Tarek El Diwany’s book “The Problem with Interest” has attracted attention from scholars of Islamic finance and bitcoiners alike, including Allen Farrington, whose newly published book, Bitcoin Is Venice, draws heavily on Tarek’s work. In this episode, Saifedean hosts Tarek and Allen to talk about the morality of lending with interest, why the practice is prohibited in Islam, and how an economy would function without interest rates. They discuss how monetary systems that require the creation of ever more debt impact human time preference, capital accumulation and morality, and whether interest would emerge in a free market monetary system like bitcoin?
- Tarek’s book The Problem with Interest
- Kreatoc Zest’s website.
- Saifedean’s podcast episodes on Islamic finance with Safdar Alam and Harris Irfan.
- Article on William Cobbett’s opposition to suspension of the gold standard during the Napoleonic Wars.
- Selected Writings on Economics by Nassau Senior.
- See Plato’s Laws, Book 5 and Aristotle’s Politics, Book I, 10, no. 5 for Ancient Greek views on usury.
- A History of Interest Rates by Sidney Homer and Richard Sylla.
- Allen Farrington’s book Bitcoin is Venice on Amazon.
- Saifedean’s podcast episode Allen Farrington’s adventures with Fiat Intellectuals.
- Saifedean’s podcast episode Bitcoin Strategy with Michael Saylor.
- Saifedean’s first book, The Bitcoin Standard
- Saifedean’s second book, The Fiat Standard
Enjoyed this episode? You can take part in podcast seminars, access Saifedean’s courses – including his new course ECO22: The Fiat Standard that starts this week – and read chapters of his forthcoming books by becoming a Saifedean.com member. Find out more here.
Saifedean Ammous: [00:03:02] Hello and welcome to another episode of The Bitcoin Standard Podcast! Our guest today is Tarek El Diwany. Tarek is the director at Kreatoc Zest Ltd. and his book, The Problem With Interest on the nature of usury and modern banking was first published in 1997, and has attracted wide readership among scholars of Islamic finance, as well as scholars of Bitcoin, I should say.
So we are also joined by Alan Farrington here, who has recently published a book titled Bitcoin is Venice and it draws heavily on the work of Tarek. And I think it’s very interesting that a lot of Bitcoiners find the economic work of Tarek and Islamic finance in general to be relevant to the topic of Bitcoin. And I certainly think so.
Before, we’ve hosted Harris Irfan and Safdar Alam, and we’ve [00:04:02] discussed Bitcoin from the perspective of Islamic finance, we’ve discussed why Harris believes Bitcoin is the most Islamic Shariah compliant form of money, and why Safdar believes Bitcoin is a better alternative that is more Shariah compliant than Islamic Shariah banks.
Today we’re hosting Tarek to discuss specifically the topic of interest, and to get the Islamic economic perspective on the problem with interest, and the case against interest. Why is interest bad? Then we’re going to discuss with Tarek – Bitcoin, his thoughts on Bitcoin, and whether he also sees some sort of connection between Bitcoin as a form of money, and the principles of Islamic finance and how – and I think this is perhaps the most interesting question that this leads us to – is what does this tell us about the nature of [00:05:02] finance in a Bitcoin world? If we live on a Bitcoin standard, what would finance look like? I think the work of Islamic finance scholars might be more relevant to Bitcoin than many might imagine.
So it’s great to have you here Tarek. Thank you very much for joining us!
Tarek El Diwany: Thank you for inviting me!
Saifedean Ammous: Tell us a little bit first about your background, what brings you into the world of Islamic finance? Why do you write about it? What do you do for a living and what is your business? What do you sell?
Tarek El Diwany: Yeah. I’ve always been working in finance, accounting, investment. I started my life in London in a stockbroking financial dealing company, quite a large one. And I set up a desk there dealing in interest rate derivatives, which I tell [00:06:02] people – this is like a double Haraam, interest rates and derivatives are generally prohibited by Islamic scholars.
I didn’t really know at the time. In particular, I had an idea that it might not be, people used to say – Oh, you’re earning ill gotten gains – but this was a secular criticism of the dealing and financial speculation industry in London which came from many people, and it was sometimes motivated by jealousy because people in that industry do earn way above the average.
And in fact, I was just recalling the other day to one of my friends that I started as an accountant actually for a few months at KPMG, and I was offered 20 times my salary to go and work in this dealing company. At the age of 20 something, to be offered that amount of money and a fast car and an unlimited expense account – it’s very difficult to say no. [00:07:02]
That is why that industry actually perpetuates in many ways, it benefits quite a large number of people, very substantially. There’s a big vested interest in keeping the status quo. I got sucked into that world for five years.
And then one day I thought to myself – look really what I’m doing, I began to see the way the system was working – those criticisms and ill gotten gains are actually quite justified, but in ways that most people didn’t recognize, and I thought I wanted to do something different, I’m not quite sure what.
I resigned, I didn’t have anything to go to, my salary dropped by a hundred percent basically. But I had some savings and I studied for a couple of years and I came across Islamic finance, and I started reading quite widely and heavily, [00:08:02] and I joined the British Library and I started to uncover a lot of books there, which one doesn’t generally find, written over many centuries actually.
And I discovered the whole world of monetary reform and financial reform from people going back to William Cobbett in the 19th century in England. And these people were not Muslims, they just had a secular justice based critique of the financial system that London had developed all those centuries ago, and was continuing to develop.
So I got very interested, and at the same time I came across the Islamic finance world and eventually I started working in Islamic finance, in project finance, in equity and investment. And I’ve been doing that ever since.
Saifedean Ammous: Okay, so then tell us what is the problem with interest, which is the topic of your book. I’ve read your book, I think it’s a fascinating read. I highly recommend it. [00:09:02] What is the central argument of your book in terms of what is the problem with interest, if you could summarize it?
Tarek El Diwany: Yeah, there are problems at what you might say illegal level, if you look at it, legally speaking, what is the contract under which interest is awarded?
And then there are macro issues of what are the consequences of having an interest based system? The one leads to the other in my view. And then there are the political issues surrounding the interest based financial system that we have and what that does to power structures.
I suppose one could include the social issues, but say that let’s lump these in altogether in terms of the effects of what in my view is a legally unjustified contract. Actually I [00:10:02] was mentioning the Christian scholars, they started off I think 900 years ago, the Scholastic’s writing about this, and one of their themes that the early Christian scholars was – to address the proposal at the time, interest was a rental of money.
Just like you rent a horse for someone to use for a day or a month or a year, why can’t you rent some money? And their response to that was illegal. I’ll just give you a brief example, and we can go more into it if you’d like, but they said – Look, if someone rents you a horse, then you pay for the use of the horse, but you don’t actually own the horse. If you own the horse, why would you be renting it? You can’t pay a rental on something that you yourself own.
So a rental is not a sale. A rental is something that you pay for the use on it. Now, if [00:11:02] you take the horse, and the horse is stolen through no fault of your own – Oh then whose loss is it? They asked.
And the answer to that question is that the loss is the loss of the owner of the horse. The one who owns it, if it’s stolen, there’s the loss. The critical question then is if money borrowed is like a horse being rented then what happens if you go to somebody you borrowed 1000 pounds from them, and the money is stolen? Whose loss is it? And clearly under law as it is now, and as it was then, you bear the loss.
The borrower of the money bears the loss. In which case, the money must belong to the borrower. In which case it can’t be a rental. In which case one shouldn’t pay a rental on something that one owns. In which case, the only fair price for [00:12:02] 1000 pounds purchased – yeah, it’s not rented remember, it’s purchased – the only fair price for 1000 pounds purchased is a thousand pounds.
If it was more or less, it would be unjust to one of the parties. That’s an example of a very early legal arguments of why interest is not justified on a contractual basis. There were many other proposals made, some of which had legal connotation, some which had an economic connotation, and those went forward through many centuries.
In the 19th century you had the idea from Nassau Senior – money, when you borrow it, and you pay interest, the lender is the one who’s having to abstain from the use of his money, and he needs to be compensated for his abstinence. So interest was a reward for abstinence. And this is a kind of economic and micro economic argument.
People criticized Nassau Senior because they said – Look, money lenders, often they [00:13:02] have lots of money and they lend a little bit of it, they don’t have to abstain from anything. They still got plenty of money, what’s actually the loss that’s been caused to them? Their cash pile shrinks by a bit, but they don’t have to abstain. – So if there’s no abstinence, then on Nassau Senior’s argument, what actually is the compensation for?
