Sir, – It is now possible for old age pensioners to buy bonds worth £500 whose purchasing power will be guaranteed by the State. The new bonds will earn no interest, but they will not be allowed to depreciate in value in spite of any amount of inflation.

At this moment, they are equivalent to ordinary bonds which are paying about 20 per cent tax free. They have been hailed as an important innovation, and they have been denounced by the building societies as a menace to the mortgage system because they are introducing indexation into the British monetary system for the first time.

No one seems to realize that we have introduced something astonishingly like the ancient Muslim system called Zakat in which units of value are defined in terms of the actual commodity which is being dealt with. For example, there is a Zakat for barley, which is the amount which can be held in the cupped hands of the tax collector. There is a Zakat for gold – defined in terms of a certain weight of metal. There is a Zakat for camels – defined as a certain number of beasts.

At the end of the fasting month of Ramadan, all Muslims flock to their mosques. They pay the dues for the poor in cash, but the amount they pay will have been computed in every town at the appropriate time, so that the purchasing power of the tax revenue will be guaranteed. Someone will have found out how much a loaf of bread costs, and the taxes will be determined accordingly. Here is indexation in its purest form, and it has been in use for 1,400 years.

Anything a taxpayer possesses above that which is necessary for his life is taxed every year, at the rate of, say 2.5 per cent, which is reckoned and paid in this way. The money has to be spent in the district in which it was paid, unless there is known to be a surplus, when it may be given to the poor in another district. They usually resent what they regard as an insulting offer of charity, and this gift is often refused, except by those who are in desperate need of it.

The prohibition of usuary by Muslim law implied that a man may not loan his money at interest, but it was at least as important that a man does not expect to see the value of his loan disappearing. It preserves its purchasing power intact. The Shah of Persia was following the ancient traditions of his people when he horrified the Western world a few months ago by proposing to link the price of his oil to the cost of other commodities.

A thousand years ago, the Muslims dominated vast areas of the world from Spain to the Pacific. Their system of trade and finance was used by people who spoke many languages and used many forms of currency. Trade and commence flourished throughout the whole of this enormous area because it was possible to acquire rights to goods in one place by disposing of the same amount of the same sort of goods somewhere else. A man could dispose of corn in Spain and acquire rights to the same amount of corn anywhere else in the Muslim world.

The Muslims have always insisted that no one should be able to sell something he hadn’t already bought and paid for. It was not possible to speculate in “futures” as men do in the West, without ever owning the goods. Men make fortunes in the City of London by financial transactions which would be strictly forbidden by Islamic law.

The Muslim system seems to us to have great merit. The western world should study it – and perhaps adopt it in whole or in part, if only because Europe has to buy its oil from men who have been following these traditions since the time of the Prophet Mohammed. It would probably be more sensible than trying to persuade the Muslims to adopt the Western system just as it seems to be collapsing in ruins.

Yours sincerely

Lord Bowden of Chesterfield, Principal
(Dr) S.T.S Al-Hassani, Lecturer in the Department of Mechanical Engineering
University of Manchester Institute of Science and Technology

2. Letters to the Editor: Times, Wednesday, November 17, 1976

Could indexation replace our ‘dishonest’ fiscal policy?

From Lord Bowden

Sir, Your splendid leader in The Times of November 3 explained the basic dishonesty of the fiscal policy which successive governments have followed ever since the end of the war, but I think that the case for universal indexation is much stronger than you have claimed it to be.

Your leader writer did not seem to realize that although many currencies have been debauched in the past, and some civilizations have been destroyed as a result, the same remedy has been discovered several times, apparently quite independently, and it has often worked.

Throughout most of the third century of our era, prices in the Roman Empire rose at about 12 per cent per annum – as they are rising here today. After 100 years the price of wheat had risen more than a hundred thousand times, trade and commerce were in ruins and the government demanded the payment of taxes in kind.

For this reason the Muslims abandoned the use of money as a standard of value in the long term, and they insisted that loans and debts be repaid in such a way as to preserve their purchasing power.

