Background to the title:
The title is actually taken from a quote from a famous economist who said:
“All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.”
If you are thinking it was Karl Marx, you are wrong.
It was actually this guy.
And the maxim applies today, where we see tech giants and others hoarding a collective treasure trove of $2.5 trillion.
Individuals or companies are forbidden from hoarding wealth. Saving for a need (e.g. buying a house, a wedding, etc.), however, is permitted.
The following verse prohibits the hoarding of wealth:
“O you who have believed, indeed many of the scholars and the monks devour the wealth of people unjustly and avert [them] from the way of Allah. And those who hoard gold and silver and spend it not in the way of Allah - give them tidings of a painful punishment. [TMQ 9:34]
Although the verse is to do with the People of the Book, its wording is general, and so it applies to all. Any wealth kept aside – other than for a legitimate need – is hoarded wealth. Even if zakat(the wealth tax of 2.5%) is paid on the wealth, it is still considered to be hoarded wealth.
Also, it doesn’t matter if the person hoarding the wealth is in poverty. As noted in the following hadith, the men who lived in Ahl Al-Suffah (who lived on charity) were deemed to be hoarding wealth for keeping 1 or 2 dinars on them even though they are poor:
“A man from the Ahl Al-Suffah died, and a Dinar was found in his garments (waist-wrap); the Messenger of Allah said: “He will be burnt”, then another died and two Dinars were found on him, and the Messenger of Allah said: “He will be burnt twice.” [Ahmad]
In the Capitalist economy, hoarding is an integral part of the monetary system. With fiat currency comes the risk of inflation. That is, there could be an increase in the money supply resulting in price increases. According to CNBC, the rationale for a low inflation economy is summarized as follows:
“Investors in financial assets like stocks and bonds are always worried about inflation because it erodes the buying power of whatever money they make on those investments. If you make 3 percent on an investment, but inflation is also at 3 percent, your real return is zero.”
This, in turn, creates the larger threat of interest rate hikes from the central bank. The CNBC article continues: "The other reason is that higher inflation usually brings higher interest rates in response, from both the Fed (which sets short-term rates) and the bond market (which governs long-term rates.)”
We all probably remember from our history classes the hyperinflation in the German Weimer Republic, where the currency depreciated from 4.2 German marks buying 1 US dollar (in 1914) to 4.2 trillion buying 1 US Dollar in 1923:
Consequently, the central banks of the Capitalist nations, like the Bank of Canada, see their role as follows:
“At the heart of the Bank's monetary policy is a commitment to maintain low and relatively stable inflation—in particular, to keep the rate of inflation close to the 2 per cent midpoint of the 1 to 3 per cent target range. The Bank's commitment is essential for influencing firms' and households' expectations of inflation. Faced with a shock that threatens to push inflation either above or below the inflation target, Canadian firms and households are confident that the Bank will act to bring inflation back to the 2 per cent target. This confidence in the Bank's policies is a result of the Bank's past record of doing what it claimed it would do—keep inflation low and stable.”
How does the Central Bank accomplish this?
At a high level, when the Central Bank raises interest rates people move money from investments (e.g. stocks, mutual funds, partnerships, internal projects, etc.) into treasury bills, government bonds or other savings accounts. The idea is that this will slow down the inflation because people will move from investing to hoarding. In other words, the interest rate mechanism is premised on the fact that people will hoard their money if the given interest rate is high enough. In university, I was taught that (during the late 70s and early 80s) one of the major tech companies refused to invest in projects because of the double-digit rates of interest they would get due to the Volcker interest rates hike of that time.
The interest rate mechanism, therefore, is a lever in the hands of the central banks that determines how much of the money will be hoarded (i.e. in riba-based instruments) versus how much will be invested (e.g. in the stock markets, small business, etc.) as well as how companies invest their capital for internal projects. Concerning the latter, higher interest rates make it difficult for project managers to justify spending the money on wages and machinery when they can just earn the same amount risk-free on US treasury bills.
