Sunday, July 24, 2011

The A and B of currencies ( The Edge, Malaysia July 18-23, 2011)

The A and B of currencies

Written by Zahid Aziz

This article appeared in Forum page of The Edge Malaysia, Issue 867, July 18-24, 2011

We have just completed a job and about to be paid for it. We are given an option to be paid A or B. A’s value is stable - there seems to be a basic value which is unchanged.

B has no basic value. If you hold B its value can be taken away by various external forces. It can be changed by the governments; it can be changed by governments creating more and more of it; it can be changed by people losing confidence in it; it can also be changed by outsiders holding large quantities of it and cornering the market for it.

However the worse thing is the theft of its value by governments creating more and more of it. We do not even realise the loss of value until we use B to buy things; what cost three B before now cost six B for example.

But we have no choice, we have to use and accept B otherwise we will be imprisoned. But then again we should be grateful it is just a prison term. In the days of Kublai Khan, we could be executed for refusing to accept B!

So the people just accepted it without any protest. The governments also told the people to ‘just do it’. In Latin this translates to ‘fiat’. Hence B is based on fiat- forced on you by the governments.

In the early days one used A to buy and sell things. However dictatorial governments force its citizens to hand over A and use only B. This trend was started by Kublai Khan and he was not a pleasant personality.

Where A was concerned no one could steal its value but with B such opportunities thrived! Isn’t this opportunity to defraud called gharar in Islamic terms?  And we have not even address the qisas punishment for theft.

Don’t forget that in an Islamic finance system we are trying to remove riba from a system of B, a system of deceptive IOUs to be exact, which is really what B is all about. One should remove riba when A is used for buying and selling. But when deceptive IOUs are used instead of A and we are trying to remove riba from that system, it’s farcical to say the least. However the persistent optimist in us hopes that this is just Phase One. Phase two will be the removal of B to be replaced by A.

Before we address the cries of the non-believer of the deemed impossibility of removing B let us dwell on the deceptive nature of B so that things will be clearer.

Now every month we receive a certain number of B, say 3000 of it, which we use to buy food and things for our family. Our assumption is that the governments have put in place a system where the total number of B in the country is unchanged. An unchanged total number of B means we can retain the value of our B, right?

We understand if there is, for example, a fixed total of one million B in the country available for buying and selling a fixed number of products of say one million C. Then the number of C our 3000 B can buy a month is unchanged! However if the number of B can be increased while C remains unchanged we can see the price of C going up in terms of B, right? That means if our 3000 B used to buy 3000 C it can now only buy 2500 C. So who is stealing the value of our B?

Governments are one of the culprits; they can do that by creating more B and you cannot do anything about it. But did you know that governments allow other groups of people to wantonly create more B? These people accept deposit of your B and lend B to other citizens.

When these citizens deposit B again, it is lent to other people. This system allows B to be created out of thin air. Based on the original amount of money that remains unchanged, both the depositors and the borrowers believed they all owned the same bundle of money. And they all have cheque books to prove they can spend it! And remember more B in the system the less C you are able to buy.

Crazy huh? But you don’t question because you were brought up not to question. Now you recall how when you first started work in the 1980s your salary was 1,800 B. If you wanted to buy a new first car it only costs 14,000 B and if you wanted to buy an ordinary terraced house it will only cost you 60,000 B. Today the young man starts work at a salary of 2000 B but a new car is 40,000 B and a new house is 300,000 B! But you still don’t question the system.

It is bad enough if that is all the effect of B, but an international system of B allows superpowers to manipulate the system at the expense of little countries. And you wonder why nobody believes, that if little countries drop B and instead use A in their international trade this ability to manipulate will end

A is gold and B is paper currency and the deposit-lending system described above is fractional reserve banking. Gold is Sunnah money; Dinar, Dirham and Fulus. Dinar is gold, Dirham is silver and Fulus is small change. Sure, there are technical difficulties down this road but is it really beyond our intellect to solve them? Or just like what riba has done to us down the centuries we are hopelessly zombied to its inequities.

Zahid Aziz has 20 years of experience in Islamic banking and finance and is a director of Muamalah Financial Consulting, an Islamic capital market consultancy.

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