So you had those economic arguments, you had the legal arguments. If we look at those and we see that there is somehow an injustice in the interest based financial contracts, then we come with philosophical points, and that philosophical point is – if there is a corruption in a key legal contract, which is endemic throughout society, then there will be corruption in the society.
And one can say even more perhaps, about the monetary system. It’s the money that we use is corrupted, then the society that uses the corrupt money will become corrupted. That’s the philosophical argument. I [00:14:02] guess we can look at all of those, but there is your chain of development.
The modern day now where people often criticize what’s going on in the world, and they say – we need solutions, we need remedies. – And I think my core point is that if you want to remedy a problem, you need to address the core of the problem. You need to address its cause, not its effects.
And I do believe that most of what’s happening now in terms of public policy is something that addresses the effects, the results of a corrupt monetary and financial system, and not the cause of that corruption. And until we address that cause, we’re not going to get anywhere really.
Saifedean Ammous: Yeah, I think that’s a very powerful argument.
To be clear, a lot of people associate the argument against interest with Islamic finance because it is most prominently made by Muslims and Islamic scholars. But it is by no means unique to Islam. As you point out, a lot of Christian scholars have made this [00:15:02] argument over the ages, and as you pointed out in your book, Plato and Aristotle also spoke about the problem of interest and where it is a problem.
And of course there’s an extensive discussion of the social and moral and political implications of this. As an economist, I’d like to begin with discussing the economic case against interest. And here what I find interesting is, the way that I look at it is, I reached the same conclusion as you, I can see an argument made against interest, but I don’t really reach it through the same route that you take.
So you argue against the time preference theory of interest rate as an explanation of interest rates, which is the Austrian perspective. Now I have a perspective on this that is inspired by the Austrians, but at the same time, different from the Austrians in certain ways.[00:16:02]
Could you care to explain to us what is your case against time preference as a theory of interest? Or before that let me at least make the Austrian case for time preference, and then you can give us your objection to it. So the Austrian case is that people prefer the present to the future. People prefer the satisfaction of a particular need today over its satisfaction in the future.
So if I were to offer you a sum of money today, and give you the choice between taking it today or taking it tomorrow, or a year from now, or 10 years from now, all else being equal, assuming that it’s the same exact sum of money that can buy you the same exact things, or actually to make the example more concrete, you don’t even tie it to a sum of money, you make it an actual physical good, so would you rather have a meal today or in 10 years? Would you rather have a house today or in 10 years?
And the [00:17:02] Austrians say that time preference is a category of human action. It’s just an inherent way of how humans are wired. That we will choose the present over the future.
And so therefore, if you offer me between getting an apple today or an apple in 10 years, I’ll take the apple today. The only way that you can get me to defer accepting the apple today is if you offer me an apple plus something more in a year. So I’ll only be willing to not eat an apple today, if the offer that is the alternative, that is the future, the apple tomorrow or an apple in a year is larger than this apple. If you make it large enough, then I’m willing to take it. So why do you not agree with the time preference theory of interest rate?
Tarek El Diwany: Yeah. First of all, I agree that humanity is hardwired to be impatient, to want [00:18:02] things now, sooner rather than later, I think that’s indisputable. The question is firstly, is that actually the case in all cases, or even in most cases? And secondly, should we encourage it? So let’s look at the first, I think there are many examples of cases where people don’t actually prefer now to later, and I’ve given examples of this, I’m sure you’re aware of them.
For example, if you asked me, do I want seven breakfasts today or one breakfast each day for the next week, then I’d be mad to choose seven breakfast today. And if you asked me, do I want my whole lifetime’s worth of holidays this year, or would I prefer to have one every year for the next 30 years? And clearly prefer later to now.
I want some holidays later, and maybe one now. There are many [00:19:02] examples where humanity actually prefers – despite its hard wiring – to have things later than in the present. And if that’s the case, then why do we have an all-pervasive rule which says that the money which we use for our transactions and which sometimes determines which transactions we do, why should that money follow a different [???]. That argument becomes much more powerful if you consider that just because human beings prefer something or are in some way hardwired, it doesn’t mean it’s actually good for them. There are many human beings who are very self-destructive and they prefer modes of behavior which they may enjoy, but are actually very harmful.
The soul cause here of saying humanity is hardwired, this doesn’t necessarily justify the action, and it doesn’t justify the rule, which is posited [00:20:02] on that action. I extend that issue of time preference because if we do accept that money now is worth more money than money later, so 100 pounds today is the equivalent of 110 pounds next year, some hugely destructive consequences flood in.
And I think one of the clearest examples for people who do finance, and I used to do project financing for my job, and so I know the financing industry does this on a daily basis – they do what’s called discounted cashflow analysis – and at the center of that is the idea that 100 pounds today is worth 110 pounds tomorrow, and vice versa.
I give a very simple example, which is not my own actually, I’ve taken it from another researcher, God bless him because I think I would never have come across it, I’ve never seen it anywhere else, michael Lipton is his name, who says – Look, you’ve got a [00:21:02] farmer, his father, his grandfather, the generations before him have done sustainable farming. They’ve owned the equivalent of 100 pounds a year of profits on their phone. Someone comes along and says – Look, I’ve got this chemical, you can add it and you can do highly intensive farming and you can on 150 pounds of profit per year, but only for the next 15 years.
Because after that your land is going to become desertified, and you won’t be able to produce anything ever. It’s going to turn the desert as far as we can see. Now, if you take those two streams of cashflow, the 100 pounds a year forever looking forward, which is reasonable because it’s happened since you knew your father’s predecessors would be doing, or you take 150 pounds a year for 15 years only. If you put a interest rate, time preference rate, of 10% on that two series of cashflows and say which one do I prefer? Then the discounted [00:22:02] cashflow analysis tells you to take the highly intensive route. To actually take the 150 a year for 15 years and then leave the land as desert. And it says to you as an analytical tool, that selection of land use is more profitable than the 100 pounds a year indefinitely.
Now that has to be wrong. And particularly now that we’re in this crisis of ecological decline, we need to make the leap of understanding that this is not about how people do farming, it’s not about whether they use chemicals, it’s about the financial system which encourages them to make the wrong choices.
So let’s come back to time preference. Let’s say it is human nature, let’s say we are greedy, or we’re impatient, the question is – should we have a system which is encouraging us to be greedy and impatient?
Saifedean Ammous: So I see that case. As I was saying, I arrive at similar conclusions to you, [00:23:02] but I take slightly different methods.
Let me make the kind of Austrian case against interest, which is that yes – discounting exists because it’s just a part of human nature. I think the example you offer about seven breakfasts today, I don’t think it really makes sense because these are different goods.
You’re taking a second breakfast today, comparing it to the first breakfast tomorrow. But the comparison between the same first breakfast today versus the same breakfast tomorrow always introduces the preference to the breakfast today, and the reason for that, the reason ultimately time preference exists, and the reason time preference is positive is that humans are mortal. We die. There’s always uncertainty.
There’s no question that you would prefer something today over 50 years from now, because you could be dead in 50 years. Same is true for five years and five days. There’s always the chance of dying.
And so we prefer the satisfaction of early needs because the present is [00:24:02] certain and the future is uncertain. And not only
Tarek El Diwany: Take that away for a moment, let’s remove that from the issue. Let’s talk about the banks.
Saifedean Ammous: If you’ll just let me,
Tarek El Diwany: I want to take the personality away from it, don’t attach it to the human being. Talk about the planet, ask the question – is one planet today worth more planets tomorrow?
Saifedean Ammous: I’ll get to that. But let me just finish to the point that I’m making, which is that we always do perform this discounting, and the evidence for this is that ultimately if we don’t discount the future we don’t consume today. There’s a difference between consuming today and consuming tomorrow.
So there is a degree of discounting the future. This is where I agree with the Austrians. But where I agree with you is that this does not necessarily translate to a market interest rate. And the reason for that, let me give you the kind of Austrian perspective of why, and then it arrives at a similar conclusion to you in terms of the high time preference [00:25:02] consequences of it, which is that we deplete our capital stock in terms of the natural capital stock, we deplete the farm.
It’s a similar example to an example that I use. The example you used is very similar to one that I use in The Fiat Standard. And the idea is this – according to the Austrians time preference determines the interest rate because time preference is the degree to which people will accept delaying gratification for the future.
The higher their time preference, the higher you need to pay them. So the higher the interest rate. The lower the time preference, the lower the interest rate. This is a key idea. What effectively Islamic finance is saying, and the kind of moral and very normative perspective which you’re proposing, is essentially saying we need to have a lower time preference.
