The Future of Monetary Reform and the Real Economy: A Problem of Trade Versus Interest

Abstract

The prologue is our starting premise.   The Qur’an (2: 275) declares, “As for those who devour interest, they behave as the one whom Satan has confounded with his touch. Seized in this state they say: ‘Trade is but a kind of interest’, even though Allah has made trade lawful, and interest unlawful”.   Keynes (1930, p. 368) picked up such wisdom of the inverse relationship between trade and interest and wrote, “The strenuous purposeful moneymakers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”   Such are the messages of moral highness and wisdom picked up in this paper. The fundamental point here is to establish the fact that the only way of phasing out interest rate from Islamic activities is to understand and implement the formalism of the inverse relationship that permanently exists between trade in the good things of life and the rate of interest as the impediment to the free flow of resources into such tradable activities.   The central bank and commercial banks and fi nancial intermediaries as practitioners must understand this organic relational concept of intellection in relation to money and the real economy. The monetary system and the real economy with the financial instruments between would thus be shown to formalize the intellection paradigm – which indeed is a truly scientific revolution. The result is replacement of the fractional reserve requirement monetary system by the 100 per cent reserve requirement monetary system backed by the gold standard. Likewise, the organic relationships of such a monetary arrangement including its monetary policy and transmission mechanism would structurally change the nature of markets and its institutional relations and individual preferences. The result at the end will be a phased down interest rate regime into a trade-related one by the rise of the tradable relationships that are generated. The foundational methodology that enters this kind of organically relational worldview with the episteme of unity of knowledge (the divine law in Islam) provides the functional ontology of the socially and morally constructed money, production and real economy circular causation. It models the legitimacy of trade as the resource mobilization instrument, while rejecting interest as the permanent impediment of resource mobilization.   Keywords: Monetary economics, Islamic economics and finance, Islamic political economy and world-system, social economics, ethics and economics.