When the interest rate is lowered, money will be moved out of interest into investments. Alan Greenspan was given the nickname “bubble man” by Peter Hartcher for reducing interest rates to near zero that moved money into the housing market. Now, this caused a bubble that popped in 2007 causing the Financial Crisis (hence the name bubble-man).
Conversely, when the interest rate is increased money moves out of investments into government bonds and the like. For example, in late 2018, the Fed (i.e. the US Central Bank) raised the interest rates from 2.25% to 2.5% or 0.25%. In reaction to this announcement, the stock market proceeded to bleed profusely “with the Dow falling 352 points and sinking to its lowest point of the year after the Federal Reserve hiked interest rates for the fourth time in 2018.” The markets fell further after that. However, this further decline was attributed to a social media post from the US president.
As noted in earlier posts, there is no interest, no fiat currency, no fractional reserve banking, and therefore no significant inflation. Consequently, there is no need for an interest rate mechanism to influence how actors will move into the economy. Instead, in an Islamic economy, the money will be fully invested into partnerships or into the economy in some other way. By making it forbidden to hoard, investors will need to find investment opportunities to make their money grow. Alternatively, the wealthy will need to find other uses of money, which include loaning to others (interest-free), charity or spending on oneself, family, neighbours and friends.
Points to Consider:
Is there no inflation in the bi-metallic system? As noted above there is no significant inflation. The money supply does, however, expand – but at the rate that gold and silver are mined. Looking at gold alone, if 50 million troy ounces of gold are produced in a year and there were 10 billion ounces in existence that would mean an inflation rate of 0.5%. Incidentally, this rate is well below the Bank of Canada’s target of 2%. So even according to Capitalist standard, the actual expansion of the medium exchange itself is quite low.
Why is hoarding bad?
In an economy that uses the gold and silver standard, it is critical that the money keeps circulating and flowing from one party to another. Individual wealth is not only good but a desired outcome in Islam. Prophet Muhammad (saw) said:
"The best Sadaqat is that which is given out of one's wealth after sufficiency." [Bukhari]
Wealth generates wealth, although personal effort plays a part in gaining such wealth and in generating the opportunities to invest the wealth. This does not pose a danger to the economy; on the contrary, it helps increase the economic wealth of the community as well as the individual.
The danger lies in the hoarding of monies by some individuals with very large fortunes, leading to the fall in the standard of income and causing large-scale unemployment thus pushing people into poverty. It is therefore essential to tackle the hoarding of monies.
Money is the medium of exchange between two properties, or between a property and a service, or between two services, hence it acts as a measure to this exchange. Therefore, when money becomes scarce, and people are unable to obtain it, the exchange vanishes and the economic wheel comes to a grinding halt. The more that money changes hands, the more economic activity proceeds. Every person or company's income must originate from another person or company. Funds levied by the State are regarded as income to the State and an expense to the individuals, and the monies spent by the State on employees, projects and servicemen's salaries etc. are in fact incomes to those people and an expense to the State. The monies spent by the employee, the serviceman, among others are incomes to those who sell their goods and services to those people, such as butchers, grocers, landlords, traders etc. Therefore, people's incomes and their overall spending would continuously be circulating.
Now if a person were to hoard a sum of money, he would be withdrawing it from the market, and this would lead to a decrease in spending and to a reduction in the income of persons who would have had dealings with that person had he not hoarded that money. This, in turn, would lead to a decrease in their production, for the demand for goods decreases, thus leading to unemployment and an overall economic decline. Therefore, the hoarding of money leads definitively to unemployment and economic downturn due to the decrease in people's incomes.
Indeed, the current state of poverty in the US and the world is attributed to such hoarding. As was discussed in the previous post, central banks pursued quantitative easing (purchasing assets) because banks were not lending and enabling the capital flow. That is, they were hoarding the money.
And it was not just the banks.
According to Business Insider, “the amount of cash held by US-based companies in foreign countries hit a record $2.5 trillion in 2015, which is roughly 14% of the US's total GDP”. In another article Business Insider, provides a graphic of the top cash-hoarding-corporations:
What is the difference between hoarding and saving?
