precisely termed a theory of coinage.
A number of Muslim scholars have differentiated between a wider medium of exchange
(wasilat tabadul) and currency (an-naqd). Currency has been defined as: “Nuqud is the plural
of naqd and is composed of gold and silver” (Majallah, Art.130), and referred to by the
fuqaha as meaning that 1 dinar equals 10 dirhams by value (as the Islamic exchange rate in
determining zakat). Due to a shortage of an-nuqud, ‘Umar ibn al-Khattab (r.a.) contemplated
using leather from camels as a medium of exchange, but the sahabah advised against it since
it would create a shortage of camels (Dawud, 1999:145 cited by Haneef, 2006:28); on the
other hand, the inference is that since camels were plentiful in Arabia it would have no doubt
have suddenly created an increase in money supply, but equally it would have increased the
cost of transportation. Hence, man is free to choose a medium of exchange, but there is an
economic impact if it is not to be pure gold or silver.
Naqd also means the payment of a price
in dirhams, as relayed in the hadith of Jabir, “He paid (naqada) me its price” (Muslim
10:3886). In the Sunan of Ibn Majah we discover an important hadith entitled the
“prohibition of destroying dirhams and dinars” in the book of business transactions; “Alqama
b. Abdullah (r.a.) reported on the authority of his father that Allah’s Messenger (s.a.w.s.)
forbade from destroying the coins in vogue among the Muslims without any necessity” (Ibn
Majah 12:2263, also Abu Dawud 23:3442). In Islamic jurisprudence (usul al-fiqh), this aught
to be sufficient evidence to not discard what Islam has intended to be currency.
Indeed, the Islamic theory of coinage is evident in the writings of Ibn Khaldun: “A gold
mithqal [dinar] weighs seventy-two average-sized grains of barley (habbahs). Consequently,
the dirham, which is seven-tenths of a mithqal, has a weight of fifty and two-fifths grains. All
of these values are accepted by general consensus” (Ibn Khaldun, 1958, 3:58), and Al-
Maqrizi: “The weight of one mithqal [dinar]…weighed 72 habbahs” of average unshelled
grains of barley whose extremities are cut (Allouche, 1994:57), and “the weight of one
dirham was fifty and two-fifths habbahs” (Allouche, 1994:61). Other than for their use in
transactions generally, the dinar and the dirham as currencies (an-nuqud) also occupy a very
important position regarding an additional Islamic function of money, as a determinant in
imparting justice within the Shari’ah, with respect to, Zakat (poor tax), Jizya (tribute tax),
Kharaj (land tax on conquered territory), Diyyat (blood-money), the minimum amount in the
case of Sariqa (theft), Mahar (dowry), and Sarf (currency exchange). More specifically,
central to the theory of money is Islam, is that the stability of the value of money is an
indispensable objective of the Islamic monetary system, and this is derived from the Qur’an,
which unequivocally stresses honesty and justice in all measures of value (Chapra, 1985:37):
“Give full measure and weight fairly, and defraud not men their things, and do not act
corruptly in the land, making mischief” (Al-Qur’an 11:85). As a store of value function of
money, for money to be eroded in value in real terms, is clearly tantamount to corrupting the
world, because of the adverse affect it has on economic welfare and social justice. If
persistent inflation exists (the effect), associated with a decline in the value of money (the
cause), as a result of an exponential supply of money in relation to its’ demand, it would
imply that money would not be able to reliably perform its role as a reliable medium of
exchange, as an honest unit of account and measure of value, as an equitable standard of
deferred-payment, and as a trustworthy store of value.
This paper is organized into five sections. The first section provides an introduction to the
research; the second section presents a review of relevant literature concerning money and
prices over the long term; the third section details the methodology; the fourth section
presents our findings and discussion; and the fifth section provides some concluding remarks
and recommendations relating to monetary theory and policy, and highlights the impact of
the research on society.
