Inflation and Its Forgotten Cause: Riba as a Cause of Inflation with Perspectives of Al Maqrizi
Inflation has a considerable influence on economic life, inflation is one of the economic problems that has received the attention of economists, governments, and a country’s policies. Various theories of approaches and policies are developed so that inflation can be controlled at the desired level.
These problems cause the reaction of Islamic economists, where the Islamic economy is believed to be able to overcome inflation by changing the behavior of the people and leaders of the country.
Inflation is an economic phenomenon that is always interesting to be discussed especially by the government relating to its broad impact on aggregate macroeconomics: economic growth, economic stability, competitiveness, interest rates, and even income distribution. Inflation also plays a role in influencing the mobilization of funds through formal financial institutions. The zero percent inflation rate is not the main objective of government policy because it is very difficult to achieve. The most important thing is to keep the inflation rate low. This moderate inflation is low inflation, which is between 0–4 percent, there is also a limit to single digit inflation.
Of the many experts ‘exposure on the factors that cause inflation, the authors found an unspoken gap in experts’ studies of the causes of inflation. The author finds other causes which when drawn to the basic concepts of economics, can be categorized as one of the causes of inflation. That is the practice of usury in the economy, especially in the scope of macroeconomics. This opinion is not entirely new, the writer found another opinion put forward by a medieval Muslim scholar, Imam Al Maqrizi who also discussed inflation even long before Western economists explained their thoughts.
INFLATION
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money — a loss of real value in the medium of exchange and unit of account within the economy.
According to Robert J. Gordon, there are three types of inflation, namely:
1. Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation encourages economic growth since the excess demand and favourable market conditions will stimulate investment and expansion
2. Cost-push inflation, also called “supply shock inflation,” is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation.
3. Built-in inflation is induced by adaptive expectations, and is often linked to the “price/wage spiral”. It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a feedback loop. Built-in inflation reflects events in the past, and so might be seen as Hangover inflation.
RIBA/INTEREST
Riba meaningfully: ziyadah (additional). In another sense, linguistically, usury also means to grow and grow. As for the technical terms, usury means taking additional assets from basic assets or capital in vanity.
Regarding this, Allah SWT reminded in His word on Quran An Nisa (4): 29
يَا أَيُّهَا الَّذِينَ آمَنُواْ لاَ تَأْكُلُواْ أَمْوَالَكُمْ بَيْنَكُمْ بِالْبَاطِلِ إِلاَّ أَن تَكُونَ تِجَارَةً عَن تَرَاضٍ مِّنكُمْ وَلاَ تَقْتُلُواْ أَنفُسَكُمْ إِنَّ اللّهَ كَانَ بِكُمْ رَحِيمًا ﴿٢٩﴾
Sahih International Translation:
“O you who have believed, do not consume one another’s wealth unjustly but only [in lawful] business by mutual consent. And do not kill yourselves [or one another]. Indeed, Allah is to you ever Merciful.”
According to Sarakhsi, Riba is an additional that is required in a business transaction in the absence of iwadh (or equivalent) that is justified by Sharia for the addition
Meanwhile, according to Abu Qatadah, ignorant usury is someone who sells his goods temporarily until a certain time. If it has arrived when the buyer’s payment is not able, e, nauar, he provides additional payment for the suspension.
Variety of Riba
Broadly speaking, usury is grouped into two. Each one is usury debt and usury trading. First group. subdivided into Riba Qardh and Riba jahiliyah. As for the second group, usury buying and selling, is subdivided into Riba fadhl and Riba nasi’ah.
1. Riba Qardh, A certain benefit or level of excess that is required of the debtor
2. Riba Jahiliyah, debt is paid more than the principal because the borrower is unable to pay the debt at the specified time.
3. Riba Fadhl, the exchange between similar goods with different levels or quantities, while the items exchanged are included in the type of ribawi goods.
4. Riba Nasi’ah, the suspension of the delivery or receipt of ribawi items exchanged with other types of ribawi goods. Usury in rice; ah arises because there are differences, changes, or additions between what is submitted now and those submitted later.
Regarding the division and types of usury, Ibn Hajar al-Haitsami said that “Usury consists of three types: usury fadl, usury al-yaad, and usury an-nasi’ah. Al-Mutawally added a fourth type, namely usury al- qard, he also states that all these types are permitted ijma based on the text of the Qur’an and the hadith of the Prophet.”
AL MAQRIZI THOUGHT ON INFLATION
Al Maqrizi’s full name is Taqiyuddin Abu al-Abbas Ahmad bin Ali bin Abdul Qadir al-Husaini. He was born in the village of Barjuwan, Cairo, in 766 H (1364–1365 AD). His family came from Maqarizah, a village located in the city of Ba’labak. Therefore, he tends to be known as Al Maqrizi. The background of Al Maqrizi’s life who is not a thinkers or philosopher and is relatively dominated by his activities as a Muslim historian greatly influences his style of thinking about economics.
