Dr. Taimoor from Laal, a professor of Economics at LUMS, made a video critiquing the "gold standard", specifically focussing on the text on "Economic System of Islam" by Taqiuddin Nabhani, the founder of Hizbut Tahir.https://m.facebook.com/story.php?story_fbid=587962499352357&id=100044158373225
Here is my response to his critique.
Dr. Taimoor. Thank you for taking out the time to read Nabhani's work and publishing this critique. Just so you know, the work of Nabhani is legislative in nature. He is a mujtahid, and the books he wrote explicating the systems of Islam was primarily a legislative effort. As you know, the legislative sources in Islam include both Quran and Sunnah in all mainstream Muslim usuli schools. His use of evidences may sound strange to you because you are not of the field of usul-al-fiqh, which itself is a complex science, with its own principles, that is backed by a rich discursive tradition of its own. Nabhani very well knew what he was dealing with and he understood how modern systems work, which is obvious from his other writings. And his goal was to lay down in writing systems that will work in the modern world, while applying the principles of fiqh in a disciplined manner.
But in the specific work you read, he limited his writing to legislation. There are other books of Hizb ut Tahrir, which are written by qualified economists that go into detailed comparative macroeconomic analysis of the Capitalist system and Islamic system as laid down by Nabhani. And those economists are trained from top institutions themselves. For example, "Comparative Economics" by Faruq Ibn Qaysr, a Ph.D. candidate in Imperial College London. I am saying this so that you understand that Hizb ut Tahrir is very serious in its study of all related modern sciences in the development and analysis of its systems and policies for the future Caliphate.
Most of the criticisms you have raised in this video are addressed sufficiently in the works of Hizbut Tahrir.
I am myself a Ph.D. in Robotics from Georgia Tech. So I am not of the field. But I have dedicated considerable time understanding the works of HT as well as the criticisms of their work. And I can confidently say that Hizb has so far fulfilled my expectations when it comes to rigor and depth in their descriptions and prescriptions for modern problems and solutions.
Having said that. Here is my brief response to some of the issues you raised in this video:
1. In the history of gold standard that you briefly narrated, you described that Great Depression followed a few years after WWI. And Europeans had given up on gold standard at the beginning of WWI, which they tried to go back to in the interwar period. Then you go on to claim that "most economists agree that the Great Depression occurred due to the gold standard."
You do realize that this "consensus" is among those economists who you largely disagree with (due to yourself being a Marxist). Those economists could very well be mistaken, as Marxists have found them mistaken in a number of other areas. Regarding the specific issue of Great Depression, actually the Austrian school's analysis is the most accurate in my view. Austrian economists argue that the Great Depression was the inevitable outcome of the monetary policies of the Federal Reserve during the 1920s. The central bank's policy was an "easy credit policy" which led to an unsustainable credit-driven boom. The inflation of the money supply during this period led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods. By the time the Federal Reserve belatedly tightened monetary policy in 1928, it was too late to avoid a significant economic contraction.
And guess what. This credit driven boom is a problem of the FIAT / Capitalist system. Gold standard wasn't implemented during this period. It is FIAT that allowed the expansionary policies in the first place.
So FIAT and Capitalism led to the problem in the first place. And when they were in the Depression, trying to blame gold, and going for FIAT was just a short-term solution to long term problems of booms of busts inherent in FIAT that the Western economies have cyclically suffered from ever since.
2. Your main argument against gold is that gold will not work as currency because of lack of supply, not keeping up with its demand due to "growth of economy" or "increase in trade activity".
This point is not valid for a number of reasons:
- Gold and silver functioned stably both in the pre-industrial era, as well as, in the industrial era. It was working fine during its classical period (1873-1914) as well, which is part of industrial age. Why did it not cause instability despite industrialization? Didn't industrialization lead to increase in trade activity? Why was it only that when WWI began, suddenly gold was abandoned by governments. That was because the governments started acting irresponsibly (for which they suffered later on) in trying to get easy access to funds (which FIAT allows)
- World gold output growth has kept up with world's population, so scarcity of gold isn't the main problem here
- Just the economy having access to larger money isn't necessarily healthy, and can lead to detrimental inflationary pressure. FIAT flexibility actually is susceptible to harmful manipulation by the governments, which according to Austrian school was the main cause of Great Depression, and according to most economists today is the main cause of long-run inflation.
