 Okay, Bismillahirrahmanirrahim. Welcome to the 13th lecture on money. My previous lecture on money, I gave just before leaving for Hajj and I was thinking of ending the class at that point. So actually, I looked at lecture and I saw that it's really extremely complicated. I was trying to cover the material given in four or five books in just one lecture and most people didn't have the understanding and so the lecture was almost impossible to follow and I could see that because of the confusion and the questions that followed. So I'm going to basically do that again, but I'm going to cover only a very small portion of the material and I'm going to try to explain it much more clearly this time, especially because this topic of money is extremely important. So with that preliminary, let me go to the green show, the slides. Okay, so these slides are available through bit.ly-slash-ss for slide share and BOM for basics of money. So capital SS and lower case BOM. So these are, I just put them up right now. So you can, there are lots of links in these slides so you can get them. I hope everybody can see the slides. Is the share working properly? Azuzma, can you confirm that these slides are visible? Hello, can somebody respond to me? Yusuf? Yes sir. Okay, so the slides are visible. All right, so we start with the preliminary on Sharia. Actually, the lecture is mostly about the economic theory and we need to know economics before we can discuss the Sharia ruling, but last time most of the discussion after the lecture was about the Sharia status. So I'm just going to make a few preliminary remarks and my recommendation is that put the Sharia to one side, first learn the economics and then you will be able to understand the Sharia ruling much better. This is a standard principle that you cannot give a ruling about something without knowing what that thing is and once we understand the economics of money, then the Sharia ruling becomes much clearer. And at the moment, at the present time, a lot of people who give rulings on money have no knowledge of the nature of money. So in any case, I just wanted to give a few indicative ideas. So Umar Adi Allah Anhu was planning to use camel skin to make dirhams, but he was advised that if we do this, then they will become a shortage of camels. So he did not do this. So it's clear that nobody had objection to the idea of token money, but it was the practical consequences. And Imam Malik also says that if leather is being used as money in some place by social consensus, then he would apply the rules of money to leather, the Sharia rules of money to leather. So there is very old and established positions on the permissibility of token money. I will give some work later. But I want to discuss a slightly deeper issue. Lots of people jump in to talk about Sharia rulings without knowing basics of Sulul Fika. And so I just want to mention three ideas from Sulul Fika, which are important for us here. There is something which is called Ibaratunnas, what is directly written in the Nasus. Nas is the Quran, but also Ahadis, which are clear in the sense that they are Sahih and they are available from multiple sources. So there is no doubt about them. So if there is something which is clear and explicit in the Quran and Hadith in the Nasus and direct, then this is called Ibaratunnas. And you cannot, if you deny this, then you are outside of Islam. For example, to say Allah is one, so to say the Prophet is Muhammad Sallallahu Alaihissalam is the last Prophet and the Salat and Zakat, maybe his basics. Anyone who rejects these cannot be Muslim. But then there is Isharatunnas, which is a hint or indication, not very clear and direct. And then there is Dalalatunnas, which is the something you can deduce from logic by, from the direct sources. So these three types of hukum are very different in terms of what, how their status in the Deen. So there are some hints in the Quran and Hadith that gold and silver are money. But these hints, which is Isharatunnas, they can be considered as a recommendation, which means that you can use it and it may be good. But they can also be description of Urf. This is what is in place right now without a recommendation. So this Isharatunnas doesn't mean that we are bound to use gold and silver. And one can, there are differences of opinion about these things. And these are mercy for the ummah, according to Hadith. So for example, consider the prohibition of smoking cigarettes. So there are some people who believe that this is haram. And some people who believe that no, this is permissible, but there is obviously no direct and explicit and specific hukum regarding cigarettes in the Quran. So this can only be derived by logic. So it's not, not direct. So if somebody says that no, I don't agree that cigarettes is haram, we cannot consider them as out of Islam. So this is, this is something which somebody uses some logic and other people can use other logic. So a basic principle which has been held throughout the ages in Islam is that we must be firm on the usul, the fundamentals. These are things which we cannot relax and we can die for them. So if somebody rejects la ilaha illallah, Muhammad Rasulullah, this is worth dying for. You cannot allow a rejection of the kalama to be within the Islam. But when it comes to furu, smoking or not and token money or you should be relaxed, there is room for difference of opinion and difference is mercy for the ummah. So this is, this is some basic principle that we need to keep in mind for understanding the sharia and its role in our