An Islamic View Of Ideal Money
The late John F. Nash (1928 – 2015) is well-known for his work on mathematics and game theory that won him a Nobel Prize in Economics Science and partly for his biography in the Oscar-winning film “A Beautiful Mind”. However, he is probably less known for other significant work that is on ideal money.
Does the notion of Nash’s ideal money bears any resemblance to Islamic ideals and how would it be possible to exist in reality?
Ideal money is basically a concept of money that is stable over a long period of time. The context of stability here refers to the value or price as indicated by zero rate of inflation.
In the context of modern world, money exists mainly due to international trade and labour specialization, in which money mediates the market and exchange process. As such, money has changed its form in line with mode of trade transactions; from physical commodity to coinage to banknotes and finally to electronic or digital currency.
The theory of ideal money postulated by Nash is to infer the stability of international currencies, particularly when they are in conflict of economic interests, arises between short-term domestic and long-term international goals. Such a conflict may take place when a currency used in a country also serves as a world reserve currency.
For example, the use of the U.S. dollar for both national and global currency leads to a tension that is reflected in the imbalance of the U.S. current account. The dilemma occurs when some goals require an outflow, while others require an overall inflow of dollars into the U.S. This has led to global savings and investment imbalances that culminated in the financial crisis in 2007 due to heightened demand for dollars.
The main challenge for having ideal money lies in the mechanism to create the price stability as manifested by zero inflation. Inflation occurs when there is a sustained increase in the general price level of goods and services in an economy over a period of time.
According to Nash, the ideal money could be arranged for by linking currencies to an appropriate index of the prices of internationally traded commodities. This calls for a technical knowledge to design an index of prices and a proper selection of a variety of commodities based on their intrinsic value and global trade suitability. The range of commodities may include gold, silver, copper, nickel, crude petroleum and so forth.
Nash’s proposal for ideal money has its own merit from the Islamic perspective. In Islamic view, money is composed of assets that are scarce, durable, divisible and homogeneous. These assets include ribawi products such as dinar (gold), dirham (silver), rice, dates, wheat, barley and salt.
In addition, money serves as a standard measurement of value across the world. For this purpose, it should not have inflated price or generate riba (usury) in a trading or exchange process. This Islamic principle is in line with ideal money that ought to be stable in value over a long period of time.
Following the Asian Financial Crisis in 1997, the idea for an Islamic gold dinar was introduced by Malaysia to be used among Islamic countries. In fact, there is a surge of interest for world’s major currencies to return to gold standard after the collapse of Bretton Wood system in 1970s.
Nash is in view that gold is the most efficient and optimal commodity for ideal money. However, he argued that the return to the actual use of simply metal gold as a standard of value might face some intricacies from government deficiency, political risk and cost involved.
Nevertheless, the ideal money is not to be considered without caution. For instance, there are shariah guidelines on the specific quality of assets or commodities to be accepted as money. Islam also views money as sacred and not merely transactional or secular in nature. According to Al-Ghazali, “The creation of dirhams and dinars is one of the bounties of Almighty Allah” and thus obligates Muslims to express shukr (gratitude) to the Almighty Creator.
Considering the risk of fiat monetary systems as currently practiced by the nations worldwide including the Islamic countries, there is a need to embrace an acceptable standard of monetary system from the perspective of maqasid al-shariah (objectives of Islam). The mechanism of ideal money based on appropriate metric, such as a consumption price index agreed between nations, can be a practical and sound solution for quality money.
With the emergence of crypto currencies against fiat money, the debates over the wisdom of ideal money is even more critical for Muslim scholars and communities in highlighting the issue of riba, Islamic monetary system and hifz al-mal (wealth preservation).