[Similarities and Differences Between Paper Currency and Gold and Silver]

Answer—and Allah is the Guardian who grants success: Between paper currency and gold and silver there are points of similarity and of difference:
1. Paper currency has no value in and of itself, unlike gold and silver.
2. Gold and silver are weighed, unlike banknotes. 3. The state controls the value of its currency, and one state may strike at another state’s currency—unlike gold and silver.
4. Gold and silver serve as currency among all people on earth equally; paper currency is particular to a given state. Some banknotes may gain wide acceptance, but that is incidental, due to the strength of the state’s economy.
5. Paper currency is liable to complete collapse, to the point that it may hardly retain any value, namely upon the collapse of the state.
Outwardly, paper currency is equivalent to gold and silver as a price-measure for goods in sale and purchase and in lease, and in valuation and compensation and all transactions in all countries.
Accordingly, we say: The rulings on paper currency should be detailed, for it is not like gold and silver in every respect such that it should be given all their rulings. Rather, between the two types of currency there is similarity and divergence, as we clarified above; thus its rulings should follow accordingly.
We mention here the rulings that diverge from the rulings on gold and silver, and we say:
1. If a man has a debt denominated in Yemeni or Saudi riyals, and the currency then completely collapses, the debtor must guarantee the value of the currency that collapsed, with the value reckoned according to its worth at the time it was taken. This is the ruling where the currency has collapsed entirely.
As for partial collapse: if it is within the customary range of fluctuation—up or down—or slightly more, that is not guaranteed. But if the depreciation is greater than what is customary with currency—such that it causes widespread anxiety and fear—then the debtor guarantees the shortfall.
We have said this because it is what justice requires.
If it is said: That may be usury, due to the increase involved. For if one owes a thousand Yemeni riyals and we require him to pay two thousand, then we have doubled the debt; and it is known that “two for one” is usury.
We say: We have already said that paper currency has no value in itself, and that its value is incidental. Dealings with it are, in reality, dealings with its incidental value. In truth, the transaction occurs on the value of the paper currency; thus, the debt is, in reality, the value of the paper currency, not the paper currency itself.
If it is said: What would the ruling be were the matter reversed—if the currency’s price increased? We say: The ruling is the same with respect to increase and decrease, because the debt, in reality, is the value of the currency.
If it is said: The same would then be required where a man owes a debt denominated in grain—wheat, barley, or corn—and the price falls to half or more; the debtor would then be required to guarantee the shortfall.
We say: The two are not the same. Grain has inherent value in itself, unlike paper currency. Its desired utility inheres within it, whether the market price falls or not.
2. It is permissible to sell Saudi currency, for example, for Yemeni currency on credit, and vice versa. Likewise it is permissible to sell paper currency for gold or silver on credit.
And it is permissible to sell Yemeni currency, for example, some of it for some of it—so it is permissible to sell a 1,000 note for 950, with the discount in exchange for the breaking of the denomination, which is the objective sought in this transaction. It is also permissible to sell one hundred notes of the 1,000 denomination for ninety-nine notes of the 1,000 denomination, because these are new and those are worn.
If there is no such objective, then an increase is not permissible, because in that case it would be without counter-value and thus would be usury.
We have only said this in this matter because paper currency is not measured by volume or by weight; thus it is treated as a commodity, and the rulings of commodities apply to it, whereby it differs from gold and silver.
3. If paper currency is hoarded for mere keeping, there is no zakāt on it; but if it is held for trade, then zakāt is due on it like other trade assets.
We have only said this because the original presumption is that zakāt is not due on it.
If it is said: Paper currency should be analogized to gold and silver, due to the evident conceptual similarity between them.
We say: The similarity between them is insufficient as a legal cause. As evidence: grain has served in place of gold and silver in many lands until recently, yet no one has said that zakāt is obligatory on it for that reason.
If it is said: Today, merchants hoard nothing but paper currencies; if we do not say zakāt is due, the poor will be lost and the charity ordained by Allah—by which the rich support the poor—will cease.
We say: In what is besides that there is what suffices for the needs of the poor, and what Allah Most High has ordained by way of mutual support lies in specific forms of wealth designated by the All-Wise Lawgiver.
• It is established as a liability (in the debtor’s obligation) like gold and silver.
• If paper currency is exchanged against gold and silver, it takes the ruling of a commodity; thus it is permissible to sell it for gold and silver for immediate payment and on credit.
Source: Min Thimār al-ʿIlm wa al-Ḥikmah vol.2