lives. So we should be tolerant and permissive when it comes to the secondary rulings, not the primary ones. The primary ones, we cannot be permissive, but we should be relaxed about the matter of whether one should lift one hand during the prayer or whether one should put it at side or whether one should have it folding. These are not things worth dying for. So now we come to the economics. So the first myth that we learned about money in the books is that money came because barter was in place and it was too difficult because there was had to be double coincidence of wants. If I want something and you want what I have to give, then we can barter. Otherwise we cannot and money prevents this. This is not true. This story is not true historically. People have studied now how money emerged and there is a historical account by David Graeber called debt the first 5000 years and it explains how money emerged. But this is a very complicated story, which I will not go into. But the point here is not to discredit the story, but to understand why this story was put into place and why this is so widespread. Well, basically from Adam Smith onwards, a school of economists has been trying to glorify the free market and to criticize the government. And so the whole thrust of modern economic theory is that free markets are good, governments are bad. So now it turns out as we will see that money, governments play an essential role in money creation. So the story actually is developed only to give strength to the idea that the free market can do everything. So this is the controversy that starts from a long time ago that there are two theories of money. One is that which comes from the free market that money emerges to facilitate exchange. When people are trading, then it is very inconvenient to do barter. So money gets created to make it easy to do market exchange. But then there is also a theory that money is created by a legal framework given by the state. Money is a creature of the law. The law tells us that money can be used for transactions. Now it turns out that both of these things are true. Money is very important because it makes market exchange very easy, but it also requires a legal framework of some sort which we will discuss. So there is a, the dominant stance among economists today is the market exchange theory of money, the barter, the Adam Smith story. But this is only one part of the picture. The other part is called chartillism which says that there is, that money is created by the state and governed by law and by social conventions. And the value of money is created by taxation because taxation makes it necessary for everybody to use money and sets a certain value of money. So one of the critical ideas that comes from chartillism is because money is created by law, it doesn't really require any backing in terms of gold or any other commodity. Now we will discuss this in greater detail later. One of the things that is often discussed in books and appears to have a lot of wisdom is that money is a medium of exchange and a store of value and a unit account and a standard of deferred payment and many other things. But these are actually functions of money, they don't really help us to understand what money is. So this is also a deceptive discussion of money because it's only after money is created that it can have these functions. And the critical question that we need to ask is how is money created? This question is not discussed and by talking about these functions, you sort of bypass these questions and forget about how money got there in the first place and let's talk about how it functions. So this is actually hiding the central importance and significance of the first question, how does money come into existence? First we have given you a false story about how money came into existence and then we say, okay, forget about the existence, even though this story is false, let's just concentrate on what money does. So again, this is a problematic. So the central issue to focus on is how money is created, how money can be created. This is, if you understand this, then you can understand about money. So one of the things is that this is a saying by some famous economist that anybody can create money, the problem is getting people to trust it. I could set up a printing press in my home and say this is an Assad Zaman dollar. I can print it like we can print currency notes in monopoly, for example. Now the question is, suppose I say that, okay, this money will trade for real one dollar bills. How can people be sure, suppose that I put my own word behind it that, okay, if anybody brings this money to me, I will give him a real dollar. So this is a sort of a backing and if people trust me, then they will, they can start using this money. So the issue is, how do we create trust in money? This is critical to understanding money. If trust can be created, then all of the functions of money will come into place. If trust cannot be created, then money will be useless. A lot of clarity can be achieved by thinking about the doomsday scenario. Suppose we are all told that the world will end tomorrow and everybody believes this. Then what will happen to money? Now we know that money cannot be used tomorrow. So if somebody accepts money, then he is assuming that somebody else later will be able to, we will take that money from him. So it should be clear that in this situation, money will fall out of use. People will stop using money for exchange. They will start bartering for whatever they need for the last day of our lives if they