In the past weeks, other Middle East and North African nations are also experiencing protests from discontented citizens. Uncertainty permeates the Arab world. What lies ahead is subject to extensive speculation.

In this article I shall draw attention though, not to the political aspects of the unfolding events. On the contrary, we will bring to the fore an important economic question, largely absent from ongoing debates, that is, the monetary regime in Islam.

As we will argue below, over the medium and long term these revolting nations need to focus not solely on democracy and political considerations, but also on economic freedom. Free market money and banking, subject to traditional legal principles, are crucial, if true liberty is to be attained.

Islamic history and tradition have a long record of recognizing and practicing free market principles. However, in the present days, virtually all Islamic nations operate under fiat currencies with fractional reserve banking. A lasting and sustainable economic recovery can only be possible by returning to a halal[1] monetary system.

Islam and Money

Historians often struggle to grasp the rapid rise of the Islamic World. In the same manner, the fall of the Roman Empire still puzzles scholars. Lacking a solid theoretical basis and analytical framework, compelling conclusions are seldom drawn.

The decline and ensuing fall of the Western Roman Empire was largely due to the "barbarians inside the gate", those responsible for the Empire's fiscal and monetary mismanagement. Within a couple of centuries another civilization would emerge and even exceed the achievements of the western world hitherto. One struggles to find a field to which the Islamic civilization did not contribute to or improved upon during the so-called Islamic Golden Age.

Freedom to exchange benefits all. Sound money reduces uncertainty and facilitates exchanges to take place. The Islamic Empire provided this very environment, that is, a large free trade area under a sound monetary system. For almost 400 years, no Muslim ruler engaged in monetary meddling. This solid foundation was a principle reason which enabled the grand achievements during that period.

Trade is embedded in the traditions and teachings of Islam. So is sound money, historically epitomized by gold.

In an excellent speech delivered in 1998 where it was urged for the return of the Gold Dinar[2], Imad-ad-Dean Ahmad[3] notes that "Muslims cannot escape the fact that gold is our money. Even if we pretend that it is not, we continue to use it in calculating the nisâb[4]. Instead of fighting the will of Allah, I propose that we embrace it". Zakat is to be paid with honest money or actual substance, not a promise to pay, hence the use of gold or silver. Islamic Law does not permit the use of a promise of payment as a medium of exchange. Prohibition is also extended to fractional reserve banking[5].

Back in that year the then recent Asian financial crisis still preoccupied the world. Ahmad timely recalls that "it is not the currency speculators who are responsible for the Malaysian crisis. [It was] harâm monetary policy that made the ringgit an unreliable currency". He continues:

Since the time of the Prophet, gold and silver served a monetary function and there was no problem abiding by this standard for 400 years. Gold is the natural monetary commodity which Allah has provided us for an equitable monetary policy free from the arbitrary or self-serving manipulations of central banks and politicians.

The difficulty involved in money supply adjustment is natural and controlled by God. Soft currencies (tokens, paper) are all too subject to the manipulations of governments seeking to engage in deficit spending or bankers seeking to increase their interest revenues through fractional reserve banking.

The case for following our Islamic heritage on these matters is moral as well as utilitarian. The difficulties of finding an effective and sound monetary policy are obviated in Islam by the monetary regime of the Dinar.

As accurately pointed out by Ahmad, the discipline imposed by a gold-standard with 100% reserves lies in the fact that one cannot mask or manipulate the level of savings available for investments or financing public deficits. Nor is it possible to create gold coins out of thin air to honor government recurring obligations.

The adoption of free-market principles was a fundamental factor that made the Islamic world experience a Golden Age. It was neither a massive government apparatus nor a central monetary authority.

A note on Interest

Rather than advocating Islam as a monetary panacea, we only aim at shedding light on some key aspects of the Islamic tradition and teachings on economic matters. That being said, it is expedient to make some remarks on the question of interest, Riba, which should not be interpreted as an exhaustive treatment of the issue.

It is futile to define what eating pork meat or drinking wine is. One can easily identify if a person is engaging in any such activity. It is quite another matter with the charging of interest, which is perhaps the most disputed issue even for some free-market Muslims. What really is interest?

Some libertarians of the Islamic faith contend that the Qur'anic prohibition is not on interest itself, but on usury, that is, overcharging. Since Islamic law sees no crime in discounting for cash or surcharges for credit in a typical vendor and buyer transaction, there should be no prohibition either to a loan issued by an external party. Interest is present in both transactions.

