Islamic Perspective – History of Money

The history of money started when the Islamic government ruled. It started when Prophet Muhammad PBUH ruled in the city of Medina in 625 AD. The money was called the dinar, which was made of 4.25 g of 22-carat gold and dirham, which was made of 3-grams of silver. Previously, money was made of the skin of a camel, but then it was prohibited as it can significantly reduce the camel population (Haneef and Barakat, 2002). The dinar was actually copied from the golden money of the Byzantine Empire while the silver was copied from the Persian Empire. These two types of money had a stable ratio of 1:10 but then fluctuated to 1:15 in the long period (Rashid et al., 2002). Such a fluctuation occurred because of the hoarding by some people. In other words, they minted the dinar to gold because the dinar was made of gold, which was the intrinsic value of the dinar.

This phenomenon was observed by Al Maqrizi. Then, the terminology known as bad money drove out good money by Gresham’s law (Rosly and Barakat, 2002). From the Islamic perspective, money is exclusively used for an exchange not for speculation or trading to gain profit purposely. Taking profit from money trading on purpose can be categorized as usury (riba) (Sanusi, 2002). On the other hand, referring to the phenomenon above, people would keep “good” money rather than to use for transaction what is “bad” money