In 1982, the average fresh graduate’s salary was RM1,200; the cheapest car, if bought brand new, was RM14,000; and a house cost RM60,000. Today, a fresh graduate earns just RM1,000 more at RM2,200 but the cheapest car is RM40,000 and a new house is RM300,000.

This has less to do with the increasing prices of steel and building materials but more to do with the way nations create money. This has not been explained to the populace.
Happy to get his job, the fresh graduate is informed he will be paid RM2,200 per month.

For the moment, we will not even consider the school-leaver who earns an average wage of RM1,000 per month. The graduate employee believes that one year from now he would be able to buy the same number of goods with his salary as he can today.

Nobody informs him the truth about money and he believes that it is just paper currency and coins, and that somehow, governments will always ensure the nation’s total amount of money remains unchanged.

In the early days of banking, banks gave gold receipts to people who deposited gold in their vaults. The gold depositors discovered they could use the gold receipts as money as they were readily accepted for the purchase of goods. These gold receipts became money. The banks then realised they could do the same with land and other assets pledged to them.
If they could get people to deposit cash with them by promise of a receipt of interest, they could lend these deposits to other people at higher interest margins. To the delight of the banks, the borrowers did not want to receive the loans in cash; they were happy to be given a cheque book with the bank with an accounting entry that said the borrower was entitled to that money.

Initially, the banks ensured the loans did not exceed the amount of cash deposited. Then they realised through experience that they needed to only hold a certain amount of cash in their vaults; not all their depositors would come to the bank to withdraw cash at the same time. As that was the case, they had the bright idea that they could lend many times more cash than they actually had.

All the borrowers wanted were cheque books, not actual cash, and if everybody used the cheque books to make payments, then there only needed to be a good clearing system, not much cash was required to be available.

This was the birth of fractional reserve banking where a RM1,000 deposited in a bank and lent out to a borrower less the statutory reserve can result in a chain of depositing and lending, which could create a figure of, say, RM25,000 out of thin air.

If the initial deposit is RM1 billion, then the money creation could be RM25 billion. Hence, the money stock of nations continues to increase and that is why the fresh graduates today have to pay so much more for cars and houses.

Governments also add to a nation’s money stock without the graduate employees realising it. When governments spend more than the revenue they earn, they have to sell government bonds to cover the deficit. In other words, they give their IOUs, take cash from bondholders and use it to pay the deficit.

When the bond matures at the end of the year and there is another budget deficit, the governments issue new bonds to pay the existing bondholders as well as another series of bonds to cover the new deficit. If the volume of bonds is too high, they print paper currency to settle some of it. This is called the monetisation of budget deficit, which adds further to the nation’s money stock.

With the double increase in the nation’s money stock from fractional reserve banking and the monetisation of budget deficits, the fresh graduate soon finds his RM2,200 per month buying fewer and fewer things. Shouldn’t we tell him what is happening to his purchasing power?

There is also a lot of reduction in the quality of products as suppliers have to lower quality standards to keep their products within the price range that wage earners can afford. For example, keropok or fish crackers no longer taste as good as more flour replaces fish in their production.

In rural Indian Muslim restaurants, the delicious bawal curry has been replaced by the cheaper sardine curry. Fresh graduates no longer buy new cars but second-hand ones and they no longer buy houses but small apartments. Some continue to stay with their parents after getting married, creating the new phenomenon called “sandwiched families” with three generations living under one roof.

We really ought to be thinking about a new money system where there are no such wild increases in the nation’s money stock. A return to gold is the obvious solution. If disbelievers say there is not enough gold to fund world trade, let’s put our thinking hats on; it’s really not beyond our intellect to solve the issue.

What appears lacking is the initiative to overcome the inertia to solve the problem. Maybe, when our grandchildren start working in 2020, they would earn RM5,000 per month, but a new car could cost around RM100,000 and a new house RM1 million.

Do we apologise to them that we were too busy to solve the problem during our time? Shouldn’t we be thinking about indexing wages and salaries? The people followed their government’s advice not to over-unionise lest it affected the nation’s economy but shouldn’t the people be helped in return now?

Yes, we are proud of national corporates recording billions of ringgit in retained earnings every year, but we paid for it with an untold amount of sweat and tears through the erosion of our spending power.

Muhammad Zahid Abdul Aziz has 20 years of experience in Islamic banking and finance. He is a director of Muamalah Financial Consulting, an Islamic capital market consultancy.