Unfortunately, the majority of Muslims interprets the prohibition on any form of interest on loans. Hindered by this sacred restriction, present-day Muslim jurists must develop sophisticated financial models so as to render them Shariah compliant.

For instance, if a Muslim seeks to purchase a property but does not have the financial means needed for the transaction, he may apply for an Islamic home finance solution, which usually work in the following manner: the bank purchases the property, which the customer then leases from the bank. Thereafter, both parties engage in a unilateral promise to sell and buy the property during or at the end of the lease period. The financial institution is then paid a tariff for providing the customer with a home finance solution[6].

Modern practice of Islamic banking reminisce us of Middle Ages' mechanisms employed to circumvent the canonical prohibition on the charging of interest on loans, such as the depositum confessatum[7].  Language also contributes in making a loan more palatable for a Muslim. Instead of advertising it as interest rate charges, Islamic loans require a "profit rate". For the layman it is hard to identify any difference in the essence of a traditional home mortgage and an Islamic one.

In our present time, money supply manipulations by a central bank accompanied by fractional reserve banking renders the debate over interest even more intricate and complex, as the expected loss of purchasing power from a debased fiat currency becomes another ingredient in the charging of interest on loans.

Interest is a feature of human nature. It is the basic concept of time preference, which means a man prefers the enjoyment of a good in the present to the enjoyment of the same good in the future. There isn't anything inherently evil in it. And so agrees a minority of Islamic scholars. It took years for Catholics to appease their conscience in this regard. Let us hope the digital era abbreviate this period in the Islamic world.

Current Monetary Policy

As commented in the beginning, virtually all Islamic nations currently operate under a fiat currency system with fractional reserve banking. What is worse, the majority is pegged to the dollar. It was a prudent policy in the past. Linking the national monetary unit to the world's reserve currency meant stability. Not anymore. Thanks to Ben Bernanke.

By pegging their currencies to the dollar one must abdicate from an independent monetary policy. That entails following the FED's every step. Currently, it means expanding the money supply enormously. China has recently witnessed troubling inflationary pressures. And so will every nation determined to sink with the dollar.

Bernanke is certainly not the sole culprit. Alan Greenspan did his part. But rather than blaming individuals, the underlying problem is obviously the monetary system which reigns today.

The reckless and desperate monetary policy of Mr. Bernanke is accelerating the worldwide perception that something is deeply flawed in our current monetary arrangement. In the medium term the most likely solution envisioned by Islamic nations is a de-pegging of the dollar. Over the long term, the only viable and sustainable solution is a total break-up from the harâm monetary regime which we all live under.

Conclusion

Both the Islamic and the Christian faith emphatically condemn theft and fraud and sanctify private property. The systematic aggression of socialism implies the exact opposite and it is precisely what we find in modern money and banking.

Socialism has wrecked the Muslim world. In some Islamic countries the estimates of people living below the poverty line is troubling. The cost of food has risen sharply in recent months. Estimated inflation in Egypt for 2009 reached 11.9%, while almost 13% last year. Additionally, the level of unemployed hovers around 10%. Analyzing other Muslim countries the picture becomes a visible trend. In Tunisia it is estimated that 14% of the population is out of work, whereas in Saudi Arabia it is approximately 11%. And the list continues with Jordan at 13.4% and Iran at almost 15% unemployed[8].

A considerable portion of Muslims, unfortunately, blames the pernicious American influence for both their political and economic imbroglio. Nevertheless, the latter is a consequence of policies adopted by their own governments. Repudiating American imperialism will not bring prosperity. It is necessary to repeal the abundant and harmful socialist policies adopted in these nations, especially in the monetary regime. Arab dictatorships inflicted poverty and brutal oppression on its citizens. Replacing them with democracy may indeed end the oppressive part, but only free market policies can promote economic relief and prosperity to all.

Recently, British magazine The Economist featured an article on the gradual change in the Syrian state, from a centrally planned economy to a more free-market oriented. The publication focuses precisely on the policies which will enable Syria to become a "social market" economy. In practice it entails reducing vast subsidies directed at electricity, fuel, transportation, water and food.