The commerce of Islam dominated the world form the Atlantic to the Pacific for a thousand years, and it depended on what I can best describe as indexed travellers’ cheques.

When Edward I came back from the Levant he introduced fully indexed pensions for his civil servants 700 years before Mr Heath ever thought of them.

After the civil war in 1948 the economy of the republic of China was in ruins, and the country was in the middle of a terrible inflation, as bad as anything which afflicted Germany after the First World War – it was as much as 10 per cent per day at one time. The government suddenly introduced widespread indexation, and inflation was halted completely in four years.

In 1964 the economy of Brazil was apparently in ruins; production was stagnant and inflation was about 100 per cent in a year. The government introduced fundamental fiscal reforms. They indexed government loans, mortgages wages and rents as well as the fixed assets of commercial firms. Since then the economy has boomed, the national product is rising faster than that of any other economy except Japan and the rate of inflation has been reduced by a factor of five.

The United States of America has introduced indexation much more extensively than many Americans realize. The pensions of civil servants and military men have been indexed for some years, and so, much more recently, are the wages of two-thirds of all blue collar workers who have properly negotiated labour contracts (nearly 10 million of them). Many bank loans are indexed as are long term contracts for oil and many mortgages.

By taking the latter step, the Americans have found that initial mortgage costs can be kept down while more deposits are attracted. If our building societies were as imaginative, they might transform the state of the building trade.

I would not for one moment claim that indexation in the countries I have mentioned has actually cured inflation. I do maintain, however, that it is difficult to believe that indexation is bound to make matters worse, as we have been so often and so confidently told by our leaders.

The time has come to call our traditional policy into question. It has robbed millions of ordinary citizens, and it has helped to destroy our industry. It seems to me to be fundamentally dishonest.

The tacit approval it has received from Parliament makes it impossible to describe it as criminal but perhaps it has been worse than a crime; it may have been a mistake. Perhaps, after all, honesty is the best policy; perhaps we ought to try it.

Yours sincerely,
Vivian Bowden

“Pine Croft”
5 Stanhope Road
Bowden
Near Altrincham
Cheshire

3. House of Lords Official Report, Vol. 374, No.120, Monday, October 4, 1976. 

In a Parliamentary debate: Lord Bowden continues:

Lord BOWDEN: My Lords, I wonder whether the House will bear with me if I discuss a topic which I think is important but which perhaps has not been mentioned so far this evening.

……….Let me take the situation further, because I am simply suggesting that the inflation to which we are now aspiring, which is 12 per cent, to 13 per cent., which is much less than we have had, is a significant number; it means that every 10 years prices rise about three to one; in 20 years prices be tenfold, so that we pay £1 then for what now costs 10p; in 10 years prices rise 100 to one; and in 100 years prices rise 100,000 times. Noble Lords may regard this as a somewhat frivolous operation in elementary mathematics, but it so happens that it is almost precisely the rate of inflation which destroyed the Roman Empire in the third century of our era; the price of wheat increased 100,000 times in about 100 years at a steady rate of about 13 per cent., which is what we aspire to get if we can. I therefore beg noble Lords to believe that the rate of inflation now is sufficient to destroy the economy unless we can devise sonic mechanism to enable us to live with it.

Of course by much the best thing is to cure inflation, but we do not know how. It is therefore extremely important to devise a mechanism in the interim to enable us to live with it, and the remarkable thing is that such a mechanism has been devised; in fact it was devised a long time ago and has been rediscovered several times since then. It was first enunciated in the deserts of Arabia about 1,500 years ago and it is described in some detail in the Koran. It is prescribed therein that if a debt is incurred it shall not be repaid in money but in equivalent purchasing power. A man must repay a debt-gold for gold, camels for camels, tents for tents, corn for corn and so on; everything in its own way. This means that the purchasing power of a debt is retained. From that date to this the Muslims have indexed such things as blood money, the price of women and all debts that have been incurred, thereby showing a degree of honesty which I only wish was understood and appreciated by our own Government and Treasury, which compelled a man in the fifties if he was a trustee to invest money in, “gilt edged” stock, if he bought 2.5 per cent. Consuls in 1952 they are worth 16 per cent, today, so that the Government have commandeered about 95 per cent of the purchasing power that was entrusted to them by a gullible citizen all those years ago. In other countries, notably those which follow the path of the Muslims, this is illegal and is held to be dishonest and I cannot but think that they have a point.

