Signs from Allah: History, Science and Faith in Islam
82. The Rise of the Global Credit Economy, Part 3 of 3
By Professor Nazeer Ahmed
Concord, CA
By 1810, the merchants, the landowners, the producers and the governments were all beholden to the bankers and at their mercy. But when the Mexican War of Independence erupted (1810-1813), the flow of American silver suffered a disruption, a scarcity of precious metals developed, and there was a credit crunch in Europe. The bankers demanded payment in precious metal, which was in short supply. Panic set in and individuals as well as nations were brought to their knees.
The merchants and the old landed aristocracy put up a fight against the gold standard. But the legislative battles in the English Parliament were finally won by the bankers with the Bank Act of 1846, which conferred legal recognition on the negotiability of credit documents.
For more than a century, until 1972, when the United States abandoned the gold standard, those who controlled the gold, controlled the monetary veins of the world. The concentration of wealth with a few bankers increased. The banks literally controlled the jugular veins of the economy. In principle, the process worked like this: First, easy credit enticed borrowers who received advances against collateral goods and real property. But when credit was tightened, liquidity suffered, and there was insufficient currency to make payments on debts. The debtors dropped prices on their properties, so that they could sell their real assets and continue to make debt payments. The economy thus moved in boom-bust cycles, in which each bust cycle devoured the fruits of human labor and created additional poverty. Major contractions in the British economy were recorded in 1815, 1825, 1847, 1857, 1866, 1893 and 1929. The last one caused a global depression and was a contributory cause for the Second World War.
The disengagement of the world monetary system from the gold standard did not change the fundamental relationship between creditor and debtor. Whether the standard is gold, the American dollar, the British Pound or the Japanese Yen, the process remains unchanged. Credit, with interest, works to the advantage of the lender in favor of economic centralization. The rich keep getting richer, while the poor sink deeper into poverty. Critics may suggest this position as too simplistic inasmuch as governments can and do tax concentrations of wealth. But taxation mitigates the concentration of wealth; it does not eliminate it. In addition, as Ibn Khaldun pointed out more than six hundred years ago, taxation is regressive; it dampens initiative. Excessive taxation kills the economy; it brings down dynasties and empires. By contrast, interest and credit continue to favor the creditor at the expense of the debtor.
What is true for individuals and nations is also true at the international level. Bereft of capital, the emerging countries of the world turned to international bankers for loans after the Second World War. The credit system increased the span of control of the international bankers over the entire globe. New mechanisms of international credit were created through the World Bank and the International Monetary Fund. Loans were offered against the natural wealth of the borrower nations (commodities such as coffee, jute, oil, bananas, spices) as collateral. Commodity prices fluctuate in response to natural causes, war, pestilence, man-made disasters or political manipulation. Should commodity prices go down, the borrower nations couldn’t make payments on their debt. The result is the same should the bankers tighten credit. To encourage their exports, and earn foreign currency, the debtor nations drop the prices of their export goods. The richer nations move in and acquire more of the poor nation’s resources at bargain prices. To continue debt financing, the bankers often force the poorer nations to devalue their currencies and accept international oversight of their economies. The cycle continues. The poorer nations keep getting poorer while economic centralization proceeds at the global level. The case history of the Suez Canal and its takeover by international banking interests (1856-1876) illustrates this observation.
The issue of credit and interest is a major element in the continuing negotiation between the civilization of Islam and the global economic system. Indeed, it is a major item of negotiation between the richer and poorer nations of the world. The issues are complex and require a deep understanding of the inter-relationship between economics, finance, commodities, employment, trade, legal and political frameworks governing the world. Suffices it to emphasize here that in the contemporary dialectic between the civilizations of the world, the credit economy is perhaps the single most important issue for negotiations. It requires sagacity and wisdom to negotiate this ocean.
(The author is Director, World Organization for Resource Development and Education, Washington, DC; Director, American Institute of Islamic History and Culture, CA; Member, State Knowledge Commission, Bangalore; and Chairman, Delixus Group)
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