So I think of the case against interest as not negating the time preference theory of interest, I think it fits better if you accept the time [00:26:02] preference theory of interest and say – what we’re calling for is a society that is low time preference. And the way that I see it as that if you look historically at interest rates and there’s a study by Homer and Sylla called History of Interest Rates, and it studies interest rates data on interest rates over 5,000 years.
What you notice is that there’s a significant downward trend as human civilization advances, as our capital stock increases, as our technological advancement increases, as our productivity increases, and as our time preference drops, interest rates begin to decline. They rise in times of war, they rise in times of crisis, they rise when bad things happen, but when there’s peace and security and the longer there’s peace and security and the longer that people are stable and secure in their property rights, you witness interest rates decline.
And so if you look at the world at the end of the 19th [00:27:02] century, before the World War began, at that point interest rates were around, the lowest benchmark interest rate for the bank of England was around only 2%.
So it already headed in that direction, and I think if we’d stayed on the hard money for another century, I think there was nowhere to go but for interest rates to continue to drop, because time preference would continue to drop. People would save more, they would accumulate more wealth.
Tarek El Diwany: Quite possibly.
Saifedean Ammous: Yeah, and then interest rates would drop. And I think the reason zero interest rate is eventually the endpoint is that time preference can only drop as civilization advances, and as people become more and more productive, and they have more wealth and they’re able to delay gratification more they accumulate more savings. And so savings become more abundant the society.
And then the cost of maintaining the savings becomes higher than the interest rate that you would get on the market. [00:28:02] This is really the key thing, which is the insight that you bring, which is that, if you borrow an ox, the ox depreciates over a year, all goods depreciate over time, and the idea that money doesn’t depreciate doesn’t really make sense.
And I think it’s true. It’s true for money as well, because there is always a cost to carrying money. Whatever the money is, there is a cost to carrying. Every money leaks value in a sense, because you have to pay to secure it. There’s a risk and there’s insurance. So if you have significant sums, you have to first store them and then you have to insure them.
So there’s always, depending on the kind of money and the way you store it and the way that you insure it, there’s always a cost which is the cost of the storage of the money, the carrying cost of the money.
Tarek El Diwany: Yeah.
Saifedean Ammous: I think my case against interests, and I don’t know if anybody has made this before, I think it’s my idea, is that – as time preference drops, it eventually drops under the cost of carrying [00:29:02] the money to the point where you will accept getting 0% nominal interest on your money because it is saving you the storage cost.
Tarek El Diwany: Yeah, it sounds interesting in a hard money system.
Saifedean Ammous: Exactly. In a hard money system.
Tarek El Diwany: Predicated on that. Two things, I interrupted you because I think I understand your issue about satiation. We’ve satiated our desire for one breakfast, but the reason I asked you to take the human personality out of that argument is because it brings the argument to a more pure basis let’s say. You could do a discounted cash flow analysis to ask – is it worth us spending 2% of global gross domestic product per year to save the planet? In 300 years time, and even with a discount rate of 2% or 3% it would not be worth it. Is it clearly showing the absurdity [00:30:02] of the discounted cashflow. Now that takes the human personality out of it because we’re not going to be here in 300 years time.
And the question then becomes what right does one generation have to make a judgment on what values generations in 200 or 300 years time? We compare a planet today to a planet tomorrow. We say – Look, why should we use up any of the value of a planet in the year 2300, and eat that value up today? Irrevocably.
So this question of time preference. Yes you could, I understand what you’re saying, but take the human personality out of it and look at objective values, the value of the planet. Not to us, but to generations who haven’t been born yet. And if I asked the question that way, and now it becomes a lot clearer that it’s not about me satiating my appetite or being greedy.
This is actually, [00:31:02] in a way it’s a question of morality, pure morality.
Saifedean Ammous: No, absolutely. I think it was Eugen von Böhm-Bawerk who said the interest rate is a measure of a nation’s morality. The lower the interest rate, the more these people are able to save, the more they are able to control themselves, the more they’re able to be moral in terms of thinking of the long-term.
So I agree with you that the socially optimal social discount rate is as close to 0% as possible, and effectively if you make the normative argument, which is that we want to live in a society where bad things are minimized, where we don’t want to have people out kicked out on the street because they missed the payment on a loan.
We don’t want to sacrifice resources that could be available for the future. It’s better that we adopt as low a discount rate as possible. And I think this is what ends up happening in [00:32:02] a normal society with hard money, with capital accumulation, and this contract continues to drop.
Also, another disagreement we have is the idea that we’re destroying the planet, I don’t think that we’re destroying the planet. But that’s a discussion for another day. I think where I see the problem is if you look at what’s happening to soy. You look at a place like the U. S. where for hundreds of years they used to grow, and not just the U.S. all over the world. For hundreds and for thousands of years, they used to farm lands according to sustainable methods that they’d used for many thousands of years. And as you say, now they’re suddenly adopting all of these intensive farming techniques to take out all the nutrients in the land and sell them as quickly as possible and make a quick profit in the first year or two or three.
And it leads to the destruction of the soil. And then it leads to the destruction of the nutrient value of the future crops. This is the soil catastrophe that the world really is experiencing. That’s the real problem. It’s not a problem [00:33:02] of CO2 in the atmosphere. I think that’s a completely baseless threat in terms of portraying it as a crisis.
What’s a true crisis is the fact that our soil is depleted, and our soil is depleted because of time preference is raised by the fact that our money is inflationary. Which is a manifestation of the interest problem where we agree. In your analysis you make the argument that interest is what causes inflation, and I think I agree.
Tarek El Diwany: Yeah look, if you’re a businessman, and you can borrow money at 5% and invest it into your farming business and make 20% by doing highly intensive farming, then there’s a very strong incentive to borrow at 5% and do highly intensive farming. Because you make 15% net for yourself.
And if you then have a society which is very heavily [00:34:02] indebted because of the way the monetary system works and wants to naturally, has a human instinct to try and get out of debt, then the way to do that is to grow your economy. I sincerely believe that this kind of worshiping of economic growth that we have, is caused by this combination of indebtedness and interest charges, which make businesses generally feel the impotous need to grow what they’re doing.
And that is a kind of an aggregate what we call forced economic growth, at least in many kinds of cancers, if you like, in society.
Saifedean Ammous: Eating the seed corn,
Tarek El Diwany: It’s eating the seed corn. And it’s interesting actually that in Arabic, the word Riba has this connotation of growth. And so does the word Zakat, which is the wealth tax, which is a good thing, it has a connotation of growth.
So you have good growth and bad growth. Many times I’ve said when I talked to [00:35:02] people that, if I come home and I tell my wife that I’ve got a growth, she’ll cry. We are worshiping economic growth, but the thing we’re worshiping is the bad kind of growth. We must distinguish some growths are not good for us.
And if we are going to try and have a successful resolution to the ecological crisis that we’re facing, we must recognize that one of the drivers is our financial system, whether that manifest itself in, whether the soil is the cause of the CO2 or the declining crop yields or whatever it may be.
But the issue is that we are forced into ways of business activity that are not good for us, and we mustn’t get hooked on this idea – growth as a celebration in the financial markets, every time we have a unexpectedly high growth, that actually may be very bad news for us.
Saifedean Ammous: Yeah. All right, so before [00:36:02] we get into Bitcoin, I want to bring in Allen. Allen Farrington has written a a great new book called Bitcoin is Venice, a part of the book discusses how Bitcoin is this new thing and how a lot of people are struggling to make sense of it.
You can make sense of it through various different metaphors and various different descriptions. And one of them is how Bitcoin is Halal, and Bitcoin is Islamic Shariah compliant money. Allen, it’s great to have you here again. What are your thoughts on the discussion so far and on Tarek’s book, and any questions you might have for him.
Allen Farrington: Yeah, I think I probably have too many questions. So I’ll ask my favorite one and you can cut me off if necessary. Tarek I just want to say as well it’s a pleasure to be able to speak with you, and to reiterate what Saif said, I think that The [00:37:02] Problem With Interest is the most cited book in my own.
I’m actually not completely sure on that. I haven’t done a full count, but in any case
Saifedean Ammous: It’s making me jelaous!
Allen Farrington: It would be a close call with James C. Scott seeing like a state. You’re in good company and you’re at worst second place! I should say as well actually, that even on the side of my book, I think that in particular chapters two through four, if I remember correctly, are literally the best explanation of the modern banking system that I’ve ever come across.
And so I’ve actually recommended your book to former colleagues in finance purely on that basis, and nothing to do with Islam, nothing to do with Bitcoin.
Tarek El Diwany: Maybe they’ll start buying a few then!
Allen Farrington: What we were saying before you came on, that you need to get back on your publishers case cause nobody can find it anywhere.
