The Prohibition of Interest in Islam

[a_student]

If you had your wealth in the form of cattle, an outbreak of disease could destroy your wealth. If you had it as toilet paper, it could be destroyed by a flood. No form of wealth is immune to devaluation.

Yes but in your examples, it was the actual thing that was harmed. In my example, I said something else was destroyed. The money would smell just as good as it did the day before, but now it would be backed by nothing. Unlike the cows and toilet paper, it would still exist.

Money makes things more flexible. My employer might have a house in town 'A' that I could live in, but I prefer to live closer to my family in town 'B'. Also, I'd prefer to know that if I were to change jobs, I wouldn't be evicted from my house.

I don't think you're following my example. I'm basically saying that your job would pay your bills instead of paying you, directly. The only thing that would be changing in your life is the fact that the money would never touch your hands, it would go directly to the bills or whatever. You would live where you live and how you live, only everything would be paid for. It's a hypothetical situation. You're talking about more of a living stipend.

Why does gold have value?

Good point. I once argued the same thing. It's just metal. But for whatever reason, it does have value and that can't be denied.

What gives gold its value, except for the same type of mutual agreement that gives paper money value?

Gold is also seen as beautiful to people. People want gold to wear it. People want money to "get rid of it" so they can get other things. Furthermore gold does not need to be backed by anything (just the way it is), money, however, does. Why is some currency worth more than other? It depends on what it's backed by. Gold is gold. But again, technically it is just a metal.

I was comparing the money to the hammer. Both are tools; neither are the thing you ultimately want, but both enable you to get it.

If I found someone who needed engineering services and had a house I liked he was willing to part with, I could trade my services for his goods. However, it can be difficult to make this work, so money is much more convenient.

Again, money is just a substitute for something else. It, by itself has no value. It's what it represents. That's why American businesses don't except Canadian currency. It's basically just paper. But what does that paper mean? If I have money then that says I did or sold something to earn this. That something gives the money it's value. We often speak backwards by saying "This house is worth $200,000." No, in reality $200,000 is worth that house. 20 years from now (for this example we'll ignore appreciation), $200,000 might not be worth the same house. However, $300,000 might be worth that house, meaning the value of the house did not change, the value of the currency has changed. That's because it holds no weight on it's own. Currency is only as strong as what it's backed by. I went to Trinidad & Tobago last year and paid $20 (their dollars) for a coke. Obviously their currency is less valuable then American currency. The coke was the same product and based on the currency exchange, had the same value.

Nobody's prohibited from bartering; it just makes more sense to use a common medium of exchange like money. If a plumber wants breakfast, it's much easier for her just to pay cash for it than to search for a restaurant with a stuck drain to offer her services to.

So in this type of system, is money not unique? It's the only thing in the entire economic system like that. That's why I said you can;t just compare to any good or service. It doesn't serve the same purpose as any other good or service. It is completely different.

 

[9-10ths_Penguin]

Yes but in your examples, it was the actual thing that was harmed. In my example, I said something else was destroyed. The money would smell just as good as it did the day before, but now it would be backed by nothing. Unlike the cows and toilet paper, it would still exist.

Then think about British farmers during the mad cow crisis. Even if their own cows weren't infected, their owners found them suddenly worth nothing. The cows themselves didn't change, but their value did.

I don't think you're following my example. I'm basically saying that your job would pay your bills instead of paying you, directly. The only thing that would be changing in your life is the fact that the money would never touch your hands, it would go directly to the bills or whatever. You would live where you live and how you live, only everything would be paid for. It's a hypothetical situation. You're talking about more of a living stipend.

I follow your example, but I fail to see why this arrangement would be more beneficial to anyone.

Also, I'm not sure why we're talking about the elimination of currency: is money forbidden in Islam?

Good point. I once argued the same thing. It's just metal. But for whatever reason, it does have value and that can't be denied.

It has value because it's perceived to have value. The value of gold is based on nothing more than mutual consensus, just like money.

Gold is also seen as beautiful to people. People want gold to wear it.

If the value is based on beauty, then why is a gold plated piece of jewelry much less expensive than the equally beautiful solid gold version?

People want money to "get rid of it" so they can get other things.

Yes, but the same is true for virtually any investment or anything that's bought on speculation. When a person buys shares in a manufacturing company, it's usually not because they want partial ownership of a factory for its own sake.

Furthermore gold does not need to be backed by anything (just the way it is), money, however, does. Why is some currency worth more than other? It depends on what it's backed by. Gold is gold. But again, technically it is just a metal.

So... if money has no value, why does it have value?

Again, money is just a substitute for something else. It, by itself has no value. It's what it represents. That's why American businesses don't except Canadian currency. It's basically just paper.

