2. What is Money?
Money Wealth
Vs.
The Question is: Can we put the sign of equality between these two things?
The Answer: and Yes and No!
3. The Essential Nature of Money
“An information system we use to deploy human efforts”
(Michael Linton)
…Think of the market economy as a game of put-and-take.
Each player takes goods and services from the market, and
each player puts goods and services into the market…
4. The Essential Nature of Money
“An information system we use to deploy human efforts”
(Michael Linton)
$$$.$$ $,$$$.$$
$$,$$$.$$
$$$.$$
$$$.$$
Money is really just a way of keeping score…
…an accounting system.
5. Let’s Look at One Very Simplistic
Hypothetical Example
6. TRANSACTION RM
1 En Ali supplies vegetables to Hotel 1000
2 En Chong needs to pay his son’s tuition fee 1000
3 The School had organized a seminar in the Hotel 1000
4 En Chong renovated En Abu’s office 1000
5 En Abu repaired En Ali’s tractor 1000
En. Abu Mr. Chong En. Ali
A small community of traders…
7. CLAIMS
A = L + (Rev – Ex)
+ – – + – +
1,000 1,000
1,000 1,000
CLAIMS
A = L + (Rev – Ex)
+ – – + – +
1,000 1,000
1,000 1,000
CLAIMS
A = L + (Rev – Ex)
+ – – + – +
1,000 1,000
1,000 1,000
CLAIMS
A = L + (Rev – Ex)
+ – – + – +
1,000 1,000
1,000 1,000
CLAIMS
A = L + (Rev – Ex)
+ – – + – +
1,000 1,000
1,000 1,000
8. SOLD GOODS/SERVISES TO Total
Cr.School Hotel Ali Abu Chong
School 1,000 1,000
Hotel 1,000 1,000
Ali 1,000 1,000
Abu 1,000 1,000
Chong 1,000 1,000
Total Dr. 1,000 1,000 1,000 1,000 1,000 5,000
NETTING EQUITY/MUQASSAH
Total Cr. Total Dr. Net
School 1,000 1,000 0
Hotel 1,000 1,000 0
Ali 1,000 1,000 0
Abu 1,000 1,000 0
Chong 1,000 1,000 0
5,000 5,000 0
For each person all their debts are settled:
10. SOLD GOODS/SERVISES TO Total
Cr.School Hotel Ali Abu Chong
School 500 1,000 500 2,000
Hotel 3,000 1,000 4,000
Ali 300 500 800
Abu 1,000 600 200 1,800
Chong 1,500 800 2,300
Total Dr. 3,300 3,000 1,100 1,800 1,700 10,900
NETTING EQUITY/MUQASSAH
Total Cr. Total Dr. Net
School 2,000 3,300 (1,300)
Hotel 4,000 3,000 1,000
Ali 800 1,100 (300)
Abu 1,800 1,800 0
Chong 2,300 1,700 600
10,900 10,900 0
In this kind of system total credit will be ALWAYS equal to total debit.
So aggregate debt will be equal zero!
Unlike in the system where bank creates money through fractional reserve and interest. There
aggregate debt keeps on escalating and can never be settled in total.
12. 12
Gigantic stone donuts served as money.
They were so huge that once they are brought to the island
no one even moves them – the islanders will just
remembered who owns which one.
In fact, once, when a crew was trying to bring some stones to
the island the storm hit the ship and it sunk together with the
stones. The crew survived though and came back to island
and told people what happened... and guess what?
They said: “it is ok, we still can use them for the trade!”...
13. an information system we use to deploy
human effort...“
“
So for centuries the stones remained under the
sea and yet it belonged to someone and was kept
being used for trade even no one ever saw it – the
most advanced monetary system before the
modern era 😂!
14. Money is simply the value bywhich
goods are exchanged and not the value for
which goods are exchanged…
“
”John Law’s
“Essay on a Land Bank” (1704)
16. 𝑴 × 𝑽 = 𝑷 × 𝒀Money
stock
Velocity
Aggregate
Price
Real things
(GDP)
Everything is in this Simple Equation:
17. 𝑴 × 𝑽 = 𝑷 × 𝒀Money
stock
Velocity
Aggregate
Price
Real things
(GDP)
≠
This side of the equation is
the real things/wealth
And this is only information
about this
So they are not the same!