I’ve honestly, I’ve had I’d say at least 10 people messaged me on Twitter after I [00:38:02] recommended it, saying that they couldn’t find it.
Tarek El Diwany: Yeah, I know it’s out of stock. We sold everything. I think about 35,000 of them were printed, which is for, and they’re sold.
Saifedean Ammous: Do you own the rights to the book?
Tarek El Diwany: Yeah, I do.
Saifedean Ammous: If you do, you can join a print on demand service with Amazon and then anybody who wants it can get it printed and delivered. You don’t have to do anything. It just prints on demand.
Tarek El Diwany: The thing is, these things started around 2010 and I just didn’t have the time, I have a day job.
But I really have to update it, and one can’t just do that in a few weekends. One needs to really devote some time to it. And that’s the issue, I think I’d want to give it an update and refresh, maybe I shouldn’t. It could just be a snapshot in time.
Saifedean Ammous: Maybe you should, and then self publish it properly and then you might not need the day job!
Tarek El Diwany: We can wish. [00:39:02]
Saifedean Ammous: I tell you from personal experience, I used to be a university professor and the internet allows you to be a scholar in a much more productive way than you would through traditional university structures. But anyways, Allen, the floor is yours.
Allen Farrington: Tarek, I have a question around, I guess the theme here is convincing people who haven’t been exposed to these ideas before which is something I’ve found myself trying to do and struggling in many cases. And so I think that the argument that comes up the most, that I don’t think I have a good answer to, but I suspect you might because you’ve thought about it a lot more than me, is that all of the legal and philosophical points that you discussed earlier on, I think an answer to the first question, they have a kind of aesthetic appeal [00:40:02] but ultimately they’re impractical given that, I guess the mundane point is, interest exists. People do this.
But possibly even morally because everybody consents. Everyone understands what’s going on. And so are you just being kind of a moral prude?
Tarek El Diwany: Yeah, okay. Look, one of the basic posits of economic theory, if you ever look at people who try to envision a new world, and they mention utopia and they present it to you, the people have freedom of contract.
Now, we kind of assume that they have freedom of contract now, and if they choose to borrow money, then what’s the problem, right? Who am I, or you or anybody else to tell them not to? I actually questioned that, I don’t think we have freedom of contract. I think people’s hands are forced very largely [00:41:02] because of the system. We don’t choose the system from the basis of freedom of contract.
The system is there and forces us to choose. And if that is the case, then the normal framework in which you have a discussion, you assume perfect knowledge, you make these assumptions, well one of the key assumptions doesn’t hold. We don’t have freedom of contract, therefore don’t tell me that people have chosen this out of their own free will.
Understanding the system and how it is. Of course people under feudalism probably understood that the Lord of the Manor had a choke hold on them, and if they left, they’d get picked up and flogged or I don’t know, burned or something, I don’t know.
But they understood the system. It doesn’t mean that it was a good system. Put the understanding aside because even if people didn’t understand during feudalism that it was a bad system, then it would still be a bad system. We can [00:42:02] probably make a better analogy, but there you go.
Take the understanding out of it I think we have to look, as people who write on this thing, as people who are informed and have studied this, and give some kind of leadership to others, and it’s not an easy job, I do agree with you. Most people do have a day job and are busy working and struggling by, and if one comes with philosophical arguments while they can’t pay their electricity bill, then you know, they’re not going to really have much time to.
So I think our job is just to continue doing what we’re doing. Put out our research. Give our talks. Write our articles. Educate people. Propose alternatives. Find ways of implementing alternatives. Very difficult because there is this lobby of vested interests, but we continue to do that. And I would say that there’s plenty of historical evidence that can support us.
I often refer [00:43:02] to the period of rule in Islamic Spain which went on for twice as long as the capitalist era. Capitalism maybe stopped sometime in the late 17th century as a 300 year trap. Islamic Spain lasted for 700 years. There was no debt crisis there, they didn’t have interest on money.
They didn’t have money creation, they used the hard commodity system. They had universities, they had trade. Far-reaching trade. Complex financial systems. They had a strong army, strong military. They did not have this history of huge volatility from man-made devices such as the monetary system.
Famines? Sure. These things can affect any of it, there’s nothing you can do about that. Generally speaking, if you look at that history, you can see a successful flourishing economy without the predicates of our current system interest money creation. And you can replicate that. I’m sure there are many places in the [00:44:02] world that I haven’t studied.
Maybe the Chinese, certainly in Baghdad, maybe the North American Indians had their own sustainable system and they weren’t depleting their sources for centuries. There are many other systems out there. We mustn’t get locked into thinking that this is the one, the only one we can choose from, or the one that we have to put up with.
Saifedean Ammous: I should say a little side note here. You mentioned the scholastics earlier, and the scholastics scholars in Spain are a strong influence on the Austrian school. So generally here we’re very much Austrian leaning, and most of my listeners are familiar with Austrian economists. Rothbard and Mises have a strong influence, and they cite the work of the scholastics.
And the scholastics were interestingly against interest, but also they were influenced by Islamic work. I think the tradition of studying and understanding [00:45:02] economics that went to the scholastics came from Islamic scholarship, which had carried forward a lot of the ancient Greek scholarship.
Tarek El Diwany: Yes, I think that is true. And you can see the evidence of that in many places. The Austrians have influenced me, I’ve read on Mises and Hayek and Rothbard, and that group of writers from around that time who provide very persuasive arguments, especially on the side of morality, if you like, as to human choice is the thing that should, freedom of individual actions produces the aggregate making those assumptions that they are truly free in their choices.
And therefore the state, for example, shouldn’t regulate prices. We have this long kind of tradition in this land that we shouldn’t regulate crisis. We shouldn’t step [00:46:02] in there to make palliatives because we may create problems that are bigger than the thing we’re trying to solve.
So I think that morality is there. The issue of course is w where does all this start? Does it start at the top, with economic policy and laws made by governments, or does it start by individual action? And I think in that sense, there is a large connection here, because what the Shariah proposes is that if you have the right laws at the micro level that individuals follow, then the top produces itself. If people give wealth tax in charity, if they don’t charge interest, if they don’t steal, they don’t do these things on the individual, then the results will be fine.
And you have this kind of, if I may just digress slightly, you have this sort of philosophy which says you have a soil of law Shariah, or it’s the Christians, it would be the Christian, or maybe for us it’s the Shariah – it’s that soil and a tree grows out of [00:47:02] it.
And that tree has certain features which we would say are the features of justice because a just tree grows from a just soil.
What has happened in recent decades is that the soil in which the tree is growing in the Western world is not soil of Shariah, it has these major problems, such as the charging of interest, creation of money from nothing, the fiat system, and many other things. And that has produced the tree which has a shape and an institutional structure and features which we as Muslims should never copy.
Because that tree would never grow in our own soil. And where this is taking me is that if you look at the modern sort of solutions that Muslims have provided in the financial domain, they’ve taken that tree from the Western world and said – Look they have credit cards, we should have Islamic credit cards. They have government bonds, we have Islamic government bonds. They have mortgages, we [00:48:02] should have Islamic mortgages. They have derivatives, we should have Islamic derivatives.
And that whole process for us, this is where we’ve fallen down because we talk about this great history and great principles, but where is it actually in practice? And I think it’s not entirely our own fault. We don’t have the soil in which we can grow our tree, but also we’ve made a big mistake in copying a tree, which could never grow in our own soil.
Saifedean Ammous: That’s fascinating. Allen, you had another question?
Allen Farrington: Yeah. It follows on very nicely from something you said before, Tarek.
And actually I’m glad that I’m not putting you too much on the spot, given that you’ve just said that actually, that you’re relatively familiar with, I guess the core Austrians. I’d just be really interested in your thoughts on similarities between Austrian and Islamic economics.
And I have my own, but I suspect yours will be,
Tarek El Diwany: Give me yours because I need a crib sheet usually to make a detailed,
Allen Farrington: I’ll set it [00:49:02] up rather than actually give my uninformed take. So I think that they both arrive at very similar conclusions about the role of uncertainty and therefore individual decision-making in markets, but as far as I can tell, they arrive by completely different lines of reasoning. If you have a take on that would be fascinating, probably Saif as well actually, I’m sure he’s thought about it too.
Tarek El Diwany: I’m going to defer to Saif. I need to hear what he says before I open my mouth on this I think.
