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Ravages of Paper Money

By Shah Nawaz Khan

In theory, the paper money can have a stable value but, in practice, paper money has always resulted in inflation.

When the Government controls the inflation and regulates banking interest rate, it cannot be regarded as usury because in verse 2/279 the need for justice both for the borrower and the lender is prescribed and under the paper currency system loss of purchasing power of money occurs.. Holy Quran  prohibits 'RIBA', which literally means 'excess' and is usually translated as usury or interest. Bible also prohibits usury. The meaning of usury is an excessive or illegally or immorally high rate of interest charged on borrowed money.  Interest means the payment made for the use of another person's money. In economics, these days, it is regarded more specifically as a payment made for capital and the compensation for loss of its purchasing power as well as the charges for its use.

How Paper Money Becomes Riba (usury) in Reverse?

At the dawn of Islam the money consisted of gold and silver coins like most other countries. In the long run due to population explosion gold and silver become scarcer than the labor and their value appreciates and while the value of labor regresses in terms of gold and silver. 

Origin of British Pound

Historically, in Anglo-Saxon Britain during the 8th century the basic monetary unit was called a sterling. It was made equivalent to 1/240 of a pound of silver and 240 sterlings became known as a pound of sterling. Periodically, as the British economy fluctuated, the value of the paper pound was altered with respect to its equivalence with other currencies as well as the silver. Since 1972 the pound has floated free at a rate determined by supply and demand.

What Happened to Gold and Silver Dollars?

There were silver and gold dollars first issued in 1794 by the United States Federal Government and over the years the actual quantum of silver and gold in the dollars coins kept on reducing. A congressional enactment in 1900 established the gold dollar as the monetary standard of value in the United States, thereby fixing the value of legal-tender paper money in terms of the metallic gold dollar. In 1934 the gold content of the dollar was reduced again, most gold coins and paper money gold certificates were called in by the federal government to be exchanged for other forms of the national currency, and the coining of gold pieces was discontinued. 

In verse 2/279 of Holy Quran the need for justice for both the borrower and the lender is prescribed. Therefore when the Government controls inflation and regulates banking interest rate, it cannot be regarded as usury.

The old golden coin of Pakistani RS. 500 is out of circulation and may now be worth RS. 500, 000 or so for its weight or may be much more more for its antique value.

The Rupee Currency note of 1949 is no more in use since last several years 

Since the 8th century in China, every experiment with fiat money has ended in disaster, many times destroying the middle class, that group that protects society from the barbarians. To counter this risk and to protect and preserve our civilization, it is essential that we once again return to "the standard of every great civilization": gold-as-money


.In 1950 the Pie coin was stronger than today's Rupee coin

Fiat Money 

Since then, circulating currency has been fiat money, the worth of which is derived from its purchasing power rather than its redeemable value. Silver dollars, however, continued in circulation until 1965, when they almost disappeared because the value of their silver content exceeded their face value. During the 1970 the Gold standard was abandoned altogether as the paper currency in circulation far exceeded the gold reserves required to redeem that.

As a professor of economic Lawrence Parks opines: Today, fiat money, money that is created out of nothing and without work, is used worldwide. The reason monetary authorities have gotten away with this prima-facie fraudulent money is a combination of coercion (specifically legal tender laws in every nation and restrictions the IMF has put in place internationally that prohibit member countries from linking their currencies to gold, and only to gold), misrepresentations, and nondisclosure of material information. Since the 8th century in China, every experiment with fiat money has ended in disaster, many times destroying the middle class, that group that protects society from the barbarians. To counter this risk and to protect and preserve our civilization, it is essential that we once again return to "the standard of every great civilization": gold-as-money.

In theory, the paper money can have a stable value but, in practice, paper money has always resulted in inflation. The experience of most countries with paper money following the disconnection of their money from gold standard shows that during the 1970s, the rate of inflation accelerated from creeping into galloping, interest rates rose to double-digits while real rates of return went negative, and their business cycles worsened, the price of energy quadrupled and there were energy shortages and gas lines.

In 1989 the old 1804 Dexter Dollar coin was auctioned off for $990,000? In 1997 another 1804 dollar was sold for $1,650,000/-

The old golden coin of Pakistani RS. 500 is out of circulation and may now be worth RS. 500, 000 or so for its weight or may be much more for its antique value.

A Brief History Of India In 15 Currency Notes

An extract from this site is given below 15 Currency Notes of British India

In the 19th century, the British introduced paper money into the subcontinent. The Paper Currency Act of 1861 gave the Government the monopoly of note issue throughout the vast expanse of British India, which was a considerable task. Eventually, the management of paper currency was entrusted to the Mint Masters, the Accountant Generals and the Controller of Currency. A series carrying the portrait of George V were introduced in 1923, and was continued as an integral feature of all paper money issues of British India. These notes were issued in denominations of Rs 1, 2, 5, 10, 50, 100, 1,000, 10,000.

Fall In Purchasing Power of Paper Money

Printing of currency notes without any base or beyond the reserves required maintaining its stability, causes fall in purchasing power of the money and we have seen the demise of gold and silver dollar as well as India's silver Rupee and other coins in the subcontinent such as paisa, annas, chowanni etc. and now the Rupee is worth less than an Anna of yester years. On the other hand in the old days where there were metal coins the worth of money used to appreciate against consumable items. Now the printing of one Rupee note costs more than its face value and it has been abolished and the RS. 5 note has also gone. Now RS. 5 coins is much smaller than the old coin one rupee.

