Leading Issues in Islamic Economics and Finance by Zubair Hasan

Author:Zubair Hasan
Language: eng
Format: epub
ISBN: 9789811565151
Publisher: Springer Singapore

8.2 Evolution of Money

8.2.1 A Social Convention

Money was not invented; it evolved as a social convention and took numerous forms over time and space. This lent precedence to money substance over its function in discussions on the subject. The importance of what works as money was reinforced by the fact that in the process of measuring the value (price) of other goods and services, money assumed a value for itself that fluctuated inversely with variations in the general price levels over time. In that, money was a different sort of measure compared to others that we used in our daily lives. The value of money—even when made of, or linked to, something having value in use such as gold or silver—would fluctuate inversely with those of other goods and services. The stability in the internal value of money thus required the controlling of fluctuations in the domestic price level. Also, what worked as money in various countries was not identical. This gave rise to issues relating to the termination of the values of different monies in terms of each other, or foreign exchange rates, for promoting internation trade.

The rising tide of international trade with the passage of time demanded something tangible that could help domestic monies enable their mutual convertibility. This need added to the significance of substance for the role money played in an economy. Bronze and copper were the first to be converted into coins, but it did not take much for gold and silver to replace them. Gold and silver coins were made in Lydian (modern Turkey) as early as around 560 BC and could well be regarded as the earliest forms of metallic coins.

However, these coins were too soft to withstand the wear and tear during circulation or to resist dishonest clippings, resulting in their weight falling below the initial measure. Gold and silver had to be mixed with alloy to make coins adequately hard. This demanded standardization of the alloy proportion in the coins to ensure their authenticity and uniformity in terms of their precious metal content. The work was done by informal private agencies for most of the 2500 years of sway the metals, yellow especially, had over monetary matters across the world. Touchstones were used to verify the purity of coins in terms of their fineness. The convention continued even beyond the publication of Smith’s Wealth of Nations in 1776. Indeed, the author was much impressed by the spontaneous evolution of such beneficent social institutions as money, division of labour, and capital accumulation that played such a vital role in promoting growth in the wealth of nations.2 Note that the gold standard in England was established by an Act of Parliament only in 1860 and in the United States much later, in 1900.

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