The Rupee like other currencies such as the Dollar and the Pound, was originally backed by real tangible wealth in the form of a precious metal. In the case of the Dollar it was gold and in the case of the Rupee it was silver. This system stabilized the value of the monetary unit both internally within the country and externally in international trade. Today, there is sufficient gold and silver in the world to support the actual economy, transactions such as buying and selling food, clothing, shelter, luxuries, manufacturing machinery, technology and so on. However, due to capitalist practices the demand for the creation of money outstrips the supply of gold and silver. Governments abandoned the precious metal standard, so that currency became backed only by the authority of the state, allowing more and more notes to be printed without being backed fully by gold and silver, so the money became worthless, if not almost worthless. Despite the false reassuring claims of the government to the contrary, the Rupee is collapsing constantly, which is leading to huge increases in prices. Yet, the government continues to print more and more money unheeding of the dire consequences, busily digging a grave for the lifeblood of the economy – its currency.
Capitalism mandates interest rate manipulations to control the economy. The privately-owned banks use depositors’ money and deposit it with Pakistan’s state bank in special accounts to earn higher rates of interest. As the State Bank does not have surplus money to pay back the interest to the private banks, it “creates money” by printing more, in order to pay interest to the depositing banks.
The capitalist balance of trade policy through devaluation of the Rupee also leads to inflation. Being a net importer country with a weak manufacturing base, Pakistan’s capitalist government oversees the devaluation of the Rupee in accordance with IMF orders. This was claimed to be done primarily to address Pakistan’s balance of trade. However, by devaluing the Rupee the Pakistani government increased the costs of manufacturing inputs, which caused havoc in the agricultural, textile and other sectors that were already reeling from the policy of high interest rates. Hence, the high cost of borrowing together with the increase in manufacturing costs, rendered many industries and companies unable to compete internationally.
Islam has mandated that the currency of the state is backed by precious metal wealth, ending the root cause of inflation. Islam defined the currency of the state as Gold Dinars weighing 4.25g, and Silver Dirhams weighing 2.975g. This is why the Khilafah enjoyed stable prices for over a thousand years. Return to the gold and silver standard for Muslims is eminently practical. The lands of the Muslims in which the Khilafah state is likely to arise contains a lot of gold and silver resources, such as the Sandaik and Reko Diq fields in Pakistan.
The future Khilafah will strengthen and stabilize the currency by backing it with real wealth, gold and silver, to end the generalized inflation which has crippled households, industry and agriculture, once and for all.
For further details see the complete economic policy and its relevant articles from the constitution of the Khilafah state in the book: Manifesto of Hizb ut-Tahrir for Pakistan
Monday, 1st Rabi-ul Thani 1434 AH