Regulating Banking Interest Rates

Indeed usury is regarded as social evil in many countries and maximum limits are prescribed over which the bank cannot charge interest on any loan or advance.  For instance on Credit Card in many States of US, the bank cannot charge more than 9 to 12 % interest but the same bank or its subsidiary is free in Pakistan to charge 52% compound interest in the name of monthly service charge of 3,50 % pm over and above the normal annual service charges of a few thousands of Rupees. This is all happening in a country which vows to have laws in the light of Quran and Sunnah but only to fool people and itself.

Paper currency when it is not backed by a promise to redeem by Gold invariably causes loss of purchasing power as we have seen during last 50 years specially after gold standard was abandoned by IMF in 1970.

The orthodox scholars of Islam regard interest - even when it is regulated by the government - as usury, which is prohibited by Holy Quran. But they have not been bale to find any solution for loss of purchasing power of paper currency and do not interpret the provision in Holy Quran for return of capital value of the amount lent. In fact they do not realize that fiat money system is RIBA in reverse as pointed out in the following quotes:

Maynard Keynes (1883-1946), British economist said ,

"The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity;; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

Ernest Hemingway, U.S. author

These certainly are against the principles of good governance under Islamic ideals.

Sale of Goods on Installments

If you sell a car worth RS. 400, 000 now in sixty monthly installments of RS.15000 it is legitimate business even though the total payments would aggregate to RS. 900, 000 but if the bank lends you RS. 400, 000 repayable in monthly installments with on Interest such as 15% or so it is not legitimate under Orthodox Islamic ideals even though you pay back to the bank hardly RS. 600, 000 in five years. Let us consider the another example.

Zaid acquired a loan of RS. One million from his friend for building a house. At that time the gold was worth RS. 50 per gram. The loan was valued as 20, 000 grams of gold and it was agreed that every year Zaid would give 1000 grams of gold and the loan would thus be repaid in 20 years.

Examined in the light of different fatwas there is no element of Riba in this agreement and it is admissible under Sharia. On the same date Bakar is sanctioned a Loan of RS. One Million by a bank on the interest rate prevailing at the time and he has to pay the annual installment of RS. 90, 000. Thus in 20 years he would be paying over RS. 18 Lacs for a loan of RS. 10 Lac and the excess of over RS. 8 Lacs is said to be RIBA and Haram. (The annuity of RS. 90, 000 per annum would accumulate to a bigger amount than 18 Lacs depending upon the interest earned by the bank.) Supposing this was interest free loan for RS. 10 Lace with annual installment of RS. 50, 000 for 20 years, how the lender would be compensated for loss of purchasing power of money under the installments paid? Will it not be unjust?

In verse 279 of surah 2 the need for justice for both the borrower and the lender is prescribed. Some people opine that an agreement under verse 2/282 can include compensation for use of money and that cannot be regarded as riba but this view is not accepted by the majority. Is Federal Shariat Court is likely to accept that view in future? Some hope so.

Now let us examine the predicament of Zaid. He is experiencing the increase in the price of gold every year. In the 20th year his last installment of 1000 gram of gold would alone cost him RS. 5 Lac in gold purchase and he ends up by paying over 35 Lacs in gold purchases to redeem his loan, which was worth only RS.10 Lacs 20 years ago and the excess of 25 Lacs that he spent on gold is regarded as Riba.

Of course, under the fiat system of money (Paper Currency without any Commodity base) the banks and financial institutions can adopt the Gold conversion system for their loans and advances and other transactions but its administrative cost would be quite great and control is also problematic.

Having a gold base for money is a sound practice. But as the Governments have issued currency notes up to umpteen times of their actual gold reserves they may not be able to switch over to commodity base. Moreover, since 1971 IMF rules prescribe that a member country must not have any commodity base for money.

Anti-Usury Laws

Prohibition for usury is given in Bible also and in many countries maximum limits are prescribed over which the bank cannot charge interest on any loan or advance. For instance on credit card in many States of US, the bank Cannot charge more than 9 to 12 % p.a. interest but the same bank or its subsidiary has been free in Pakistan to charge 52% compound interest in the name of monthly service charge of 3,50 % pm over and above the normal annual service charges of a few thousands of Rupees. This is all happening in a country which vows to have laws in the light of Quran and Sunnah but only to fool people and itself.

Printing of currency notes without any base or beyond the reserves required maintaining its stability, causes fall in purchasing power of the money and we have seen the demise of gold and silver dollar as well as India's silver Rupee and other coins in the subcontinent such as paisa, annas, chowanni etc. and now the Rupee is worth less than an Anna of yester years. On the other hand in the old days where there were metal coins the worth of money used to appreciate against consumable items. Now the printing of one Rupee note costs more than its face value and it has been abolished and the RS. 5 note has also gone. 

Let us pray the speed at which the fall in purchasing power of money is controlled.

Maynard Keynes (1883-1946), British economist said,The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

Comments and suggestion may be sent to the author shah1936@gmail.com

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