But both side MUST grow step in step (in equal proportion) with each other!!!
18. 𝑴 × 𝑽 = 𝑷 × 𝒀
In our current monetary system…
This element grows
out of ANY proportion with
anything real
Money
stock
Velocity
Aggregate
Price
Real things
(GDP)
19. Amount of Existing Money Supply Created by Commercial Banks
through Fractional Reserve Banking System
Estimated using Broad Money (M3) less Currency in Circulation (M0)
Source: Computed using data from Bank Negara Malaysia statistics
13,513,000,000
213,513,000,000
413,513,000,000
613,513,000,000
813,513,000,000
1,013,513,000,000
1,213,513,000,000
1,413,513,000,000
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
RinggitMalaysia
M3 - M0
M0
Exponential Growth:
A graph for any other country will look pretty much similar
20. 𝑴 × 𝑽 = 𝑷 × 𝒀
In our current monetary system…
» Problem: If M grows out of proportion then on the other side of the
equation two possibilities:
1. Y cannot keep pace with the growth (because Y, the GDP, indeed
physically cannot grow fast) → P (prices) must absorb excess
money stock
2. If we want P to be constant then we must constantly push for the
GDP growth
» In our current systems, we experiencing both of the above (1 and 2)!
» And both, and 1 and 2, have devastating effects on our society…
Money
stock
Velocity
Aggregate
Price
Real things
(GDP)
23. $20/
oz
$20/
oz
» A fiat currency is money that has no intrinsic value of its own. It
is not redeemable for gold, or anything of value for that matter.
» It takes predominantly two forms — currency notes and coins
(state-issued money) and accounting money such as cheques
and electronic money (created by commercial banks through
loans).
Fiat Money
24. Fiat Money: Seigniorage
» Fiat money has seigniorage, i.e. face value that is more than the
intrinsic value.
» For example assume that the cost of printing a one-ringgit note is 10
sen. Then the seigniorage of the note is 90 sen
» The seigniorage is the benefit enjoyed by the first user
of the note. It is also the advantage enjoyed by
counterfeiters.
» This seigniorage has numerous socio-
economic-political and environmental
implications as it is nothing but
profound riba.
25. Abu Said al-Khudri reported Allah’s Messenger
s.a.w. as saying: Gold is to be paid for by gold,
silver by silver, wheat by wheat, barley by
barley, dates by dates and salt by salt, like for
like, payment being made on the spot. If
anyone gives more or asks more he has
dealt in riba. The receiver and giver are
equally guilty.
“
Sahih Muslim
”
27. Interest requires
endless economic
growth even when
actual standards of
living remain
constant
1 𝑴 × 𝑽 = 𝑷 × 𝒀
»The interest requirement itself does not exist
in the form of money yet. Hence, total debt
(principle plus interest) is not repayable in
aggregate.
»The current monetary system can therefore be
sustained only in a dynamic fashion by
creating more and more money. This is done
primarily by creating new debt that gets into the
economy as additional money.
»Notice, if we want P = const, Y should
continuously grow.
Interest and Its Effects on Economy
28. Interest and Its Effects on Economy
Interest encourages
unhealthy
competition among
participants in the
economy
2 Money = Debt
Private Sector Debt
Government Debt
Due to interest charges, total debt is not repayable in aggregate because interest
payable does not exist in money form. Default/Financial Distress therefore caused by the
mere design of the system.
Micro-level: Competition for money
»Business world becomes increasingly competitive
»Some are able to service debt, some are sure to default
Rescheduling of Loan?
Additional Money = Debt
Indebtedness grows.
Confiscation of Real Wealth
Yes No
There is a max limit to debt level that
can be borne by firms/government.
Further rescheduling of debt is not
possible
Debt Default
Destruction of Money
Banking Crises
Economic Problems
Political Turmoil
29. Interest and Its Effects on Economy
Interest
concentrates
wealth in the hands
of a small minority by
taxing the majority.
3 » Banks are generally in the hands of a minority
(who provide the “financial services”), while the
rest of the nation work in the real sector
producing goods and services.
