Munich Personal RePEc Archive

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.

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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.

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