Cattle, barrels of oil, farmland and carpentry labour are not accepted at any American mall I've ever been to; does this mean that these things don't have intrinsic value?

But what does that paper mean? If I have money then that says I did or sold something to earn this. That something gives the money it's value. We often speak backwards by saying "This house is worth $200,000." No, in reality $200,000 is worth that house.

Actually, it works both ways.

20 years from now (for this example we'll ignore appreciation), $200,000 might not be worth the same house. However, $300,000 might be worth that house, meaning the value of the house did not change, the value of the currency has changed.

Or, more likely, the value of both the house and the currency changed. Measure the value of a house in loaves of bread or barrels of oil, say, and it'll be something different in 20 years (and the change will be different depending on whether you measure in loaves or barrels).

That's because it holds no weight on it's own. Currency is only as strong as what it's backed by. I went to Trinidad & Tobago last year and paid $20 (their dollars) for a coke. Obviously their currency is less valuable then American currency.

No, all you can figure out from that is that their currency is divided up into smaller units than the currency of the United States. If you want to figure out if it's less valuable, you have to compare the purchasing power of one US dollar vs. the equivalent in Trinidadian dollars at whatever the exchange rate is.

The coke was the same product and based on the currency exchange, had the same value.

Why would a product have the same value close to where it's made as when it (or its raw materials) is shipped from far away at great expense?

So in this type of system, is money not unique? It's the only thing in the entire economic system like that. That's why I said you can;t just compare to any good or service. It doesn't serve the same purpose as any other good or service. It is completely different.

Whatever you use for exchange serves the purpose of money. It doesn't really matter if your currency is paper bills, chickens, or cigarettes. If you refrain from eating your chickens or smoking your cigarettes so that they're available for trade, then for you they don't serve any purpose other then as a medium of exchange... just like money.

 

[a_student]

Then think about British farmers during the mad cow crisis. Even if their own cows weren't infected, their owners found them suddenly worth nothing. The cows themselves didn't change, but their value did.

Based only on perception, not actual value, unless they were infected in which case the value did actually change.

I follow your example, but I fail to see why this arrangement would be more beneficial to anyone.

Also, I'm not sure why we're talking about the elimination of currency: is money forbidden in Islam?

That's not the point I'm trying to make. I'm talking about the value of money and how it is really just a means of exchange. If you could exchange your man hours directly for goods would you miss money? I mean, I guess it's fun to count.

It has value because it's perceived to have value. The value of gold is based on nothing more than mutual consensus, just like money.

You can wear gold. It's considered a beautification. Has been for thousands of years. It's also a metal which gives it value. Currency is printed on paper or cotton. That's why they laugh when you show them a "piece of paper" with Queen Elizabeth's face on it in Florida. However, gold holds its value wherever it goes.

If the value is based on beauty, then why is a gold plated piece of jewelry much less expensive than the equally beautiful solid gold version?

Are you really asking this?

Yes, but the same is true for virtually any investment or anything that's bought on speculation. When a person buys shares in a manufacturing company, it's usually not because they want partial ownership of a factory for its own sake.

No, they want stock so they can make more money so they can buy more things. $1,000,000 is not going to feed you. You have to exchange that money for something of value (ie food).

So... if money has no value, why does it have value?

Money has no value on its own. It must be backed by something. Why is Monopoly money worthless? Because it isn't backed by anything but technically i's the same stuff in terms of materials.

Cattle, barrels of oil, farmland and carpentry labour are not accepted at any American mall I've ever been to; does this mean that these things don't have intrinsic value?

That means no one is interested in your cattle and such. I'm not arguing the purpose of money. It definitely serves a purpose. It's a median of exchange. but in terms of value, it's just paper. The paper represents something though. It is backed by something. A degree from Harvard is just a piece of paper, but it's what that paper represents. No one is in awe at the actual piece of paper more so than the fact that you completed the coursework to earn the degree. It's the work that has value, the paper just represents that work since you can't take the classroom with you.

Actually, it works both ways.

As long as the money is backed by something.

Or, more likely, the value of both the house and the currency changed.

I said ignore appreciation. In reality, yes everything will change value over time.

Whatever you use for exchange serves the purpose of money. It doesn't really matter if your currency is paper bills, chickens, or cigarettes. If you refrain from eating your chickens or smoking your cigarettes so that they're available for trade, then for you they don't serve any purpose other then as a medium of exchange... just like money.

Let's, for kicks, say the currency was chickens. What would be the value of those paper bills then? Now let's switch back, what is the value of a chicken? Thus, we can clearly see that a chicken has more value than a paper bill that is backed by nothing.