» Since the banks create most of the money for a
nation in the form of debt even a small interest
charge is a charge on almost the entire
economic output. In dollar terms this is likely to
be huge.
» Being wealthy, this minority group is likely to
have a low marginal propensity to consume.
Therefore, money and wealth would tend to
concentrate in their hands, without circulation in
the economy.
30. 1. Amplified business cycles (continuous financial crises).
2. Disparity in income distribution and creation of poverty
3. Need to control prices of basic necessities
4. Drastic effects on housing sector
5. Prices of controlled goods grow gradually
6. Effects of price control on agriculture (agriculture is not attractive
anymore)
7. Effects on society (women/children have to work)
8. Effects on environment
9. Threat to sovereignty
10. Provides fertile ground for speculation, manipulation and arbitrage
A Whole Host of Socio-Economic Implications
To list just few…
31. 1.fiat money
2.fractional reserve requirements
3.interest rates
𝑴 → 𝑷 × 𝒀
↓ = ↓ =
M × V = P × Y
After full employment and the reach of potential GDP
(when Y cannot grow any more), asset price bubbles
develop in particularly the properties and stock market, i.e.
sectors that enjoy easy bank credit.
At a point in time, absurd price levels in those
sectors, particularly the stock market would prompt
investors, both individuals and corporations to
reevaluate and adjust their portfolios. This portfolio
adjustment brings about sharp drop in stock prices,
property prices and ultimately the aggregate price
level.
Unemployment ↑
NPLs destroy the
money supply through a
multiplier effect
Businesses may
start retrenching
workers to save
cashflow for debt
service. This
transfers what was
originally a problem
in the financial sector
to the real sector of
the economy
P↑
Unemployment
< 3%
_
Y
P↑
Amplified Business Cycles (Continuous Financial Crises)
32. Amplified Business Cycles (Continuous Financial Crises)
𝑴 × 𝑽 = 𝑷 × 𝒀
In the aftermath of a financial crisis Y has a lot of slack capacity. This is because
a lot of real wealth has been destroyed in the process – a lot of businesses
slashed their workforce and reduced production… → slack capacity is available
and Y can start absorbing growth of money stock again once it starts pumping in
again.
And the whole dynamic will repeat again and again and again! That is why we
are having crises periodically and continuously.
Money
stock
Velocity
Aggregate
Price
Real things
(GDP)
33. Disparity in Income Distribution and Auto-Creation of Poverty
» Aggregate price level increase vs income level increase: low-income group
would find the rise in aggregate price level burdensome, particularly if the
prices of basic necessities also rise. Their income grows slower than the
general inflation (aggregate price level).
» Those with very low or no income growth would be seriously affected such
that their purchasing power could fall below subsistence level, pushing them
into absolute poverty levels.
» Plus interest rate that concentrates wealth in the hands of minority by taxing
the majority.
» Therefore, in the present fiat money interest-based monetary system poverty
is automatically and continuously created!
34. Need to Control Prices of Basic Necessities
» Because there is constant prices growth (inflation) it is common for prices of
staple items like rice, sugar, flour, meat and oil be controlled. If people (especially
lower income group) find the price of their lunch increase on a frequent basis
then chances are that they might picket on the streets.
» Therefore, such controls may also be necessary for political reasons.
» Hence, if the price in one sector of the economy were controlled, then the
increasing money supply would find its way into other sectors, and cause price
increases in these sectors at a rate higher than overall average rate of inflation.
Properties and stock market are most conducive for this (people are generally
happy when the price in these sectors increase since many hold these as
investments).
» A growth in the price of housing of higher than 6.73 per cent is likely to be
burdensome on the lower income group. This is because a home is a basic
necessity that takes a large chunk of people's income.
» This would necessitate government intervention on the housing issue for the low-
income group.
35. Drastic Effect on Housing Sector
» While land is fixed in quantity, its price is likely to rise higher than the income
growth of low income group (remember that the property sector is also among
those designed to absorb the increasing money supply).
» This means in due time, housing for low income group will not be landed,
meaning that they are likely to be low-cost flats. Property developers would
respond to this by building smaller and smaller-sized homes so as to make them
"affordable".