During his lifetime, Al Maqrizi was known as a hard critic of the monetary policies implemented by the Mamluk Dynasty government which he considered a source of catastrophe that destroyed the country’s economy and Egyptian society.
He studied various disciplines, such as jurisprudence, hadith and history, from the great scholars who lived in his time. Among the well-known figures who greatly influenced his thinking was Ibn Khaldun, a great scholar and initiator of the social sciences, including economics. His interaction with Ibn Khaldun began when Abu Al-iqrishad settled in Cairo and assumed the position of supreme judge (Qadhi Al-Qudah) of the Maliki school during the reign of Sultan Barquq (784–801 H).
Al Maqrizi was also a Muhtasib (market overseer, kind of head of institution or head of market, pent.) He held the position for two years. At this time Al Maqrizi began to come into contact with a variety of market, trade and Mudharabah issues. So that his attention is focused on the prices that apply, the origin of money and the rules of the scales. Who had knowledge of the economic conditions of his time and was also a fierce critic of the Mamluk Dynasty government. He applied the analysis of Ibn Khaldun in his book entitled Ighatsah al-Ummah bi Kasyf al-Ghummah (helping people by knowing the causes of his illness). That is determining the causes that caused the economic crisis in Egypt during the 806–808 period.
In 811 H (1408 AD), Al Maqrizi was appointed as the executor of the Waqaf administration in Qalanisiyah, while working at An-Nuri Hospital, Damascus. In the same year, he became a hadith teacher at Madrasah Ashrafiyyah and Madrasah Iqbaliyyah. Then Sultan Al-Malik Al-Nashir Faraj bin Barquq (1399–1412 AD) offered him the representative of the Mamluk Dynasty government in Damascus. However, this offer was rejected by Al Maqrizi.[3]During that period, Egypt experienced a receding period. The economy in general is very alarming, food production and reserves are insufficient to meet the increasing needs of the population. This resulted in a scarcity of basic necessities, leading to mass starvation in Egypt, something unprecedented.
The situation inspired Al Maqrizi to present his various views on the causes of the crisis in his work, Ighatsah al-Ummah bi Kasyf al-Ghummah. Al Maqrizi classifies inflation in two groups, namely:
1. Human Error Inflation, is inflation that occurs due to mistakes made by humans themselves. This happened because the leadership style of the Mamluk dynasty which tended to be authoritarian, also often cases with cases of corruption and poor administration, excessive taxes, increased circulation of money currency.
2. Natural Inflation, is Inflation due to natural causes caused by a decrease in aggregate supply or an increase in aggregate demand. When a natural disaster occurs, a variety of food and other crops experience crop failure, so that the supply of these items has decreased very dramatically and scarcity occurs. On the other hand, because of its very significant nature in life, the demand for various items has increased. Prices soared far exceeding people’s purchasing power. This has significant implications for the prices of various other goods and services.
Furthermore, Al Maqrizi criticized the procurement of the amount of money in the community. The existence of a policy of printing a mixed dirham currency also printing money, a currency made of copper, began during the reign of the Ayyubid dynasty, Sultan Muhammad Al-Kamil ibn Al-Adil Al-Ayyubi, intended as a medium of exchange for insignificant goods with a ratio of 48 fulus for each dirham. After the reign of Sultan Al-kamil, the printing of the currency continued until officials at the provincial level were affected by large profits from this activity. The one-sided policy began to be implemented by increasing the volume of money-printing and setting a ratio of 24 fulus for each dirham.
The discourse on inflation in the socio-economic phenomenon has always been a hot topic of conversation between western and eastern economists. Milton Friedman who is famous for his statement inflation is just monetary phenomenon or inflation is just an excessive amount of money. This opinion at a glance has similarities with Al Maqrizi’s criticism of the irregular amount of money.
RIBA AS A CAUSE OF INFLATION
Based on the theory put forward by Western economists regarding the cause of inflation, the practice of usury is not included in the cause of inflation. However, the authors argue, in practice it is true usury that is the main and fundamental cause of inflation. Before going any further, allow the author to put forward a number of correlations of the inflation theory between the theories put forward by western economists quoted from Robert J. Gordon and the theories put forward by Muslim scholars of the Middle Age Al Maqrizi on Adiwarman Karim.
1. Demand-pull inflation and Human Error Inflation
Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. The explanation has similarities with Human Error Inflation proposed by Al Maqrizi. According to Al Maqrizi, inflation occurs due to corruption and bad administration (corruption and bad administration), excessive tax (Excessive Tax), increased circulation of fulus currency (Excessive Seignorage). Al Maqrizi implicitly stated that the mismanagement of people caused an increase in the prices of goods on the market.
2. Cost-push inflation and Natural Inflation
Cost-push inflation is caused by a drop in aggregate supply (potential output. This has similarities with natural inflation as stated by Al Maqrizi. Al Maqrizi believes inflation is caused by natural things that occur outside of human control that cause scarcity of goods on the market. Among them he cited the natural disasters of flash floods that occurred during the time of the Prophet Noah Alaihi Salam, also during the Ramada or famine period that occurred in the Hijaz during the Caliph Umar bin Khattab era. Al Maqrizi can be interpreted in an opinion that inflation can occur due to the decrease in aggregate supply or the increase in aggregate demand caused by certain things.