Saifedean Ammous: The way that I see it is that, and to follow up on what you said earlier, the way that the Austrians approach this topic when you think about it in terms of time preference and the Austrian ability to analyze time preference – is the key toward bridging the two ideas, the way that Islamic [00:50:02] economics meets with Austrian economics. From the Islamic compliant economics, it’s a prescriptive and normative statement that we want to have a low time preference, and we make sure that everybody has a time preference by following the religion that says – you follow the religion because the religion says you can’t lend at an interest, so therefore you’re essentially forced to not discount the future heavily. Because you can’t gain interest on money.
You’re forced to not discount the future, it forces you to lower your time preference in a way. On the other hand, from the Austrian perspective, I think what happens in Hoppe says the lowering of time preference initiates the process of civilization. And in turn, the process of civilization leads to a feedback which also lowers the time preference further and further.
And I think you arrive at a similar [00:51:02] point. Now here’s where I depart from Mises and Rothbard, and this is where I think people will start taking the pitchforks out – my usual Austrians, I’m going to get stoned as a heretic by the Austrians for this I think, not by the Muslims – is that from the Austrian perspective, they think that time preference determines interest rates, but they don’t take that to the conclusion, I think, which is what happens if time preference continues to drop.
What happens then is that you basically end up with a system, which is similar to the one that you describe in your book, Tarek, but it isn’t imposed through religious doctrine. It’s emergent on the market because the time preferences dropped and now you’re expected to lose 1% of your money every year on storing that money.
And so therefore you’re happy to save that 1% by giving that money to somebody [00:52:02] else who has the legal responsibility to hand it back to you in a year, so you save 1%. And so people will lend, but only two people that they trust, and so lending without interest will be something that happens with friends and family mostly, but then if you want to lend for business, you don’t lend you just take equity. That’s the natural thing.
Why would you, in that situation where the natural market clearing interest rate drops to zero, why would I want to invest in your business? Or even if it’s very close to zero, which is the current situation, why would I want to take – and sorry, not invest in your business, why would I want to lend to your business when you’re going to pay me back 0.5%, but I’m taking the credit risk, which means that I could lose 100%. Nobody would be willing to take that situation. I think it’s currently artificially imposed through the fact that we have an inflationary monetary system that [00:53:02] makes it profitable to get into debt, even at an interest because the money itself is being devalued.
This is the key point.
Tarek El Diwany: Yes, that’s what makes it work very largely. For the banks, they create value out of nothing, then they take the interest yield on it.
Saifedean Ammous: Yeah. Historically, fractional reserve banking would always be failing, and then the way that they managed to make it work in the 20th century was to destroy the currency basically.
Constantly bleeding the value of the currency in order to keep this Ponzi going, and it’s essentially an intergenerational Ponzi. Future generations are paying for the conspicuous consumption of current generations. This is where it has led. And that is why I find Bitcoin and the marriage of those two topics so fascinating, because Bitcoin operates in a way – I don’t know how familiar you are with the culture around Bitcoin, but one of the most important things to understand about Bitcoin is that it bends to [00:54:02] nobody, it’s just continuous, it’s just every 10 minutes there’s a new block, and it’s been doing this for 13 years and leaving behind the constant trail of heartbroken people crying because it won’t change and do what they think is best for it to change. And so we’re in this kind of natural experiment now where we’re witnessing this growing, very quickly growing, a hard money economy that can’t really be stopped and it’s just growing.
It’s giving us an example as it’s giving people the ability to save into the future, which I think is enormously important, and I think it’s going to lower time preference all over the world. So it’s going to give people the ability to save, which is going to make them start discounting the future less.
And I think you see this among Bitcoiners – it’s insanely common. I meet a lot of Bitcoiners because my book is popular with Bitcoiners, and it’s incredibly common how many people will tell me this, they say – I used [00:55:02] to spend all my money drinking and partying, and then I figured out that I could save Bitcoin and looked at Bitcoin, understood Bitcoin, and now I don’t drink, I don’t party, and I put that money into Bitcoin and I just hold Bitcoin.
You see the shift, like you’d go from partying and time preference can only see as far as next weekend, and who are you going to party with – to starting a family, Bitcoiners have the grand visions of dynasties and intergenerational things which really fiat people don’t have, because fiat people are on a treadmill that means they can’t see past next weekend.
Everything is discounted. There’s no easy way for providing for the future. So what happens now is we keep lowering time preference because we have Bitcoin and we’re going to see an empirical test of whether what I’m saying is correct or not, we’re going to see [00:56:02] time preference continue to drop.
And then I’m curious to see what happens with interest. And I think, without,
Tarek El Diwany: Bitcoin would have to become the dominant system for your empirical tests to work, surely.
Saifedean Ammous: That’s what we’re doing, I don’t know if you’ve noticed.
Tarek El Diwany: How long are you expecting to do this test in the near future?
Saifedean Ammous: We’re on it, yeah!
Tarek El Diwany: What percentage of total turnover transaction volume in the world on a daily basis?
Saifedean Ammous: I think what matters is not so much the transaction volume, what matters is the percentage of cash balances. That’s really the key thing. How much of the world’s cash balance is in bitcoin, that’s the metric.
And currently it’s around, I’d say about half a percent of global cash balances. So still got a lot of room for growth, but this is what Bitcoin does – it grows. So the really fascinating thing here is that, and there are a lot of crazy controversial ideas in Bitcoin, but I think that Bitcoin is going to effectively bring about an Islamic kind of monetary [00:57:02] system.
Not through any kind of Islamic legislation or regulation, just simply through market incentives. Because I think it fits very nicely with the Islamic way that you think of finance, where the money is hard, nobody can print the money, so therefore nobody can guarantee that if you’re giving away a loan and you’re getting 5% back, there’s nobody out there who can print Bitcoin to bail out the bank that is going to inevitably fall short.
So people who are going to try these kinds of shenanigans are going to end up basically losing their Bitcoins. And we’re going to head toward a system in which people either lend at a basic interest rate of zero, or invest equity. I think it’s still too early to see this now, but this is how I think of it theoretically in the future.
Tarek El Diwany: Coming back to the question on uncertainty, then I think that is a critical issue, how does the world of Islam look at uncertainty in a financial context? And when you make the [00:58:02] equity transaction, let’s take that as the basis for this little discussion. An interest based lender would say – Look, is a very uncertain business, it’s a startup, I will lend at 20% or 30% because there’s a lot of risk here. They make that judgment in advance, quite subjectively very often, but the issue is – this a correct apportionment of the risk, right? If you compare it to the equity position, we make a judgment in advance – should we buy equity in this startup venture?
But the actual apportionment is not based on an estimation, it’s based on an actual fact, on a set of accounts with a profit number, agreed according to a certain number of accounting standards, which people generally abide by, and which investors and entrepreneurs both know. That profit figure is distributed according to a percentage share in the equity.
So the risk resolves [00:59:02] itself into a just distribution, but yes, you make your ascertainment of whether you should invest at the beginning, in using your own metrics just as an interest rate lender would, the key is that the interest rate may not match the outcome. In which case either the lender is shortchanged because the business was very successful and made a very large profit, or the lender is shortchanged because the businessmen went bankrupt and lost all the money and he didn’t pay attention to his business as well as he would have done.
If it had been entirely equity based, there was this kind of moral hazard for a limited liability company, which borrows debt and the directors can walk off scot-free. If the company goes bankrupt, they themselves are not on the hook. So you have this asymmetry in interest based lending which you don’t have in equity.
And I will say that that way of treating uncertainty – to say, yes, make your own judgment a-priori but the [01:00:02] ex-post distribution is based on a just economic calculation. I think that’s the fair way of handling uncertainty. I mean we could go on, but let’s just make, if I can, one more point.
The financial system, I know you want to discuss Bitcoin, running out of time a bit, but the financial system that we have now, using the interest rates and lending as a motor economic growth is actually one of the main determinants of increasing wealth inequality. We know as business people, that if you want to borrow money from a bank, the one short way of getting money is to already be wealthy, the bank will lend against people who have assets.
People who are poor, who don’t have assets, can’t borrow from the bank. So what happens then is that if you have a society in which many people have business ideas, the ones who actually get the capital are the ones who are wealthy. Because they have the security to offer as collaterals to the banking system. [01:01:02] And that keeps the wealth circulating within the wealthy.
If you have an equity based system, the investors only chance of making a profit is not by taking security on your house and selling it if your business goes down, it’s by sharing your profit. So they want to invest in people who have good ideas and who make profit. And a poor person can have just as good ideas as a rich person.
So under the equity system, the key is not the level of wealth that you already have when you make your application for finance, the question is – how good is your idea? How good is your management? How good is your experience? Wealth is not such a central determinant of who gets the funds under an equity based system.
So I would actually say that to welcome uncertainty and treat it in the right way, actually it’s not only just morally, it’s actually something which helps us from the economic [01:02:02] point of view to reduce the terrible wealth inequality that we are suffering.
