Many people always try to fit in the Islamic Economic Principles into the modern economic terminologies instead of adopting a vice versa approach. Without even realizing the fact that these modern terminologies were either originated from the Greeks or research of Muslim economists. In order to remove this misconception, this article is an endeavor to highlight the origin of modern economic concepts and key aspects of Islamic Economics including monetary and fiscal policy from principles to practice.
Basics of Monetary Policy
Conventional monetary policy can be traced back to late 19th century when it is used to maintain gold standard and it’s most modern form is known as gold bullion standard [GBS]. GBS is a system in which gold coins do not circulate, but in which the authorities have agreed to sell gold bullion on demand at a fixed price in exchange for circulating money. Until 1971 most monies of the world were backed by gold. Surprisingly, the current value of paper or electronic money are not backed by gold but can be adjusted by the creators of money.
Monetary policy attempts to stabilize the economy by controlling the interest rates and spending by restricting the governmental borrowings. The monetary policy is a big impediment to free market economy because government controls the economy through monetary policy which is not possible in a gold environment. This is exactly what happened in so called free market capitalist economy in 1931 when gold replacement of currencies were stopped by banks.
With the passage of time, just to control the so called free economy through monetary policy, a layer upon layer over currencies were introduced, that is, initially currency was introduced then undermining currency positions were covered up through book adjustments and now through the concept of plastic money.