This idea that a debt shall retain its value shows itself in all sorts of other ways. For example, King Edward I. as he afterwards became, spent some time in the Levant as a Crusader and when he returned he introduced a fully indexed system of pensions for the benefit of his civil servants. That was in about 1260 and the system was consolidated into an Act in 1285. It was re-invented by Mr Edward Heath in 1972 and when I told him that he had been beaten to the punch by about 700 years he expressed astonishment and delight. I am making the point that the idea that debts should retain their purchasing power as distinct from their monetary value is ancient and at the same time modern. In America, today many things are indexed. For example, the pensions of nearly all public employees and ex-military men, the wages of 10 million ordinary working men who have labour contract and many bank loans and mortgages. In America there is no longer as we have here in the building societies, a complex mechanism for transferring purchasing power from the hands of people who lend money-into the hands of those who borrow it. Can we run a system of building societies which has this effect for much longer. Indexed mortgages are now available in America along with indexed bank loans and most contracts for civil works are automatically indexed, as a great many of them are here.

I believe that we have to learn to live with inflation until we learn to cure it and that the only way to do this is to derive a proper system of values which is independent of money and is concerned with purchasing power rather than with the numerical value of money. The system has been introduced in America, Brazil and Canada and although the conventional wisdom in this country suggests that to introduce it would make inflation worse, those countries which have tried it have found exactly the opposite effect; as indexation has been introduced, inflation has been reduced, in Brazil by a factor of five and in America by a factor of two. I would not suggest that inflation can be cured by indexation, but I suggest that the belief that, indexation necessarily makes matters worse, is a theory which cannot be sustained  in the light of the available evidence.

Although the idea seems eminently sensible, it has been bitterly opposed by acurious alliance; on the one hand, the Treasury hate it because they fear the thought of perhaps having to repay the full purchasing power of the money they have borrowed from people in saving certificates or savings bonds. They fear, furthermore, that what every Chancellor of the Exchequer calls the “buoyancy of his revenue” will be destroyed. By this they mean that, as inflation occurs and wages and salaries go up and the threshold at which income tax is levelled does not go up, so the Chancellor takes a greater proportion of the wages and salaries of every person in the country. So the Treasury dislike it. I have discussed the matter with Treasury officials who say, “But suppose we were to introduce these reforms. The Government would be in the intolerable position that when they wanted more revenue they would have to raise more taxes.” The thought that this should be intolerable to the Treasury fills me with horror because, after all, what is the function of the House of Commons but to act as a watchdog over the public purse? This function has now been totally lost because the Treasury constantly gets a greater and greater proportion of the revenue of the citizens, just as Maynard Keynes observed in Austria and Germany just after the war in 1919.

This reform is therefore unpopular with the Treasury. It is unpopular with accountants because accountants believe that what one can best call the traditions and procedures were described on tablets of stone round about the time of Moses. They will not concede that there is any other alternative possibility apart from the convention in which they have been brought up. Thirdly, indexation is violently opposed by those extreme Left-wingers who hope that if we leave things as they are Lenin’s prophecy will be fulfilled and the capitalist system will be destroyed by debauching the currency as we are doing today.

So we have these three extraordinarily unlikely allies or to put it another way, we have the most extraordinary hotbed of cold feet the world has ever seen.

I believe that the diagnosis of much of our ailment is simple. We have never understood the full implications of inflation nor the way in which, as Maynard Keynes observed with horror in Europe 50 years ago, it takes from industry the capital on which it depends, it takes from the citizens the wealth they have accumulated and it learns to spend it as if it were recurrent income, as successive Governments of this country have done ever since the war.

We cannot cure inflation. Let us, however, do our best to learn how we can live with it in such a way that it does not destroy us as Lenin so confidently forecast that it would.

…

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