Re-examining the equation of exchange according to Shariah rationale money

Ghassan, Hassan B. (2016): Re-examining the equation of exchange according to Shariah rationale money. Published in: Turkish Economic Review , Vol. 5, No. 4 (December 2018): pp. 402-415.

Abstract

Earlier, the Muslim scholars stated that money is a social convention. For instance, Ibn Taymiyyah (1263-1328) indicated that the gold standard money constitutes a pricing system or a rationale money. Ibn Khaldun (1377) urged a stable monetary policy by using Shariah currency which is related to the number of transactions, and the monetary policy was done through a control and a supervision by a Shariah board office as a monetary authority. The focus point in all transactions is to forbid the Riba including the banking interest rate. Inside the Shariah paradigm and according to historical economic facts revealed by Ibn Khaldun, we suggest that the economic theory of money, through the equation of exchange, should be re-examined by treating the value of transactions and the velocity of money as endogenous, and considering the stock of money as exogenous and determined only by the monetary authority. We expect that when the consumers and producers as buyers and sellers behave following the Shariah transactions by avoiding any form of unfair dealing, the speculative money will tend to zero and all the money stock will be in circulation. It is best for community welfare that the money reaches its optimal velocity by improving the trade between members of the society. Such Shariah statement would be realized at least through the Zakat system and by any form of re-distribution of the wealth or social giving. The implementation of a new gold standard system requires a political decision and the flexibility of the market prices processes. Even if money is just an instrument, it is perceived differently in Islamic and non-Islamic perspectives. The practical prescriptions (i)-ii)-(iii) based on Shariah transactions perception and Islamic economics paradigm would fit more for the mankind that needs justice and fairness.

• Item Type: MPRA Paper
• Language: English
• Keywords: Shariah, money, gold-silver, equation of exchange, convertible paper, fairness.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions

References

1. Abdul-Rahman, Y. (2010). The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking. Chapter 5 Money and its creation. Edition John Wiley and Sons, Inc., Hoboken, New Jersey and Canada.

2. Al-Suwailem, S. (2000). Towards an Objective Measure of Gharar in Exchange. Islamic Economic Studies, 7(1&2):61-102.

3. Anderson, RG., Bordo M., & Duca, JV. (2017). Money and velocity during financial crises: From the great depression to the great recession. Journal of Economic Dynamics and Control, 81:32-49.

4. Askari, H., & Krichene, N. (2016). 100 Percent Reserve Banking and the Path to a Single-Country Gold Standard. The Quarterly Journal of Austrian Economics, 19(1):436-471.

5. Askari, H., Iqbal, Z., & Mirakhor, A. (2015). Introduction to Islamic Economics: Theory and Application. Singapore: John Wiley & Sons.

6. Askari, H., & Krichene, N. (2014). The gold standard anchored in Islamic finance. 1st Edition Palgrave Macmillan.

7. Barro, RJ. (1979). Money and the Price Level under the Gold Standard. The Economic Journal, 89(353):13-33.

8. Bernholz, P. (2003). Monetary Regimes and Inflation: History, Economic and Political Relationships. Cheltenham, UK: Edward Elgar Publishing.

9. Bukhari Abou Abdullah Muhammad, (810-870). Sahih Al-Bukhari. Volume 3. Translation by M. Muhsin Khan, Edition of Mika’il al-Almany 2009, Book 34 Sales and Trade, Hadeeth number 382.

10. Chapra, MU. (1985). Towards A Just Monetary System: a discussion of money, banking and monetary policy in the light of Islamic teachings. The Islamic Foundation, Leicester, UK.

11. Currie, LB. (1991), 2004*. Money and savings: how definitions affect policies: January 16, 1991. Journal of Economic Studies, 31(3/4): 371–381. * re-printed.

12. El Diwany, Tarek (2003). The Problem with Interest. Second Edition, Publisher: Kreatoc Ltd. London, UK. https://ribh.files.wordpress.com/2007/12/the-problem-with-interest-tarek-el-diwany.pdf

13. Figuera, Stefano (2018). Considerations on Islamic Economic Thought Regarding Monetary Matters in the Middle Ages. Œconomia, 8(1):1-28.