Saifedean Ammous: Yeah, I should say here we’ve hosted Michael Saylor, and in my book – The Fiat Standard, it’s like a user manual to how to use the fiat system – based on the fact that it is a monetary system that is inflationary, Saylor basically says – this is what rich people do everywhere. I think it’s very correct.
And when you understand how fiat works, it makes a lot of sense. What rich people do everywhere is that they have assets and they borrow against them and they borrow in the currency that is depreciating, and so their debt is constantly getting cheaper to repay and they generate cashflow from these businesses that more than covers the debt because the debt is very long-term.
And so they just keep rolling it over and they live off of it, and the way that the system is done, there’s the way that the system works, is that it allows people who own money who have wealth to just keep the wealth there without having to actually do anything [01:03:02] with it, just use it to borrow against it. And this is effectively what Saylor is doing with Bitcoin and that he’s borrowing fiat, using his company to borrow fiat to buy Bitcoin. Which is great because it’s the way that we euthanize this insane system where everybody keeps borrowing and then buying Bitcoin, eventually we end up with more Bitcoin than US dollar debt, and eventually we euthanize the bond market, and people use bitcoin as their medium of saving.
This is really the plan. I’ve said this before. The appetizer for Bitcoin is the gold market. We’re going to take the share of gold as a store of value, but the main course is the bond market.
The main course is people stop holding bonds for the long-term and they start holding equity and Bitcoin.
Tarek El Diwany: It’s a kind of crunch point that’s coming in the sense that the bond market has been held up by creation of fiat money. [01:04:02] Governments have been supporting bonds, and yet that very act supports the price of bonds, stops them falling, stops the interest rates going up.
So you have an inflationary environment which keeps the interest rate low, which is an astonishing contradiction in economic terms. Where that resolves itself to is a very interesting point actually, it’s coming I think fairly soon.
Saifedean Ammous: Yeah. And I think the way to think of it as that initially people used to save in gold, and then they took the gold, and then they gave them physical money and told them – It’s okay, it’s going to be better because you put the money in the bank account and you get an interest rate, and you don’t need the physical gold, that was in like the 1930s. And bank interest rates for a while could keep up with inflation, but that of course was unsustainable, and it led to banking crisis and all kinds of problems.
Then interest rates went down, and then they couldn’t keep up with inflation, so you have to go to the bond market to save. And that was of course great for the government because [01:05:02] you’re buying bonds from governments, and that’s financing them and it’s allowing them to create money and create debt and spend insane amounts of money on all kinds of insane sorts of things.
But that was also a Ponzi and it was not sustainable, so the bond market couldn’t keep up. Bonds don’t beat inflation. So people have moved to stocks, now stocks are the way to beat inflation. And so people put their saving account in the stock index, which basically is the way to try and beat inflation.
If you don’t have access to the stock index, you are getting ruined by inflation. You have no easy refrain from it. It’s just constantly robbing everybody in the world who has cash and bank accounts as saving assets and rewarding people who have access to a us government credit at low interest rates.
So it’s a massively unfair system, but it’s coming, it is an unsustainable Ponzi and I think the way out of this is Bitcoin. So that brings us to Bitcoin. So what do you think about [01:06:02] Bitcoin? Are you orange pilled yet?
Tarek El Diwany: People have asked me to pin my flag to, look I think one can look at this again from a legal perspective and ask questions, if you want the Shariah perspective on it, then I can tell you that there are certain issues which need to be discussed. And I think perhaps those discussions have not advanced as quickly as they should have done, given the growth in public interest. But there was a general point in Shariah that wealth is anything that’s useful, and property is wealth that can be owned.
There are some kinds of wealth can’t be owned, like sunlight or a beautiful view or some public like water for example, underneath the ground, it’s definitely wealth because it has a use and wealth is anything that’s useful to society. But some kinds of wealth can’t be owned.
Now, one has to go through this process of asking – is it [01:07:02] wealth? If it’s owned wealth, then it’s property. Is it a valid form of property, therefore? And is it then the kind of property that you can trade? And there was is progression of questions. So it’s well known, I think in Shariah, that some kinds of items or not regarded as wealth at all, like alcohol, for example, pork, you cannot sell that – if you try to in a transaction, the transaction is void.
And there are some kinds of wealth which are useful, but you cannot sell. If we ask these questions about Bitcoin and then we can come to a position where we can say – what is itself? It is potentially, on the one view, a receipt for ownership of something, as a title is to house for example, there’s a land registry.
You have a document which gives evidence of ownership of a property, right? And so tokens on the cryptocurrency system, then I think that’s a fairly good [01:08:02] analogy. A token gives you a right, utility token or an asset token to a particular service or asset or a share in it, and I think there is generally no disagreement now among modern scholars that a receipt, a warrant, a warehouse receipt can be used to trade copper or assets of that nature.
This is not actually what cryptocurrency is I think. I think we have to pass by that potential characterization and ask about a second form of characterization, which is that it is a kind of digital asset, in the same way that for example the digital copy of my book might be an asset. It exists on a database, it’s electronic, and people can buy it now because it has a utility, you can use it for your benefit, and you can value it at whatever you want. If you want to pay a thousand pounds for it, you can. If I’m prepared to sell it for 1 pound, I [01:09:02] can. And again, I think that’s not what we’re talking about here with cryptocurrency, what we seem to be looking at with the non tokenized cryptocurrency is a database entry. And the question that we have to ask, an analogy is helpful, I can say to you – Look, a record on a database is a record of a thing that exists outside of the database. If I have a house I can certainly buy and sell the record of the house, which is on an electronic database.
But the thing that gives the record value is the asset that stands behind it. I can live in a house, I can’t live in a database record. We have to ask the question – is Bitcoin an electronic work of art for example, of intellectual property, which I can buy and sell, [01:10:02] or is it some conceptual value that exists as a record on a database? Then the question becomes should we be using this as a kind of money?
Now again, just a couple of minutes on this, and then you can tell me what your thoughts are, and where you want to go. There are Muslim scholars who have said, and these are very literalist ones, that only gold and silver can be money, and God created gold and silver to be money.
And they have taken the very literalist position and an exclusive position, and say that gold and silver is the only form of money. There’s a very close connection to what the Austrians have said in the past on this. There are other scholars who said that gold and silver can be money, and you cannot prohibit them being used as money because the Prophet, peace be upon him, used them as money, and you cannot prohibit what the Prophet permitted.
We have [01:11:02] those scholars who perhaps sit in the middle, and then there are those scholars who are perhaps the most liberal ones who say that we use the objectives of Shariah, justice, stability and so forth, to judge what should be money. And any system which has low costs or lower costs, that has security, that has justice, safety, transparency can be used.
And these ones tend more to support, they haven’t been supported, for example, the fiat money system in the past, by saying – Look, it costs a lot of money dig gold out of the Earth, why do we spend all this money when we can have a cheap system producing paper at very little cost?
So you have this range of opinions. One thing that I would say is that at the time of Umar ibn al-Khaṭṭāb, they were discussing using camel skin money. They had that discussion, they decided not to. Not because they thought that gold and silver only should be money, but [01:12:02] because they thought that too many camels would be killed in the race to acquire camel skin money.
This is a very important point because it means that something that is permitted – a camel and camel skin, was not adopted on the wider economic case. That we don’t want to go destroying our stock of camels in a race for money. And remember, this has many feedbacks in it.
Money is something that is used to buy things. If we kill all the things that we buy, if we destroy them all, then what’s the point in having money? So there has to be a balance. And this is one thing that is in favor of silver, that gold and silver is produced if the value of money is high, if there’s a shortage. Because the cost of buying the capital equipment to mine the gold and silver will be low when the cost of money is high. When gold is expensive, it means capital prices are low. One is the [01:13:02] corollary of the other. So shortage of money, gold – expensive, prices low buy equipment produce gold, the gold supply increases, prices decrease, capital equipment becomes expensive, can’t buy capital equipment to produce gold because there’s not a profit in it.
So we have this kind of level, there’s a natural balance. And we have to think about these wider economic connotations and not just look at the narrow legal position. But that narrow legal position is where I believe we start. So question, is it a receipt for ownership? Is it digital art, intellectual property of a kind? Is it a conceptual of value that resides on a database and we use it because it’s cheaper, more transparent, we justify it on the objectives of the [?]
Saifedean Ammous: I would say, it’s not a receipt because it is the good in itself. So a lot of people say Bitcoin is backed by nothing, and the answer to that is Bitcoin is itself the backing of other things. You can have things backed by Bitcoin. Gold is not backed by anything either, [01:14:02] it itself has its value.
