Wishful Thinking of Gold

I read this article recently, where the writer makes a case against returning to gold as a currency unless the issue of “growth” is resolved.

Two points:

  1. Quran 2:285 lists what should be the default attitude of the Muslims. “We hear and we obey.” As fiat currency was not used by the Prophet (SAWS) during his lifetime, Muslims first have to stop using it without raising any questions regarding “growth” or anything. But that is an issue of belief and not really debatable or my primary focus here.
  2. My primary focus, and interest, is that fiat currency fuels inequality. To be more precise, it fuels wealth inequality that in turn worsens income inequality in the long run. I have not come across any literature or read any article (of any kind) which made this claim, then again, most economic literature avoids the topic of inequality like it’s the “Ebola of the economics universe”. My gut instinct is based on the following thought experiment:
    • Imagine two people, one in possession of an apartment, the other living in a rental and both earning a fixed salary. A fiat currency is introduced (call it the dollar, $). The poor guy has no wealth, except for the salary. Both are earning the fixed salary of $1000 a month. An expansionist monetary policy is followed and there is a 10% reduction in the value of the currency. Their salary, which is fixed, becomes, in real terms, $900 ($1000 – [10% of $1000] = $900).
      • The person living in the rental used to pay $100 a month as rent, with the devaluation the rent is fixed at $110 to keep it in parity with real terms. Previously the person had $900 leftover; now the person has $890 leftover. If the poorer person kept all savings in the form of currency, the value of that savings will have taken a 10% dip as well.
        In nominal and real terms, income and wealth inequality have both worsened after the expansionist policy is pursued.

My complaint against fiat currency is not that it is forbidden in religion only, rather the reason that it is a discouraged practice. There is the little matter of fiat currency promoting interest, which is one of the major sins in Islam; however, a matter that often escapes attention is that the use of fiat currency worsens inequality and over time, the worsening inequality leads to an unstable society of “haves” and “have nots”. In that situation, introducing a market mechanism for everything will eventually lead to a large number of people being “priced out” of many things in life [you may want to see the following TED Talk by Michael Sandel to get an indication about what I mean].

Anyone thinking “What’s the big deal about inequality?” needs to be shown the details of the Occupy protests (the protest slogan was “We are the 99%”), and the massive protests that occurred in Spain and Greece after the austerity cuts were implemented to know how inequality can affect a population.

So my opposition to a fiat monetary system is not just ideological, it is also based on my (strong) suspicion that it fuels inequality which is very abrasive to social harmony.

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