 

[9-10ths_Penguin]

Based only on perception, not actual value, unless they were infected in which case the value did actually change.

Ah... so it was only perception, not reality, that led farmers to decide that it was better to slaughter their cattle than to continue to pay to feed them?

If actual value is different from perceived value, how do you measure "actual value"?

That's not the point I'm trying to make. I'm talking about the value of money and how it is really just a means of exchange. If you could exchange your man hours directly for goods would you miss money? I mean, I guess it's fun to count.

No, I wouldn't miss money in that case, because I'd never be rid of it. "Man hours" would become the unit of currency.

You can wear gold. It's considered a beautification. Has been for thousands of years. It's also a metal which gives it value. Currency is printed on paper or cotton. That's why they laugh when you show them a "piece of paper" with Queen Elizabeth's face on it in Florida. However, gold holds its value wherever it goes.

"Pieces of paper" with Queen Elizabeth's face on them are readily accepted at any bank or currency exchange in Florida... they're probably more widely accepted there than gold would be.

Are you really asking this?

Yes, to illustrate a point.

You said that gold's value comes from its beauty. Assume you have two equally beautiful objects, both made of gold, as least as far as can be seen by the naked eye; if beauty is indeed the source of gold's value, why would one be worth more than the other?

No, they want stock so they can make more money so they can buy more things. $1,000,000 is not going to feed you. You have to exchange that money for something of value (ie food).

A factory is something of value. The equipment in it is something of value. The raw materials and inventory that the company owns are things of value. Stock in that company is a fraction of ownership of all those things... all things of value. Stock is a thing of value: it's exactly what you suggested money can be - an instrument of exchange that is backed up by real value.

Money has no value on its own. It must be backed by something. Why is Monopoly money worthless? Because it isn't backed by anything but technically i's the same stuff in terms of materials.

No, it's worthless because people consider it worthless, period.

That means no one is interested in your cattle and such. I'm not arguing the purpose of money. It definitely serves a purpose. It's a median of exchange. but in terms of value, it's just paper. The paper represents something though. It is backed by something.

Yes, it's backed by the perception of value. Even if currency is backed by gold, it's still just backed by perception... only one more step removed.

If people stop perceiving money as a thing of value, it loses that value... and this has happened occasionally in the past.

As long as the money is backed by something.

No, it works both ways even if money is backed by nothing more than mutual agreement.

I said ignore appreciation. In reality, yes everything will change value over time.

Even if you assume that the value of the house stays fixed in whatever measure you use, its value will change relative to any other point of reference you may have.

Let's, for kicks, say the currency was chickens. What would be the value of those paper bills then? Now let's switch back, what is the value of a chicken? Thus, we can clearly see that a chicken has more value than a paper bill that is backed by nothing.

Then why will people readily accept paper bills in payment for chickens?

 

[a_student]

Ah... so it was only perception, not reality, that led farmers to decide that it was better to slaughter their cattle than to continue to pay to feed them?

If the cattle were sick, then they did lose value.

If actual value is different from perceived value, how do you measure "actual value"?

No, I wouldn't miss money in that case, because I'd never be rid of it. "Man hours" would become the unit of currency.

"Pieces of paper" with Queen Elizabeth's face on them are readily accepted at any bank or currency exchange in Florida.

Hmmm... So it must be exchanged in order to gain value? Why isn't the paper itself worth anything? Because it's just paper.

You said that gold's value comes from its beauty. Assume you have two equally beautiful objects, both made of gold, as least as far as can be seen by the naked eye; if beauty is indeed the source of gold's value, why would one be worth more than the other?

If it's gold-plated that means someone is trying to pass it off as gold. You can buy a body kit that makes a Honda Civic look like a Ferrari. I wouldn't race anyone in it though.

Stock is a thing of value: it's exactly what you suggested money can be - an instrument of exchange that is backed up by real value.

Exactly. But what happens to the value of that stock if the company goes bankrupt? You can say "I have a million shares in 'X' company." But guess what? It's all worthless because the company that backs it has gone under.

No, it's worthless because people consider it worthless, period.

Why do they consider it worthless? Because it isn't backed by anything. If I opened a shopping mall called The Monopoly Mall and advertised that we accepted Monopoly money, people wouldn't think it was as worthless. Furthermore if it was actually backed by something, like gold (by the way the US dollar is backed by gold, not vice versa) it would have definite value.

Yes, it's backed by the perception of value. Even if currency is backed by gold, it's still just backed by perception... only one more step removed.

Who determines value? People do. If something is coveted it has value. Gold is coveted. Money is coveted, but only when backed by something such as gold. Remember no one wants Monopoly money. Why? It's not backed by anything that anyone covets.

