In mainstream economics, it’s very hard to not discuss interest rate. The idea of interest rate in mainstream economics is so prevalent that if a person successfully pushed the idea of interest rate out of all equations, chances are, modern economic system would undergo a radical transformation, for better or for worse. In Islam, there’s an explicit prohibition of usury (tag). I don’t consider modern-day interest rates as usury but rather, accept usury as unreasonable interest rates, such as those enforced by loan shacks; not rates imposed by proper financial institutions that are based on economic fundamentals. However, if a person really wants to err on the conservative side, it’s really hard for me to reconcile modern economics that I’m acquainted of with Islamic economics. But it occurred to me recently that there might be a way to reduce the presence of interest rates in an economic system. There are probably more than one way but I’ll touch only one.
First, let’s get down to basic.
There are a number of causes why interest rate exists. One of them is inflationary expectation. At the same time, inflation is caused by several reasons. One of them is the increase of money supply. Some people may not agree to that but let’s just assume that the monetarists, the Austrians and the supply-side people have the upper hand over Keynesians.
When inflation is going up, it’s typical to hear a corresponding central bank to increase interest rate; nominal interest rate. A real interest rate is roughly equivalent to nominal interest rate subtracted by inflation. Because inflation necessarily erodes real interest rate, increasing the nominal interest rate prevents the real interest rate from falling too much or at all. For this reason – and other unstated reasons – interest and inflation rate are closely related.
Keeping this in mind and the fact that Islam forbids usury – assuming usury includes those rates that I don’t consider as usury – adopting the gold standard is a logical solution to reduce the differences between Islamic and mainstream economic system (tag).
According to Wikipedia, the “gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold.” In a gold standard, every note issued by a government is backed by gold. This limits or outright eliminates a government’s ability to increase money supply, unlike fiat currency. Again, since one of the causes of inflation is money supply increase, adopting the gold standard eliminates inflation and with it, a cause for interest rate. Of course, this is assuming that the price of gold itself is free from inflation, which it is not. But the price of gold is relatively stable for us to not think too much of it. Gold is a reliable store of value.
Because gold standard eliminates a need – I stress, not all – to have interest rate, I’d expect those that want to build a more Islamic society to support a reversion to the pre-Bretton Woods period; back to the gold standard. Or any standard that takes away the government’s power to increase money supply.
The standard however is not free of fault. It has its own set of problems but I’m not planning to go into that. One question is, do I want to revert back to the gold standard?
Well, I’m pretty happy with the current system. No point fixing something that ain’t broken, yet.
Finally, do you notice something? This practically means there’s a policy overlap between conservative Muslims and objectivists! The causes for support differ but the end result is the same nonetheless. That’s just weird.
p/s – holy shit. Did you guys see how those shares at the local stock market fell today? Words on the streets have it that it has something to do with Iris. The Security Commissions along with Bursa Malaysia’s effort to curb excessive speculations over Iris might have spilled over to many other counters. I haven’t seen so many reds in recent local history!
pp/s – I am the very model of a modern wikipedian.