need anything. So the point about this is that the value of money depends on the trust that money will continue to be useful. This is very important because money itself is useless. So the question is how can you create this trust? And so the simplest and the crudest method for doing this is to have commodity money. If I am using clothing like silk was used in Japan or if I am using gold or silver or rice or oxen or camels, then these things are intrinsically valuable. So if these are being used as money, then there is no difficulty in ensuring, in creating trust. This is automatic, but if I am using a token money, I am using a leather skin, a paper note, then we need additional mechanisms to create this trust. And very often, most often in history, governments have played an important role in creating this trust in money. Even when you are using gold, governments have played an important role by creating standardized coins. See, if somebody gives you a piece of gold, then you have to go and measure how much, what is the weight of this piece and you have to determine, is this 24 carat or 12 carat, normally people in everyday exchange cannot quantify exactly what is the quality of gold. So the government mints the gold and thereby guarantees that this gold is of the right weight and the right quality. And so that standardization, even when you have gold and silver currency, is done by the government and that also creates, is essential to creating trust that what you are getting is real gold and not fake if the gold coin has a seal of the government on it. So, very often for people who are naive, like I was before I studied money, the question for us is that how can token money exist? You have paper, there's nothing behind it. How can this be used as money? This is the naive question. But once you really understand how money works, then the mystery becomes the opposite that commodity money that is gold and silver and bronze and many other things, objects, you were used as money for a long time. The question is for those who understand money is how come, why wasn't token money introduced earlier and used much more widely? So why is this, where does this question come from? It comes from understanding the harm created by use of commodity money and there are two harms. One is the one that is sort of obvious. This comes from the Hadith we discussed earlier that if we start using leather, camel leather skin for money, then there will be a shortage of camels. People will start using camels for money and you won't find camels to ride upon. The same thing happens when you use gold. The use of gold for normal purposes becomes very expensive. There was a time when Bunker Hunt brothers cornered the market on silver. They were thinking that this will be the commodity money and silver prices rose enormously and people who were using silver in different kinds of things, jewelry and many other uses were unable to get silver for their use. So use of a commodity for money, even now the gold is very expensive in the world today because there is a huge amount of uncertainty about the dollar dominance has been lost. Many other currencies are coming to existence. Nobody knows what will happen next. So central banks are collecting gold among other things because the dollar backing which is which was universally in use around the world no longer seems very secure. So they are trying to develop some other backing for the currency. But this idea that the alternative use of the commodity becomes less. This is not of great importance although it does play a role. You can calculate that it causes a loss. But the much more serious problem with the use of commodity is that it cannot adapt to the needs of the economy. And so this is the point that I will explain in greater detail. Also the issue that may be puzzling is that I have said that money does not require backing but I am saying that banks are now storing gold. So the question is so this seems like a contradiction. But what I want to say is that money doesn't require gold backing but money does require a mechanism for creating trust. This mechanism can be gold but it can also be other things. And so what are these other things we will discuss later. So now we come to the issue of why use of commodity money is bad because it does not meet the needs of the economy. So we find that there are many many cases in history where the money was for example gold or silver but there was not enough of it for the economy to function. And as a result the economy suffered from recession and depression and many other kinds of problems. Now that the what the economic textbook teach is called the quantity theory of money. And according to the textbooks the scarcity of money cannot happen. When you have a fixed amount of money gold for example then the prices will adjust to make it enough. So if you half the amount of gold that is there in the economy then the prices will become half and then everything will work just as before. But this is false. Quantity theory doesn't hold. It has never held in history. And so the the reality is the prices do not become one half when if you if there's a contraction the gold supply it leads to recession and depressions and many other economic problems. So this is something that is important to understand because this remains a topic of controversy among economists. One of the critical contributions of Keynes the revolution of Keynes was that he said that money matters. And this is exactly what conventional economists say and today even the there is a real business cycle