Then why will people readily accept paper bills in payment for chickens?

Because the paper bills can get you other things. If cigarettes was the currency, people would still want chickens. No one would want paper bills.

 

[9-10ths_Penguin]

If the cattle were sick, then they did lose value.

A small number of cattle were sick, but every cow in the country, even the healthy ones, lost value.

And you never answered this question:

If actual value is different from perceived value, how do you measure "actual value"?

Hmmm... So it must be exchanged in order to gain value? Why isn't the paper itself worth anything? Because it's just paper.

No, it doesn't have to be exchanged to have value, but the fact that it can be exchanged indicates that it does have value.

If it's gold-plated that means someone is trying to pass it off as gold. You can buy a body kit that makes a Honda Civic look like a Ferrari. I wouldn't race anyone in it though.

I'm not talking about scamming anyone; nobody's trying to pretend that the gold plated jewelry item is solid gold. if beauty is the characteristic that gives gold value, why wouldn't two items that are identically beautiful have the same value?

Exactly. But what happens to the value of that stock if the company goes bankrupt? You can say "I have a million shares in 'X' company." But guess what? It's all worthless because the company that backs it has gone under.

If the company goes bankrupt, it's usually because they can't meet their debts. This means that the things of positive value like the factory are offset by things of negative value.

Why do they consider it worthless? Because it isn't backed by anything. If I opened a shopping mall called The Monopoly Mall and advertised that we accepted Monopoly money, people wouldn't think it was as worthless.

Actually, people would still probably consider Monopoly money worthless, but clear out all the merchandise in your mall for next to nothing.

Furthermore if it was actually backed by something, like gold (by the way the US dollar is backed by gold, not vice versa) it would have definite value.

The US dollar is not backed by gold. The US government does hold some gold reserves, but nowhere near the worth of the money in circulation. The US hasn't used the gold standard for a long time.

Who determines value? People do. If something is coveted it has value. Gold is coveted. Money is coveted, but only when backed by something such as gold. Remember no one wants Monopoly money. Why? It's not backed by anything that anyone covets.

Why does what's backing your money matter to the individual consumer if people are willing to take your money for goods and services you want?

Because the paper bills can get you other things. If cigarettes was the currency, people would still want chickens. No one would want paper bills.

People would still want the chickens they'd consume anyway. Nobody would want the chickens that people would otherwise keep for use in trade.

 

[tariqkhwaja]

Firstly, as a_student pointed out, I am not against borrowing but interest.

You see capitalism is based on selfishness and the theory that if everyone is selfish the economy will give us maximum allocative efficiency. One key problem with this model is the growth of the poor. Because if everyone is selfish no one will lend to the poor. This problem is resolved in capitalism by introduction of interest where interests serve to encourage the rich to lend to the poor. However, if it can be proven that interest produces negative effects on society (that outweigh the short-term positive consequences) then preventing lenders from using interest becomes mandatory, even if the buyer and seller agree.

Now lets think macroeconomics instead of microeconomics. What if (and this has often happened) the entire economy of a country goes into recession? If the entire economy goes into recession interest rates are usually reduced (though are still positive) to boost the economy. My question is if the entire economy is going in a loss overall (therefore more loss-making firms than profit-making firms), how on Earth do all the lenders in all the banks still get more money than before? It happens, I know, but how on Earth does it happen and where on Earth does this money come from?

 

[tariqkhwaja]

What happens in this case is that somehow (through the government allowing more credit to exist) there is a greater amount of money available to people (in banks or in the market). The overall amount of money increases. Yet there is not doubt that during a recession the overall output (production) was less than earlier. Thus, by increasing the overall money the purchasing power of an individual is increased. Yet supply (during a period of recession) can not meet this increase in demand due to interest.

Enter: Inflation!

Yes it is true that in the short term it is thought that increasing interest rates reduces inflation by reducing spending and encouraging people to save. But in the long-term these savings increase in value regardless of whether the investment was successful or not so. The money in saver's pockets automatically increases and in the long term since supply can not meet the increase in purchasing power we have inflation.

That is one of the consequences of interest based economies. When you put a charge on borrowing a tool for trade then you hurt the economy and that is another reason why interest should be banned.

 

[interfaithdilaog]

Informative thanks.

 

[imaginaryme]

Disgusting.

Usury is evil. The "economic realities" are that currency speculation, derivatives, the futures market, all this crap is blatantly responsible for pushing the entire world to the edge of a depression from which it may not recover. Look into the fractional reserve system and the lending concept of exchange of fair value if you still think money is worth something. It ain't.

And even if you're a flaming capitalist, feel free to explain capital gains tax to me.