The Stability of the Islamic Financial System 149
effects. The unfair redistribution of wealth, at the expense of individuals
on fi xed incomes and creditors, is simply immoral. Islamic fi nance avoids
these and other pitfalls of a fi nancial system based on credit and leverag-
ing. We cannot keep repeating the cycles of boom and bust and pretending
that the next time the results will be different. We are living out the adage that
defi nes stupidity as repeating the same act and expecting a different result the
next time! It is time for the world community to lift its head out of the sand,
to shed its reliance on debt, interest and leveraging, to totally revamp the
fi nancial system to rely on risk sharing.
ENDNOTES
- This chapter is based on research presented in Askari et al. (2010).
- Their proposals became known as the Chicago Reform Plan; it was economics
professors at the University of Chicago — Henry Simons, Frank Knight, Aaron
Director, Garfi eld Cox, Lloyd Mints, Henry Schultz, Paul Douglas, and A. G.
Hart — who elaborated the Plan. Professor Irving Fisher from Yale University
was a strong supporter of the Plan. His book 100% Money was an attempt to
win support among academics and policymakers for the Plan. - The consolidated account can be compared to the overall fi scal account of the
government or to the balance of payments of a country. Each account is com-
posed of two components: a current account and a capital account. The overall
balance of the consolidated account should be sustainable for fi nancial stability
to be maintained over time. - For instance, the United Kingdom suspended the Gold Standard in September
1931, following a run on its gold reserves. Similarly, the US suspended the gold
standard in August 1971 when its gold reserves fell critically below the level of
dollars held by foreign central banks that had the legal right to convert dollars
into gold at the rate of $35 per troy ounce of gold. - Bills of exchange, promissory notes, and commercial papers were issued in much
larger amounts than circulating currency during the eighteenth and nineteenth
centuries. They were also considered as instruments of credit that economize on
the use of gold or bank notes. When discounted with banks, these credit instru-
ments contribute to expand bank credit. - Deviation from this defi nition makes Islamic fi nance simply another form of
conventional fi nance.