The Real Cause of Inflation and Its Solution

The Real Cause of Inflation and Its Solution

The wave of inflation that has gripped Pakistan for the past few years is now crossing all the limits of tolerance. Oil, sugar, flour, pulses, vegetables, eggs, meat, electricity, gas, school fees, to name a few, are becoming increasingly unaffordable for a large segment of the population. When we look at how the current economic system works, we see a deep and interconnected relationship between inflation and this capitalist system.

In the past, just like other currencies such as the dollar, pound and franc, the rupee too was backed by a precious metal. In the case of dollar, this precious metal was gold, while in the case of rupee, it was silver. This monetary system strengthened the financial system not just internally but also in international trade. That is why, during the period of Islamic rule, the Indian subcontinent used to be the engine for the global economy.

But interest-based loans that are issued under the Capitalist economic system and the stock market created so much demand for money that gold and silver alone could not fulfill. Furthermore, World War I also led to an increase in demand for money. Several states then decided to abandon the prevalent currency system and instead started printing paper currency that was not backed by either gold or silver reserves. This led to each successive printed currency note having a lower value than the preceding one, leading to an increase in the prices of commodities. Thus, the constant increase in the prices of commodities is one of the defining characteristics of this capitalist system. Therefore, in this system, each state keeps track of the rate of inflation of its currency. Paper money not backed by any precious metal, however, is only one of the four main causes of inflation.

Another reason for inflation is the inability of the government to effectively manage the demand and supply of different commodities and the support of corrupt government officials of the capitalist class, which ensures that essential commodities are scarce in the market, and thus expensive. The democratic rulers of this capitalist system do not interfere with the efforts of the capitalist class to hijack the supply chain, and instead bow down to them when they are blackmailed. These capitalists create a shortage of supply by hoarding commodities and forming cartels so that they can double and even quadruple their profits when the prices rise. On the other hand, the government does not import essential commodities, whether it is oil, LNG or wheat, sugar or other commodities, on time, so as to limit its current account deficit, and ensure that it has enough dollars to pay back the interest on loans that it has taken from international organizations, without having any concern to whether its population has enough to feed itself. Thus, a shortage of supply leads to increase in prices and causes inflation.

The third major reason for the rise in inflation is the sharp rise in the price of energy, which in turn increases the cost of doing business and commercial activities. The privatization of power plants has taken the energy infrastructure out of public and state control and put it into the hands of a few multinational investors who then have a major say in the price of energy.

The fourth biggest and main reason for the rise in inflation is the capitalist tax system which broadly comprises of direct and indirect taxes. Most of the revenue generated through taxes actually comes from indirect taxes, which is levied on all goods and services, causing their prices to rise beyond their actual prices. An example of this is the General Sales Tax (GST) and petroleum levy applied to the actual prices of petroleum products.

If we talk about the alternative to this capitalist system, then the Islamic economic system emerges as a unique system with all its features. Islam requires that all currency notes that a state issues, be backed by precious metals. By doing this, Islam has eliminated the root cause of inflation. Islam has made gold and silver the basis of the state’s currency. The Prophet (SAW) commanded Muslims to use gold dinars and silver dirhams as currency with weights 4.25 grams and 2.975 grams respectively. This is why the Khilafah State had been able to keep prices stable for more than a thousand years. Currency in an Islamic state, thus, has a strong base. The Islamic state, further, accumulates more gold and silver reserves in a systematic manner, and may also engage in barter trade to keep gold and silver reserves intact. Furthermore, it insists on international trade being in gold and silver, thus ending the current oppressive dominance of the dollar, which is closely guarded by the IMF. By forcing the currency to be backed by gold and silver, Islam effectively prevents the government from simply printing more and more notes to cover its fiscal deficit and from controlling the amount of money in circulation by raising or lowering interest rates.

As far as the second major cause of inflation is concerned, the head of the Islamic state in an Islamic system i.e. the Caliph, is responsible for the welfare of his subjects and for meeting their needs. In fact, he will be held accountable for this on the Day of Judgement. So, the Caliph is forced to take strict actions against the hoarders and impose penalties on them. This discourages the formation of monopolies and cartels and eliminates them entirely from the system. Furthermore, Islam abolishes all taxes on imports for domestic traders so as not to establish a monopoly of a few investors on market supply. And all of this is not based on the Caliph’s whims or desires, but is based on the commandments from Allah (SWT), and hence their implementation is obligatory. The Messenger of Allah (SAW) said: مَنْ احْتَكَرَ عَلَى الْمُسْلِمِينَ طَعَامًا ضَرَبَهُ اللهُ بِالْجُضَامِ وَالْإِفْلااسِ “Whoever stockpiles food and deprives the Muslims of it, Allah will make him a victim of leprosy and poverty” [Ahmad and Ibn Majah narrated by Umar; Sahih Hadith].

As far as the third major reason for inflation is concerned, Islam forbids private ownership of energy resources and declares them to be public property which is to be guarded by the state and the benefits derived from it are to be passed directly on to the people. In an Islamic state, it is, thus, not permissible for the Caliph to privatize oil and gas reserves or power plants, which means that the energy prices will be low and accessible to the general population.

Finally, as far as the fourth reason is concerned, the imposition of general sales tax and other such indirect taxes, which do not discriminate between the rich and the poor, are forbidden and considered a great sin. The Prophet (SAW) said: لا یدخل الجنۃ صاحب المکس “The one who takes taxes will not enter Paradise” [Ahmad, Abu Dawud, Hakim]. Thus, in Islam the prices of goods and services are the same as their actual prices. In conclusion, inflation is such an integral part of the present system that it is not possible to separate the two from each other. It is, therefore, time to establish an Islamic state that will ensure our economic prosperity through the implementation of Islam as it had done for centuries before. The present government has failed like the previous democratic and dictatorial governments because no system other than Islam can succeed in the Muslim world. If Muslims are to make progress in this world, then they must first establish an Islamic state that implements Islam comprehensively, of which its economic system is also a part.


The views expressed in this article are those of the author and not necessarily those of The Lahore Times.

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