I think the best way to think about Bitcoin perhaps from this perspective is that it is the monetary properties of gold separated from the physical properties of gold. So it’s like a new chemical, if you want a new periodic element in the periodic table that has no electrons, no protons, it’s not physical, it’s similar to gold in its economic properties. And I think the key thing, the story of camels, I had not heard this one before and I find it really fascinating. The idea that they’d use this. So in The Bitcoin Standard, I discuss this – why gold and silver ended up being money?
And it is precisely because they have the lowest supply growth rate. Because it’s just very hard to increase more, find more of them.
Tarek El Diwany: Yeah, stock to [01:15:02] flow, I read the whole book, I thought it was very good by the way.
Saifedean Ammous: Thank you, thank you. Glad to hear that! So it is the stock to flow, and the problem with camel as money is not, as you say, it’s not that it is not yellow and shiny like gold or silver, the problem with camel as money is that you can just kill all the camels and then you have a lot of money and then you don’t have any camels, and then you starve. So you want something that is not easy for anybody else to produce. You don’t want copper for instance, you don’t want nickel, you don’t want oil, because people would just make more and more of this and then that’ll bring the price down.
So Bitcoin takes that economic property, which is the difference between camel and silver and gold, the difference between oil and gold, the difference between copper and gold, and codifies it into software and allows you to buy it digitally. Now yes, you can’t hold it physically, but just because you can’t hold it physically, it doesn’t mean that it doesn’t have value.
I think this shouldn’t be something difficult for a Muslim scholar to understand. [01:16:02] Just because it doesn’t exist physically, it doesn’t mean it doesn’t have value. And the reason is, even though it doesn’t exist physically, it’s just say a number or a series of characters that you’ve memorized, you were able to use it in the same way in which you use gold.
In other words, you can click these numbers into the right machine at the right time and you can pay me and you can make transfer of payment for me. So it performs all of the functions of gold. It’s like a way of buying this new chemical, this new element on the periodic table that is like gold, but better, but it doesn’t have any of the physical properties.
So I am no Sheikh, but I don’t see a reason why this would be Haraam. The fact that the price goes up and down is not a problem with Bitcoin, it’s a problem with a fiat monetary system and it causes the price of everything to go up and down.
Tarek El Diwany: The price volatility is not the issue, subject to freedom of contract of course, but per [01:17:02] se – price volatility is not the issue.
There were people who went to the Prophet and asked Him to regulate the price of wheat during a famine, and He refused because He knew that you have to address the cause of the problem, not the results of it. I think there are many analogies here, but the issue comes back to what I said earlier, trying to cure a problem by addressing the effect rather than the cause can lead to even bigger problems.
So I think one has to look, really one has to focus on the narrow legal issues first, and I think intellectual property rights are widely accepted now. I think there are very few serious scholars, none that I know who don’t accept internet patents for example, intellectual property rights as a genuine form of asset.
And indeed, I don’t think in modernity with inventions and designs, and so you need patents. And these things that exist digitally, there isn’t a physical thing to them really. So that [01:18:02] kind of right I think is accepted now. There is a another issue that we need to look at and the objectives of the Shariah of course are relevant here because we may still make a judgment that says that Bitcoin is actually not fulfilling the requirements of Islamic law, but it is actually a lot better than the thing we’re using at the moment, which is the fiat money system.
There was this lesser of two evils argument, and I put that into the objectives category. When we look at reasons for, actually let me say that the basis of Islamic law is a prohibitions based law. We don’t look to see whether something’s permissible, we look to see whether something’s prohibited.
So the rules list what is prohibited, and then if we don’t see any of these prohibitions being relevant to a particular issue, then it’s permitted by default. So we have to look at it from that basis. But having said that then, there is this fiat money system, which is not transparent [01:19:02] where your money can be frozen at anytime, someone can press a button in the central bank somewhere, suddenly you have nothing. And on that basis it would seem that Bitcoin is better, but of course we, and people inside the system said to me that we cannot be 100% sure that there are no back doors.
If somebody isn’t watching the transactions that are happening within the system. We have to be, I think willing to accept that there are some unknowns there. Nevertheless, I think if we were then as advisors to speak to people who are thinking to invest – take the role of an investment manager, then one would ask the question – look it may be permissible, but is it wise to go into this?
And people who’ve read the history of the Dutch tulip boom will know how herd mentality can take over, and if one is a scholar, one has a duty to people to say – [01:20:02] Look, there is a speculative mania going on, tulip bulbs are not worth $1 million each, this will all be over in a few years and you’ll lose everything.
And if there is this subsidiary economic issue, we’re not dealing with principles now, we’re just asking the question – Have people got mad? Are they paying too much for this digital record? Then I think any scholar, any person has the right to make that case. Has the right to say – Look guys, prices are too high, this has been whipped up.
And to deny that, you can make an economic argument both ways. So I think that kind of argument we have to separate out. I don’t think it’s probably relevant to what you want to talk about. We need to talk about the principles, the legal issues surrounding, what is this thing that one is buying and selling?
Saifedean Ammous: Yeah, the Dutch tulip thing I think is let’s say [01:21:02] is a favorite whipping horse of the nocoiners, but it actually never really happened. It’s mainly apocryphal stories of just the price of tulips going up for a few months, and it wasn’t such a big deal.
It was magnified because people were trying to tell, calvinists were trying to promote anticapitalist propaganda, and so they made it like, but anyways, Bitcoin is not tulips! And the agricultural commodities in 17th century Amsterdam bare little relation to the realities of 21st century technology.
Tarek El Diwany: South street bubble then, Mississippi scheme, there’s plenty of them.
Saifedean Ammous: This is the thing, if you actually really look at how those bubbles work, Bitcoin is the precise anti bubble technology. In that whether it is the south sea bubble or the tulips or housing bubbles, or stock market bubbles or anything, ultimately what is happening is that people use [01:22:02] those things as a store of value because their money is crappy.
Their money’s being inflated, so they choose to escape that by buying this thing, and then because everybody’s dumping their money for this thing, this thing up and then more and more people enter into it, and then it goes up more and more, but then what happens? Then supply catches up. Whether it’s houses, whether it’s tulips, whether it’s land in Louisiana or whatever it is, people find more of the thing that is being monetized and they bring it onto the market and they bring the price crashing down. So gold resists that.
Allen Farrington: Sorry Saif, just to interrupt very briefly and to tie it to Islamic economics and finance as well, another reason that can happen or an additional reason at the same time is because they were doing it on leverage that then defaults.
Saifedean Ammous: Yeah, exactly. That’s why leverage is Haraam.
Tarek El Diwany: I’m assuming some people are buying Bitcoin on leverage.
Saifedean Ammous: Of course, a lot of people are. I [01:23:02] lost my train of thought, I’m sorry,
Tarek El Diwany: South sea bubble, Mississippi, the money system is causing them to do that.
Saifedean Ammous: Exactly. And Bitcoin is different in this regard because there’s no way of making more of it.
And this is the key thing which is the difficulty adjustment, which means that Bitcoin has a supply production schedule. Currently we’re making around 900 Bitcoins a day, and Bitcoin is abided by the schedule regardless of how many people are using it. So whether it’s eight people using Bitcoin all over the world, or 8 billion people using Bitcoin all over the world, we’re only making 900 tomorrow.
There’s no mechanism for bringing a large supply of Bitcoin onto the market that brings the price crashing down. So it’s the south sea bubble that is prevented from ever popping. The problem with all of these bubbles is that they were monetizing things that were inflationary, that can be increased in their supply, that don’t have a very high cost of production.
The cost of production doesn’t keep up with the increased monetary demand. So the monetary demand increases the price for [01:24:02] land in Louisiana or houses or tulips or whatever it is, it goes up a lot, but then the market price goes up, the cost of production is low, producers just make more until they bring the two together, and so that destroys anybody who saves in it. Bitcoin resists this because the producers can’t make more.
Tarek El Diwany: So they can produce a second Bitcoin system maybe?
Saifedean Ammous: Yes, it’s not like Bitcoin because it doesn’t have ultimately what makes Bitcoin important, which is that it is decentralized and nobody controls it.
So Bitcoin is going to
Tarek El Diwany: Is that something that can never be achieved again?
Saifedean Ammous: Yes. Because basically what happened is the Bitcoin was introduced by a guy who disappeared, and it’s been running for 12 years with him, and it has attracted throughout those 12 years everybody who accepts the idea that they don’t get to make money and they don’t get to print money, they don’t get to live in a world of fiat where they get seniorage anymore. Anybody who [01:25:02] wants a neutral protocol went into Bitcoin. Everybody who wanted to be their own inflationary shitcoin central bank went and started their own inflationary shitcoin central bank, which is highly centralized.