14. Gerlach, S., & Svensson, LEO. (2003). Money and inflation in the euro area: A case for monetary indicators? Journal of Monetary Economics, 50:1649–1672.

15. Ghassan, H. (2016). A Consumer Model and Social Welfare Based on the Writings of Shibani (750-805 AD, 131-189 AH). PSL Quarterly Journal, 69(278):235-266.

16. Ghazanfar, SM., & Islahi, A. (1990). Economic Thought of an Arab Scholastic: Abu Hamid al-Ghazali. History of Political Economy, 22(2):381-403.

17. Hahn, FH. (1983). Money and Inflation. Cambridge, MA.

18. Hasan, Z. (2011). Money creation and control from Islamic perspective. MPRA Paper No. 39796.

19. Hassan, MK., & Lewis, MK. (2007). Handbook of Islamic Banking. Algaoud and Lewis, Chapter 3. Edition Edward Elgar.

20. Ibn Khaldun, AM. (1377). The Muqaddimah: An introduction to history. Translated from the Arabic by Franz Rosenthal, (1958). 3 vols. New York: Princeton.

21. Iqbal, MM. (2003). A Broader Definition of Riba. Journal of Islamic Banking and Finance, 20(3):7-31.

22. Islahi, A. (2006). Monetary thought of the Sixteenth century Muslim Scholars. Online at https://mpra.ub.uni-muenchen.de/18346/

23. Islahi, A. (2001). An analytical study of Al-Ghazali's thought on money and interest. Online at http://mpra.ub.uni-muenchen.de/41438/

24. Islahi, A. (1988). Economic Concepts of Ibn Taymiyyah. Leicester, UK: Islamic Foundation.

25. Itani, Talal (2012). This Quran could not have been produced by anyone other than God: The Quran. Published by ClearQuran, Dallas and Beirut. www.ClearQuran.com

26. Kato, Hiroshi (2012). Reconsidering Al-Maqrizi’s View on Money in Medieval Egypt. Mediterranean World, 21: 33-44.

27. King, RG., & Plosser, CI. (1986). Money as the Mechanism of Exchange. Journal of Monetary Economics, 17:93-115.

28. Maes, I. (2018). Central banking through the centuries. WP 345, National Bank of Belgium.

29. Mele, A., & Stefanski, R. (2018). Velocity in the long run: Money and structural transformation. Review of Economic Dynamics, forthcoming.

30. Muslim, ibn al-Hajjaj (817-875). Sahih Muslim. Volume 4. Translation by Nasiruddin al-Khattab, Edition of Maktaba Dar-Us-Salam 2007, Chapter 15 Exchange and selling gold for silver on the spot, Hadeeth number 4063.

31. Officer, LH., & Williamson SH. (2019). The price of gold 1257–present. Measuring Worth. Retrieved from http://www.measuringworth.com/datasets/gold/

32. Pamuk, S., (2000). A Monetary History of Ottoman Empire. Cambridge University Press.

33. Ron, Paul (2011). Gold, Peace, and Prosperity: The Birth of a New Currency. Second edition, Publisher: Ludwig von Mises Institute.

34. Simons, H. (1947). Economic Policy for a Free Society. Chicago, The University of Chicago Press.

35. Tuncer, C. (2012). Monetary sovereignty during the classical gold standard era: The Ottoman Empire and Europe, 1880-1913. Economic History Working Papers 44725, London School of Economics and Political Science, Department of Economic History.

36. Ugolini, S. (2018). The Historical Evolution of Central Banking. Chapter in Stefano Battilossi, Youssef Cassis, Kazuhiko Yago; Handbook of the History of Money and Currency, Springer Nature.

37. Ugolini, S. (2017). The Evolution of Central Banking: Theory and History. London: Palgrave Macmillan.

38. Vico, Giovanni Battista (1668–1744). The New Science of Giambattista Vico. 2d Edition 1968, Translation Thomas G. Bergin and Max H. Fisch. Ithaca: Cornell UP.

39. Von Mises, Ludwig (1953). The Theory of Money and Credit. New Haven, Yale University Press.