The scientific correlation between Al Maqrizi and western economists in different eras and time zones proves how intelligent and visionary Al Maqrizi was in discussing a problem in society. Apart from all that, Al Maqrizi discussed other matters that were not specifically discussed and were not categorized as causes of inflation by western economists. That is the arbitrary provision of money (fulus), or what can also be said as the practice of usury.
Reflecting on the procurement of money that was criticized by Al Maqrizi, the procurement of paper money in all countries in the world has a common problem. According to Al Maqrizi, both before and after the arrival of Islam, currencies were used by human beings to determine the prices of goods and labor costs. Al Maqrizi stated that the creation of a currency of poor quality would eliminate a good quality currency. printing currency must be accompanied by greater attention from the government to use the currency in further business. Neglecting this, resulting in an unbalanced increase in printing money with production activities can cause the real purchasing power of money to decline.
Regarding the procurement of fulus money criticized by Al Maqrizi as stated in the previous discussion, let the writer compare it with the current procurement and distribution of money which the author will emphasize on the Fractional Reserve Banking (FRB) system through the Fractional Reserves Requirement (FSR) policy.
Fractional Reserve Banking is banks accepting deposits from customers and making loans to borrowers, while holding in reserve only a fraction of the bank’s deposit liabilities. This is done on the grounds that this step will advance economic development. While the Fractional Reserves Requirement is the amount of deposit that must be deposited. Each country has its own policy regarding the amount of deposits deposited. The percentage of mandatory savings figures ranges from 3–50% depending on the policies adopted by the country’s government.
The following is an example of a table for a country that hypothetically implements a Fractional Reserves Requirement of 20%, with the procurement of money by the central bank worth 1000 currency units:
Through the table above, it can be seen that from the total money that is worth 1,000 units of currency, causing the money to continue to grow up to 4570.05 units of currency. While the total money is only worth 1000 units of currency. This system causes the existence of new money is always needed to cover the need for money that is born from the difference between the total deposits with an initial deposit that grows and develops from interest or usury. The central bank creates paper money or fiat money and lends it to other commercial banks with interest or usury.
In addition, the conventional economic arena also states the existence of seigniorage in money. Seigniorage is the difference between the value of money and the cost to produce and distribute it. This term refers to the profits obtained by the issuer (Central Bank) from legal tender, generally the result of differences in material costs (paper) to produce currency (currency) and value (numbers) that are affixed on a piece of paper. For example, the intrinsic value of a one dollar piece of paper is 0.03 percent of the paper object. This makes the injustice and transfer of wealth of every economic subject in trade, individuals, communities, companies or nations in general muamalah.
The author’s opinion regarding usury in the procurement of money is based on what the scholars agreed in al-Mujamma ‘al-Fiqhi al-Islami in 1402 H / 1980 M. Among the points presented, there are two types of usury affirmation in the procurement of money, namely:
1. Riba an Nasiah, is usury due to a time delay, referring to quantity. As an additional to be paid in the debt-receivables transaction.
2. Riba al Fadl, is usury which occurs due to unjustified additions to the weight and size of the exchange.
Through the short description above, it is clear that interest or usury causes the price of goods to rise and the money supply more and more, the more is not in accordance with ability, while the intrinsic value of money does not match the value of the money.
This is in line with government policies criticized by Al Maqrizi with the inconsistency in the determination of the exchange rate of money with the dirham. As stated in the previous discussion, the adoption of the policy of the ratio of the money exchange rate from 48 funds per year to 24 funds per year makes price instability in the community. This is caused by an unbalanced increase in printing money with production activities that impact on the real purchasing power of money has decreased.
CONCLUSION
Inflation is an economic phenomenon that is worth remembering its large impact on the macro economy in the aggregate. There is a general increase in prices of goods over a period of time. Research economists, especially western economists, have discussed a lot about this. They have also formulated causative factors, so that the solution to overcome inflation. Although motivated by a number of studies initiated by western economists who try to review the cause of inflation, the discussion on the practice of interest or usury seems to escape observation. This journal answers one problem that may not be questioned by the majority of western economists. What is the real cause of inflation if it is dived from another perspective which turns out to come from the way of procuring and distributing money that adopts the practice of interest or usury. This opinion was strengthened by the argument from Al Maqrizi, a medieval Muslim scholar who criticized the government at that time from the monetary policy taken, to the provision of money that was not in accordance with the exchange rate.
The author concludes that the existence of the Fractional Reserve Banking (FRB) System which is nothing but adopting the Ribawi operating system or interest is one of the causes of inflation. This is because, with the operation of the Fractional Reserve Banking (FRB) System in a country that automatically makes the country’s needs for the existence of new money always necessary or even mandatory. Which also means it will always increase the money supply in the country. In other words, inflation will continue as long as the money supply is increasing and is needed to continue to grow.
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