Don't confuse religious questions and empirical questions

Religious questions are answered by consulting religious sources. Empirical questions are answered by studying the real world. Confusing these two types of questions is a serious mistake.

Summary

Religious and empirical questions are answered by different methods.
Whether God says that money should only be gold or silver is a religious question.
Whether the economy would function better by replacing fiat money with gold or silver is an empirical question.
The empirical answer is clear. All advanced economies use fiat money because they run better than they did with gold as money.

My experience is that large numbers of people, sadly including many university graduates, fail to think clearly. In particular I often find that people who hold strong religious views confuse religious questions and empirical questions.

Accordingly I made this the theme of my February column in the magazine Islamic Finance News.

Letter from Amin - 11 February 2016

Clear thinking requires us to avoid confusing religious questions and empirical questions.

“Should Muslims consume alcohol or pork?” is a religious question. While I don’t give religious advice to others, to me it is clear that the Quran tells Muslims not to consume either.

“Is drinking alcohol or eating pork harmful?” is an empirical question. While excessive alcohol consumption has always been known to damage the body, the latest medical research indicates that there is no safe level of alcohol consumption. Conversely there is no evidence that eating pork which is properly preserved is harmful. I still abstain from eating pork, because of my religious beliefs, and for the same reason did not drink even before the latest scientific findings.

Many Muslims advocate replacing fiat money with the use of gold, or sometimes gold and silver. However most of the time such advocates fail to distinguish between religious arguments and empirical arguments for making that change.

Whether God prohibits Muslims from using anything other than gold or silver as money is a religious question. Each Muslim needs to decide that question for himself or herself, since we are all individually answerable to God. In a democracy, if a majority of its citizens consider that fiat money is religiously prohibited, it is not unreasonable for that country to change its national currency to gold or silver. (As an advocate of economic freedom, I consider that such a country should not prohibit its citizens from using the fiat money of foreign countries for private sector transactions if they so wish.)

Whether an economy runs better (measured by criteria such as economic growth, rates of employment, levels of inflation etc.) with the use of gold as money or with fiat money is an empirical question. It can only be answered by looking at the real world, and religion can offer us no guidance.

Fiat money has undoubtedly led to some spectacular national monetary catastrophes, such as the rampant inflation of Weimar Germany or modern Zimbabwe. Despite that, all advanced economies use fiat money; not one requires its paper money to be backed, in full, by gold. This was not the case in the past, for example the nineteenth century.

There is a simple reason why all advanced economies abandoned the use of gold. Gold unduly constrains monetary policy, and its limited supply is inherently deflationary. While it would take a textbook to prove it, the empirical question has a clear answer. Countries’ economies run worse, not better, if gold is their money.