» In certain countries, for example, the situation has come to a state where people
practically "rub shoulders" in their homes. These things suggest that in a money-
creating system people will be gradually living in flats or condominiums.
» At this juncture the banking sector comes to the "rescue"—by giving longer
durations to settle housing loans. In the 1970s the average housing loan duration
in Malaysia was about 10 to 15 years. In periods before that, loans for a period of
even less than 10 years were common. But now most banks would even go for
35-year housing loans!
36. Prices of Controlled Food Items Grow Gradually
» Government will be forced to increase prices even for
necessities in a stepwise fashion – gradually over long period of
time.
» Otherwise the producers of those
goods will feel a pinch – after all,
their purchasing power is also
gradually eroding with the ever-
growing inflation.
37. Effect of Price Control on Agriculture
» Since most of the price controls are on agricultural products, in our
money-creating economy, agriculture would become less attractive
compared to sectors that do not face such controls, like finance,
manufacturing or construction.
» Therefore people will find it less rewarding to participate or invest in
agriculture. it would not be surprising if there is a high tendency for
people to convert land allocated for agriculture into lands for other
categories, for example, construction or industrial manufacturing.
Governments are forced to subsidize to encourage agriculture.
38. Effects on Society
» The system automatically creates poverty (#2 in the list) →
» Working longer hours, few jobs, no time for family, social
activities (do we ever talk to our neighbors these days? We all
are busy chasing money)
» Women and even children are forced to work too.
» Those who are really in dire need and below the poverty line
might become criminals. Etc.
39. Effects on Environment
» Constant push for growth.
» Just like agriculture, environment can be forsaken for the prospects of higher
returns.
» For example, if the interest rate is 10 per cent, it becomes a viable business
venture to cut down trees, sell the wood and invest the money at the 10 per cent
interest rate. This is because the trees themselves do not grow at 10 per cent per
annum.
40. Threat to Sovereignty
» The banking system, apart from creating money through loans, also evaluates
loan applications and decides to whom the "created money" would be extended
out as loans.
» In such an economic system therefore, while it is the workers and businesses
who produce the real output and services, it is the banking sector that decides
who would have the purchasing power to buy those output.
» The foreign banks would be creating the money of the country while the locals
sweat to produce the real goods and services.
» With the power vested in the banks to decide who would be given the created
money in terms of loans (and hence the purchasing power), it would only be
matter of time before the banks have politicians under their control and
ultimately the country.
44. The crucial idea that we
must embrace is that…
Money must have beginning
and the end – they are created and
they must be extinguished…
45. Mr. CookMs. Drew
?Credits
» When Mr. Cook creates credits to pay Ms. Drew, he
obligates himself to accept credits from someone in the
system at some future time in payment for his own
goods or services (by making a sale in the future, he will
“redeem”/extinguish the credits that he originally issued).
» Ultimately, we each have only one currency with which to
pay, and that is our own production.
46. Mr. CookMs. Drew
?Credits
» Ultimately money is just an information about the real
goods and services being EXCHANGED
» Therefore, if Mr. Cook, later on, does not accept credit for his
own goods/services from somebody in the system (maybe
from Ms. Drew or from somebody else) than exchange
effectively did not take place!
47. Goods/
ServicesMs. Drew
Credit
Mr. Cook
Mr. Baker Mr. Young
Ms. Zane
Credit
Credit
Credit
Credit
CreditGoods/
Services
Goods/
Services
Goods/
Services
Goods/
Services
Goods/
Services
» In a mutual credit system, the members empower themselves to do the
same thing that banks have done for years, essentially creating their own
money in the form of credit but saving the cost of interest, while
distributing the money themselves according to their own needs.
Mr. Cook
ISSUER
48. Blockchain and AI solutions totally enable
us to tally up this system to perfection and
make it mass success
49. and until we do so, we better do not
even talk about Islamic Finance…
because
50. The truth is that if the strict legal
position of Islamic law is adopted, all
transactions in paper currency [fiat
money] will become invalid.
“
”Nyazee (2008)
The Concept of Riba and Islamic Banking
Advanced Legal Studies Institute, p129
