On the Nature of Modern Money
Chapter in "Islamic Economic Perspectives and Theoretical Models." eds Tariqullah Khan and Salman Syed Ali, IRTI, IDB and QFIS, HBKU (Forthcoming)
35 Pages Posted: 17 Dec 2014 Last revised: 22 Oct 2019
Date Written: February 25, 2015
Monetary theory texts teach that governments create money and control monetary policy. Researchers at the Bank of England, IMF and many others show that fractional reserve banking allows the private sector to create money. Most money currently in existence is created by the private sector, through the process of lending on interest. Thus creation of interest based debt is intimately connected to the process of money creation in the modern financial system. It should be obvious that giving the privilege of money creation to private parties motivated by the profit motive would lead to massive concentration of wealth. We provide historical evidence to show that this is indeed the case. This system of money creation is inherently unstable, and has led to numerous financial crises. Any reasonable evaluation of costs and benefits of the current system of money creation by private banks would lead to the conclusion that the costs have tremendously outweighed the benefits.
Current efforts to adapt the Sharia’ (Islamic Law) to allow for modern banking are harmful, since modern banking itself is harmful to economies. The Chicago Plan was devised to return the privilege of money creation to the government where it properly belongs. We show that this plan can be adapted to create Islamic financial institutions which would be substantially different from current western financial institutions. These would be differentiated and specialized, and also provide real world services in addition to financial ones. We discuss the numerous advantages that adherence to Islamic principles would produce. Among these we would list elimination of banking crises, stabilization of economy, reduction of income inequalities, provision of economic justice, and greater investment in projects of high social benefit, rather than private benefits.
Keywords: Chicago Plan, Islamic Finance, History of Banking, Economic Justice, Debt
JEL Classification: E4, E5, P4
Suggested Citation: Suggested Citation