Although the US helped in maintaining illegitimate regimes in power, bad economic policies are not an imperialist imposition. They are a self inflicted burden, imposed by the nation's own government, be it democratic or not. Ultimately, it is the economic freedom which will be the decisive factor in the downfall of any form of government, in the Middle East or anywhere else on earth.

 It is imperative that new formed governments of Egyptians, Tunisians and other Middle East nations are sufficient Islamic when it comes to monetary affairs, and not only to disapprove of the western moral decay, or to speak out against the US unconditional support of Israel. That means adopting a monetary system backed by commodity money with 100% reserves, in full accordance with the precepts of its legal code.

If Muslims are to enjoy liberty, peace and prosperity again, they cannot afford to ignore the consequences of a fraudulent monetary regime. Democracy per se is not capable of limiting government expansion and bringing about prosperity. Gold per se cannot guarantee it either. However, the discipline it imposes on governments makes the metal a much sounder path in the road to prosperity. Furthermore, it hinders the disorderly and harmful advancement of an inherently unstable banking system.

Muslims must heed the teachings of their prophet and the traditions of their history. They ought to demand their governments to forgo this dishonest monetary arrangement and really abide by the precepts of Islam. Embracing their faith does not mean rejecting capitalism. It actually entails adhering to principles which enable civilization to prosper.

If democracy is the worst form of government, except for all others, let its effects be restrained by a monetary regime befitting to Islam and human nature, that is, a free-market one.

[1] Halal is the Arabic term used to designate something as legal, authorized, lawful or permitted. It is the opposite of harâm.

[2] Both the Gold Dinar and Silver Dirham are ancient coins from the Islamic world. Nevertheless, there is a growing movement attempting to bring the old coins back into circulation so as to have a sounder monetary system backed by a commodity money. In Malaysia, the states of Kelantan and Perak have either already introduced or announced to introduce such coins.

[3] Speech given by Imad-ad-Dean Ahmad for the American Muslim Social Scientists in Chicago, October 30^th 1998. Imad-ad-Dean Ahmad is a palestinian-american scholar and president of the Minaret of Freedom Institute, a Muslim libertarian think-tank. http://www.minaret.org/OLD/MONETARY.HTM

[4] Zakat, one of the pillars of Islam, is a contribution to the poor and needy. Zakat is obligatory when a certain amount of one's wealth, called the nisâb is reached or exceeded. The nisâb is stipulated at 20 Gold Dinars (90,8g of Gold) or 200 Silver Dirhams (594g of Silver). It is interesting to remember that, like the dollar or the pound, both dinar and dirham are used as denominations for national currencies. Dinar is used in Bahrain, Jordan, Kuwait e in Tunisia, whereas dirham was adopted for the currencies issued in Morocco and in the United Arab Emirates. However, nowadays they are just names on a paper and have no resemblance with the old Islamic coins, the Gold Dinar and the Silver Dirham.

[5] Ayub, Muhammad, Understanding Islamic Finance, 2007, John Wiley & Sons Ltd: Chichester, England.

[6] Every Islamic financial product must undergo the scrutiny of a Shariah Committee. See an example of a Home Finance product with the approval of Islamic jurists. http://www.hsbc.ae/1/PA_1_083Q9FJ08A002FBP5S00000000/content/uae/pdf/approval_amanah_home_finance.pdf

[7] "It was a simulated deposit which, despite the declarations of the two parties, was not a true deposit at all, but rather a mere loan or mutuum contract. At the end of the agreed-upon term, the supposed depositor claimed his money. When the professed depositary failed to return it, he was forced to pay a "penalty" in the shape of interest on his presumed "delay," which had nothing to do with the actual reason for the "penalty" (the fact that the operation was a loan). Disguising loans as deposits became an effective way to get around the canonical ban on interest and escape severe sanctions, both secular and spiritual." Huerta de Soto, Jesús, Money, bank credit and economic cycles, 2009, Ludwig von Mises Institute: Auburn, AL, p.64.

[8] Other Islamic countries present an even more precarious situation. However, it would entail analyzing factors which are out of this article                's scope. Among them: Palestine, which suffers a blockade exercised by the state of Israel; Afghanistan, Iraq and Pakistan, which are still in the midst of an endless war. To some extent, we might even include Iran, for suffering under economic sanctions which certainly harm its development, but which I deem not to be fundamental in their current economic outlook.