Literature Review
This section reviews orientalist literature, historical monetary and prices, contemporary
articles related to this research including methodology. Numismatic literature derived from
the orientalists, mostly writing in the 1950s and 1960s, strove to prove that Muslims merely
replicated Byzantine coinage (Ehrenkreutz 1959, 1964 also Grierson, 1960, 1961). Ironically,
when also combined with additional data from Brunetti (1950) and Gordus (1974), we
essentially have a reasonably complete picture on the standard of fineness, and thus the
attitude towards purchasing power, of not only early Muslim coins, but of those coins in
circulation at the time of the Prophet (s.a.w.s). Since Islam arrived with the dawn of mankind,
we may further reflect in Allouche’s translation of the Ighathah by Al-Maqrizi, who reported
that, “the first to mint the dinar and the dirham was Adam, who said that life is not enjoyable
without these two currencies” (Allouche, 1994:55-56), and Rasulullah (s.a.w.s.) said, “A time
is certainly coming over mankind in which there will be nothing (left) which will be of use
save a dinar and a dirham” (Imam Ahmad ibn Hanbal, Musnad, cited by Meera, 2002:1):
hence, an-nuqud are ancient coins that will once again be adopted for the benefit of mankind.
For earlier analysis on monetary conditions and prices in Egypt, Allouche (1994), Ashtor
(1969, 1971, 1976), Balog (1961), Shoshan (1983), Schultz (2003, 2008) and Borsch (2005)
provided commentary and data on exchange rates and prices of wheat and other commodities.
Allouche’s translation of the Ighathah was an indispensable chronicle of monetary policy in
Egypt. Although, the orientalists, and Ashtor in particular, provided excellent source
material, we found their readiness to dismiss first hand Muslim accounts in favour of their
own interpretation, has led to a number of errors: their inability to tie in numismatic evidence
and differentiate between legal weights, various Egyptian coin standards and Egyptian
weights was the most obvious, by ignoring Al-Maqrizi (Allouche, 1994:68), whilst Balog’s
(1966, 1973) interpretation of surviving glass-weights as a form of circulating token-money
and his subsequent defense (Balog, 1981) from Bates’ (1981) correct interpretation and
dismissal of Balog’s theory, was perhaps the most embarrassing, by ignoring Al-Muqaddasi
(2001:199). Whilst views differed, generally, we learn that by the time of the Mamluks,
although gold was still found to be in circulation, fulus became the dominant circulating coin
and the exclusive measure of value, including its’ use in paying land taxes (kharaj) and zakat
on the profits of merchants. Silver was melted down to make jewelry for the courtiers, or in
the form of bullion, for export in exchange for the import of copper with the Europeans,
specifically the Venetians offered copper from the Netherlands, Hungary, Serbia and Bosnia
(Ashtor, 1976:305), until, according to Al-Maqrizi, silver became almost non-existent
(Allouche, 1994:71), and lost its function of money as a medium of exchange and a measure
of value. The over-production of fulus (Allouche, 1994:55) resulted in a hyper-inflationary
depression (ghummah) in 806-607/1404-1405 that killed half of the population (and all the
livestock), due to poverty, starvation and the plague (Allouche, 1994:51, Ashtor, 1976:305),
including Al-Maqrizi’s own daughter (Tomas, 1996:111).
In recent times, a number of articles have appeared discussing a return to the gold dinar
under a gold standard. These articles are positive towards their analysis of gold, but their data
is rather selective being only derived from Malaysia and only over the short-term.
Nonetheless, in discussing the stability of gold in relation to other assets (returns on gold
were compared to returns on stocks), Mansor confirmed investing in gold coin, such as a
dinar or Kijang Emas, “as a vehicle for preserving wealth in the midst of recurring financial
turbulences during the present time” (Mansor, 2011:88), and also assessed whether money
supply was a significant cause in fluctuations relating to real output and prices, stating that
concerns relating to the “instability effect of money supply are well grounded empirically”
(Mansor, 2006:18). Additionally, by correlating consumer products in dinar and the U.S.
dollar, Sharif showed that the dinar would stabilize price fluctuations (Sharif, 2007:16).
Mansor also showed decisively from 2001-2007, that savers in gold have a “complete hedge”
against domestic inflation, as measured by CPI (Mansor, 2009:373-388). On the other hand,
Zubair Hasan received the Islamic Development Bank’s Laureate Prize in Islamic Economics
in 2009, for expressing the return to dinar under a gold standard as “being devoid of
reason…[and] it is time that we banish gold (dinar) as money from all serious discussions in
economics – mainstream or Islamic” (Hasan, 2008:3,18). It is unfortunate that his paper is
largely absent of empirical evidence and rather short on the correct interpretation of
economic theory, although Hasan does point out that “the difficulty with most of the
econometric excursions is that their results are specific to the period the data cover. They are
found very weak on the prediction front” (Hasan, 2008:13) having pointed out that a lower
correlation between gold and prices existed in the decade prior Mansor’s data.