It should be clear, however, that the damage to the economy emanates from hoarding money and not from saving; saving does not halt the employment cycle whereas hoarding money does. The difference between hoarding money and saving is that hoarding means accumulating wealth without purpose. It means taking money away from the market. For example, the $2.5 trillion that the corporations are sitting on is an excellent example of hoarding – that money is not circulating in the economy, being invested into partnerships and the like. Savings, on the other hand, accumulate wealth for a purpose, such as to build a house, or for a wedding, or to set up a business, etc. This type of money accumulation does not affect the market nor does it affect the employment cycle, for it does not lead to taking money from the market. Rather it means saving a sum in order to spend it at a given time, thus the money will circulate again once it is invested. Therefore, there is no harm in saving, unlike hoarding the money for no real purpose.
Islam has made it lawful to save gold and silver, for it means the accumulation of money for a purpose. Islam permits a man to save money to accumulate the mahr (amount paid by the husband to the wife as part of the marriage contract) for a woman he wishes to marry or to save money to go to Hajj etc. The saver, however, would have to pay the zakat (2.5% asset tax) due on the accumulated money if it reached the Nisab (as noted in the post about zakat; the Nisab “works out to be 85 grams of gold ($3,388.95 US) or 595 grams of silver ($316.98 US)”) and remained in his possession for a full year
How did the interest rate mechanism destroy the American labour movement?
The same interest rate hikes used to control spending also reigned in the wages paid and destroyed the labour movement:
“Ten million people were unemployed by 1982, and the press was running stories on the “new poor.” Wage reductions became the norm in contract negotiations. Weekly take-home pay fell more than 8 percent between 1979 and 1982 and failed to recover for the next five years. But the most amazing measure of the recession’s political success was this simple fact: Before the 1980-82 recession, wage freezes and pay cuts in unionized industries had been almost nonexistent. In 1980 not a single union contract negotiation had ended in a pay freeze or cut. By 1982, however, 44 percent of new contracts conceded wage freezes or outright cuts. Wages had been rising more or less consistently since the end of the Second World War, but now the tide had turned.”
What is essential for Muslims and non-Muslims to understand is how Islam guides and empowers us to question the "vile masters of mankind." When analyzing the current state of poverty in the US, we should actively recognize how the current system is being used to oppress us all – even the rich. Billionaires like Warren Buffet, Nick Hanauer and Ray Dalio all recognize that mal-distribution of wealth is a ‘clear and present danger.' For example, Ray Dalio noted that “Capitalism is basically not working for the majority of people” and that “[t]he most pressing problem I see right now is the wealth and opportunity polarity gap, that’s the big source of conflict…American leadership should declare the opportunity gap as a national emergency”.
You can see him make similar comments in the following video:
Obviously, I disagree with Dalio’s remedies: but at least he is honest enough to realize the system is not working. Moreover, the reason that his solutions won’t work is because the system needs to be overhauled at its roots. The system must abolish interest so that the interest rate mechanism can't be used to shift money out of the real economy into interest-bearing investments where the interest rate mechanism can't be used to colonize the poorer nations or be used as a tool in the hands of the bankers to force people out of work and make them unable to even negotiate with a higher wage. (In Islam there are no unions as it is the state that must intervene to protect the rights of workers and those that can’t work, but we will discuss this, in sha Allah, in a future post.)
Freedom of ownership versus Allah’s (swt) Right Over us
Finally, this is a good illustration of the ideological difference between Islam and Capitalism. Islam does not maintain the notion of freedom of ownership: rather we must use our wealth as Allah, the Creator of all wealth, has decreed. This means Muslims can't keep money aside and instead must either save for a specific purpose, invest it or spend it. In Capitalism, there is freedom of ownership, and so the wealthy are free to hoard $2.5 trillion in cash – leaving society free to languish in a "wealth and opportunity polarity gap."