And if these have succeeded, if you see them even compare to Bitcoin in any sense, they are only being compared to Bitcoin because they’re being centralized and they’re being promoted and marketed by people who are paying money in order to make them sound like they are like Bitcoin.
But the more successful the altcoin is the more centralized it is, and with Bitcoin, it’s the exact opposite. It’s becoming more and more decentralized over time, whereas all the altcoins are just centralized gimmicks. So this is why Bitcoin is really the only one that matters, and this is why Bitcoin is the only one that I think I could, again, I’m not a Sheikh, but I think Bitcoin is the only one that is Halal.
Because with everything else you’re buying, even if it is consensual, you’re buying into something that is just basically somebody [01:26:02] else’s database, and they can mess with that database in all kinds of ways. You’re allowing somebody to print money at low cost, so I think it’s similar to the camel story, but there are no camels there, so you’re just making the people behind those things extremely rich and extremely powerful in a way that’s unsustainable. Because these things won’t be able to grow into a neutral protocol used apolitically internationally all over the world.
Tarek El Diwany: I think in that case, yeah you have this uncertainty issue coming back then. If the value that you’re buying is uncertain, in the traditional example is the bird in the air, you can’t sell a bird in the air because you never know whether you will be able to catch it, you might own it, it might’ve flown out of the cage you would still own it, but how can you sell it to somebody? You never guarantee you’ll be able to catch the thing. And if there’s uncertainty over a camel in a womb, for example, unborn camel, you can’t sell it.
You don’t know whether it’s healthy, male or female, big or [01:27:02] small. On those traditional examples scholars have given themselves the right to judge things impermissible based on the uncertainty over their existence or of their value. And I think in those systems where people have simply gone on those sort of pre-Madonna kind of road show and promoted their new coin, and it’s just their own laptop.
And then I read one example of a few years back that kind of thing I think can be prohibited on legal grounds. And of course you may not know at the time that the system suffers from this floor of uncertainty or lack of transparency or fraud. Maybe you need to make a judgment, based on your experience and perhaps even your intuition that a particular system is not reliable.
Now that is a particular problem because Shariah generally judges on the basis of facts that are observable, not [01:28:02] on the basis of intentions. And if you look at somebody and you say – Look, I can see this new coin, but I just don’t like the look of this person, right? That is not a sufficient ground for making something prohibited.
Now, if you give yourself the right to say that about some other coins, not Bitcoin, then maybe somebody has the right to say this about Bitcoin. Because we do not know who invented it. And I think you must accept that there are, whether they’re right or wrong, there are sincerely held views that say, how do we know?
And can you give a guarantee that next year Bitcoin won’t be worth nothing? Can you give that guarantee, are you absolutely 100% certain? People have that right to make that judgment, and I think what I’m saying is that there may be scholars out there who say – Look, it seems okay, but we just have this feeling that something’s not [01:29:02] right here.
Saifedean Ammous: Yeah. But look, we have a lot more than feelings as a problem with the fiat system, that’s the key thing.
Tarek El Diwany: Yeah. With the fiat system there are clear demonstrations that this is a corrupt system which is in the hands of a particular power elite who will use it. The Russians have just suffered, if one regards this as a reserve money and suddenly a few hundred billion of it can be frozen, then it’s not reserve money. So we, of course there are questions, but I’m speaking to you as somebody who is an advocate with any coin, I’m just trying to demonstrate that there is a range of concerns, and who would know what was the coin that failed in Europe? The one coin was it?
Saifedean Ammous: A lot of coins have failed, all of them will fail eventually.
Tarek El Diwany: At the time that it was launched, I looked at it, I said look, Bulgarian company, Gibraltar, I was thinking [01:30:02] these are not renowned places for financial regulation, but I can’t tell you that you shouldn’t go into it. I can just say that it just triggered alarm bells. And so there is this kind of thing in the background which is not a legal argument, it’s just that feeling of people who’ve been around the wild.
Saifedean Ammous: Yeah. No, I can see this, but I think, the argument ultimately comes back to fiat and the current Riba system. I think scholars are grasping at straws trying to find reasons why they would say that Bitcoin is problematic from a Shariah perspective while really avoiding the very blatantly obvious problems with Riba money.
And this is political of course, because like in Muslim countries you don’t get to be a religious authority if you go on TV and tell people – Hey, you need to [01:31:02] dump your governmental shitcoin and not play these central bank games. So all over the Islamic world modern banks operate and they operate the system, and a lot of Sheikhs have admitted that – Look, this is just the way that the world works and you have to play along with it. So it’s quite common in many Muslim countries, Sheikhs have said – If you don’t do this, you’re harming yourself, and you you’re weakening and immiserating yourself, and that’s not something that Islam wants from you, so go ahead.
And after writing The Fiat Standard and really looking into how fiat works, I can see the argument for that. I’m not saying it is justified, I don’t have the ability to issue,
Tarek El Diwany: But it’s a pragmatic kind of statement of fact.
Saifedean Ammous: It’s a very pragmatic statement of fact in the sense that
Tarek El Diwany: It’s not even a judgment, it’s just a statement of fact.
Saifedean Ammous: I think after writing The Fiat Standard, I [01:32:02] came to this very controversial conclusion that essentially fiat is a tax on being Muslim. Because if you are in a money that is devalued, everybody who engages in lending and borrowing is benefiting from the devaluation of the currency and everybody who saves is paying for that.
So effectively it’s taxing people who don’t engage in interest based lending and rewarding people who do. And I think this has been a massive problem for the Islamic world over the last 100 years. Because they haven’t been able to benefit from the system as much as others have.
Tarek El Diwany: Potentially yes, and they’ve sold their resources for this devaluating money.
Saifedean Ammous: Exactly. So this is the context from which you need to judge Bitcoin. Instead of getting into the idea of there’s all these sci-fi scenarios about what might happen that would ruin the world, the reality is currently you’re using dollars or national currencies of [01:33:02] Muslim countries that are backed and based on the dollar. You’re perpetuating the system and making it stronger by using it.
And Bitcoin is an alternative, and it’s an alternative where you can, the more you study into it, and this is really the thing, the more you study into it, the more you realize it’s different from altcoins, it’s different from national currencies, it doesn’t have anybody in charge, and of course I can’t guarantee anything, I don’t know the future, nobody knows the future. I can’t make a guarantee about Bitcoin being there tomorrow, but the choice you have to make is not between a world of me offering you a world of 100% certainty where Bitcoin is there tomorrow and worth more or not, the choice is you are going to be using the fiat Riba money that is losing value, that is creating all these problems that is against your religion, or are you going to be using Bitcoin?
Now think about which one has a better chance of maintaining its value over time, and then think about [01:34:02] which one is more in accordance with your principles, and then it becomes a fair comparison.
I think this is the mental leap that people need to make one understanding it. We’re not looking at a new optional app that we’re thinking of – should I download this app on my phone or not? You already have a very bad app on your phone. You have malware, which is the U. S. dollar.
You can just say – am my downloading this or not? If you download this, you’re getting rid of that malware. You can’t ignore that out of the cost benefit analysis.
Tarek El Diwany: Okay. When we started you said maybe we’ll get through it in an hour.
Saifedean Ammous: Time preference is positive so we discounted the second hour very heavily.
Tarek El Diwany: I think it’s been very interesting and I’m very glad that I came on this discussion! [01:35:02]
Saifedean Ammous: Thank you, likewise. Thank you so much for joining us, it has been very fascinating and I look forward to staying in touch and hearing what you’re up to!
And I really do insist you must re-publish the books, just put it on Amazon, even if you don’t edit it, and then once it starts selling it’ll encourage you to start putting more time into editing it and making an updated version.
Tarek El Diwany: Okay Saif! I’ll take that very seriously, I’ll see what I can do in the next year or so.
Saifedean Ammous: Excellent! Thank you so much, thank you so much for joining us. Thanks to Allen and to everybody else who joined us.
Tarek El Diwany: Thank you Allen, thank you everybody else!
Saifedean Ammous: We don’t have time for questions but we’ll have time again.
Tarek El Diwany: They can connect with me, I don’t mind if they connect with me privately and we can talk.
Saifedean Ammous: Fantastic! And I have a feeling we’ll have you on again, this isn’t the end of the discussion on Bitcoin and the Islamic finance, I think.
Tarek El Diwany: Inshallah!
Saifedean Ammous: Inshallah, take care.