This research may address Hasan’s criticisms of the selective nature of contemporary articles,
when we consider the 821 year empirical investigation, coupled with that of Abdullah’s
analysis in England, America, Ottoman-Turkey and Malaysia (2013, 2014). In this sense our
quantitative analysis, in developing a grounded theory for an Islamic monetary theory of
value, reconfirms our earlier qualitative review of earlier Muslim scholarship concerning annuqud.
Al-Maqrizi’s insisted that Muslims should return to a bimetallic commodity standard
in the form of the dinar and dirham, being the Islamic currency, as reflected in al-nuqud al-
Islamiyyah (Al-Maqrizi, 1967), and also in the Ighathah (Al-Maqrizi, 1940; Allouche 1994).
Al-Maqrizi argued that when debased gold or silver, cheap fiat money (fulus) or related
monies of account (such as the dirham fulus), circulated such that their exchange rates were
fixed and did not reflect their intrinsic market value, then ‘bad money’ (fulus) would drive
out ‘good money’ (dinars and dirhams): his monetary reform was to simply expose the cheap
money, by allowing Islamic currency to circulate according to its intrinsic value: in this case,
‘good money’ would drive out ‘bad money’, and prices would remain stable and low over the
long term. In this sense, Choudhury is correct in interpreting money in Islam as endongenous,
that it could circulate (he suggested within a gold reserve system) according to real output,
rather than exogenous monetary management derived from fractional reserve banking
(Choudhury, 1997, 2010). He also noticed than whilst Islamic banks had performed well in
terms of profit maximization, they had lagged in terms of providing instruments for socioeconomic
development (Choudhury, 2005). Meera also highlighted the injustices of the
fractional reserve banking system (Meera, 2007), having emphasized importance of the gold
dinar system in retaining its store of value (Meera, 2002), and recommended a multi-lateral
netting and clearance system involving the dinar as a unit of account (Meera, 2004).
Our research goes further in envisaging a physical return to the Islamic currency. Of course,
it would ensure that there would be no ability for credit creation involving debt at interest,
since fiat money would be redeemed for high quality gold and/or silver coinage, and the
opportunity cost of the time value of money is eliminated, when the value of money is stable
over the long term. In restoring ownership to the medium of exchange to the ummah, credit
creation is halted, since it is effectively declaring banks deposits as legal tender and thus
removing them from the balance sheet of financial intermediaries. Importantly, the
sovereignty of the issuance of money is restored to the public mint, but the ownership is
transferred to the private individual. Indeed, at a macro level, the separation of the provision
of finance and the issuance of money, would no longer require any currency commission or
monetary authority to manage the supply money, except for the market oversight office (alhisba)
and the public mint (as-sikka), the latter operating under the auspices of the state
treasury (bayt al-mal), to ensure that the intrinsic value of an-nuqud Islamiyyah is
maintained, thereby ensuring a trusted medium of exchange in domestic and international
transactions. Whereas, at a micro level, profit and loss sharing equity finance requires an
endogenous money supply, circulating by specie according to its intrinsic market value (not
by tale reflecting any nominal face value), and expands or contracts with trade. In this sense,
Islamic banks would evolve into genuine two-tier mudharabah vehicles for the provision of
finance, or become wealth managers. In reality, non-participatory financial intermediation
would revert to direct participatory Islamic equity finance in the form of mudharabah and
musharakah investment contracts involving private individual partnerships or similar
financing arrangements emanating from pious endowments (waqf) to improve socioeconomic
development. Moreover, absent of the interest rate on debt based fiat money, the
purchasing power of gold and silver would significantly increase, such that the impact from
the efficient distribution of zakat in the form of an-nuqud, would also provide an important
contribution to economic growth, especially as wealth is rotated to the poor with a higher
propensity to consume goods and services involving prices, which would no longer
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