- Islamic system isn't gold-standard based. It's bimetallism. Silver bullion can boost money supply when gold falls short.
Finally, even if we consider that gold supply isn't able to keep up with the human population at some point in the future, why is that such a big deal?
- Suppose gold supply doesn't keep up with trade activity, since gold is also in the market (as non-currency), that gold can start getting into currency market to compensate for the scarcity as people start finding gold more valuable as currency than as, say, jewellery.
- Even if that market remains inelastic, the shortage of total gold will only result in a macro effect of aggregate prices of goods to decrease in terms of gold in the long run. This deflation will be slow and so will not cause instability.
- Is long-run deflation necessarily bad? I don't think Keynes gave strong enough reasons to justify that (especially in the context of Islamic economy, his reasoning doesn't apply)
Firstly, this deflation could just reflect the natural outcome of a more productive world. Meaning if the world is too productive, the goods should come cheap. This also disincentivizes supply of goods beyond what is necessary, which may be good for environment
Secondly, even if this deflation is due to genuine shortage of gold, the problems like delayed consumption, liquidity trap, increased debt burdens, and slow labor-market adjustment (feared by Keynes), these problems are either inapplicable to Islamic system, or are dealt with efficiently. Consider for example that Islam already dis-incentivises savings, because of prohibition of interest, also prohibits hoarding of money, also penalizes unspent-cash with zakat etc. So delayed consumption isn't a problem of Islamic economy. It is a problem of a debt-driven Capitalist economy where people start saving money to avoid opportunity costs.
3. Second reason you mentioned is the issue of "monetary policy". FIAT being an excellent tool to moderate price volatility etc. This purported advantage of the FIAT currency is a red herring, as it is the manipulative nature of fiat money itself that produces price instability.
Or the ability of central banks to manipulate money supply to correct busts or extend booms. The bust phase is often characterised by an economic recession in which unemployment is high, investment is low and the economy is contracting in output and growth. Both governments and central banks combat this scenario through monetary and or fiscal measures such as open market operations (such as quantitative easing), reducing interest rates and increasing fiscal expenditure. Whilst these policies aim to correct the bust, they can introduce yet another recession after full employment has been achieved. This argument stems from the Austrian school of thought in a much wider debate on why cycles occur altogether.
Whilst there may be contention over what engenders a cycle, history has shown us that the manipulation of credit to reduce rates (so as to stimulate demand and output) often produces asset bubbles in the short run that triggers crises when realised by the real economy. It is clear within this context, that fiat money is not a remedy to downturns, rather the reason why they exist and why central banks are able to engage in expanding credit, which ultimately leads to the very issues they are purported to resolve (of contracting liquidity and credit within the real sector).
4. You also mentioned how countries were running out of gold due to imports. So they abandoned gold. But how did abandoning gold solve this? The issue of reserve crisis has taken another form i.e. US dollars. Counties with large negative BoPs are stuck with the same problem. Only that, when it was gold, then no one had an "unfair advantage". Yes those economies that were advanced had an advantage. But it was a fair advantage. By making fiduciary currency notes whose printing is monopolized by one government (i.e. US), we gave US an unfair advantage. Now, they can spend a little amount of effort printing a $100 bill. While we will have to pony up goods and services to be able to access the same bill. How is this fair?
Imbalances in gold reserves due to import-export imbalances are actually self-corrected by international gold standard as Hume has explained in his law of price-specie flow mechanism. If US had more gold due to exports, there'd be inflation in US due to increase of gold specie supply locally, so its exports would start costing more to outsiders, which should reduce the amount of US exports, correcting these imbalances.
5. You also rhetorically asked if going back to gold will finish American hegemony. The previous point also explains that it will at least take away a clear unfair advantage the US has, where US dollars are in demand only because the oil-producing post-colonial nations, that US had come to dominate using its superpower status post-WWII, have struck a deal to only trade oil in USD. This is despite that oil is not primarily a US product. It is simply politics. And a result of political subjugation of our lands with our rulers being agents of the US since the Khilafah was abolished in WWI.
6. Also, I will look into this further, but I don't understand why you made a big deal out of the difference between "gold standard" and "trading in gold and silver". Hizb totally wants to go back to the latter. We are for bimetallism, not just gold-standard. And we will seek to mint actual dinars and dirhams, in the long run, instead of just issuing paper currencies backed by gold (which can happen in the short term transition phase after Khilafah is established).
— Munzir Zafar