theory and according to real business cycle theory money does not matter. What does that mean? I mean it means that the quantity of money just determines the level of prices and has nothing else to do in the economy. So if you double the quantity of money the prices will double and nothing real will change. So this is what the theory currently being taught in macro around the world says even though this is completely false there's nothing to do with reality. So because this is a deadly wrong theory and it is part of the deceptions about money I will explain in I'll try to explain some detail why this is false and why money matters and why there can be scarcity of money even though economic theory says that there is no such thing. So first let me start with the theoretical example suppose that we have a simple economy agricultural economy we have a thousand farmers each one needs to spend one dirham to buy seeds and fertilizer and water and energy the material inputs and he has to spend one dirham on labour and if we can get all of these inputs the capital and the labour then he can produce one ton of wheat and he can sell this for five dirhams and so make a profit of three dirhams. So suppose that we start in economy every farmer has two dirhams then 5000 metric tons of wheat will be produced and the money supply in the hands of the farmers will be 2000 dirhams because every farmer has two dirhams and so everything will work fine but now consider the next scenario suppose that farmers don't have this money but there is money in the economy somebody or the other in the economy has 2000 dirhams then again the economy will function in the sense that the farmers will be able to borrow this money and produce and they will be able to make profits of three dirhams and they will be able to pay back their loan. Now this is an interesting situation because the wealthy people the ones who have dirhams can charge interest and they can charge either share so you give us half of what you produce so if they lend two dirhams the farmer earns five dirhams and then in the end they split it evenly so either both sides get two and a half so the farmer gets a half dirhama profit and they get two and a half or they split the profits in which case they both of them make one and a half dirhams it how this distribution is made will depend on who has how much power if the financiers have a lot of power then what will happen is that they will end up getting all the surplus and this is what has happened in history for a large large period that even though the farmer makes three units of profits basically the financiers take all the profits away and leave the farmer with just enough to feed himself and to be able to plant for the next season so because if they don't lend the money the farmer will be able to produce zero and he will be hungry and star so the financiers have a lot of power in these economies but consider the third scenario where there is just not enough dirhams nobody has 2000 dirhams so in the whole economy there are only 1000 dirhams then what will happen only half of the farmers will be able to produce and 500 farmers will starve to death and there will be no production so this is the critical scenario if there is shortage of money production will not take place and so there's a recession even though the economy could have produced 5000 tons the economy only produced 2000 tons because there was only enough money to do that much and shortage of money led to a severe loss this was the critical contribution of Keynes Keynes said that contrary to traditional economic theory money matters money matters in the short run and many matters in the long run if there is less than enough money there will be a recession in the economy now if you want to formalize this and we need to formalize one has to understand that this is a general principle that understanding requires theory if you have a set of events this is what happened if you want to draw a lesson from it then you have to extract a lesson which is at a higher level of abstraction so that it can apply in other places if you say okay farmer Musa produced this much with that much labor and this much wheat this is a particular historical event if you say and from that you can derive nothing but if you say farmers who use fertilizer and wheat and make payments now this is an abstraction this is taking this one event but making it more general then the same event might occur again and so this extracting of patterns from history this is called theory and it is essential to understand so the theory we want to develop here is not part of traditional monetary theory not part of traditional economics but is essential and is developed in this book by Graziani the monetary theory of production and basically what Graziani says is money is essential to the production process just like what I have said in the previous slide farmers borrow money and they pay for their inputs they pay wages this all this action happens first first you need money in order to buy your inputs in order to hire a labor and so money is used first and then when money is used up then the production takes place and then you sell your produce and then you get the money back now if you compress the time if you say everything happens all at once then the money disappears and this is why economics doesn't have any time in it and actually Keynes introduced the timing factor to show to explain why money matters is that first we use up the money then we earn the money now suppose that time is compressed everything happens in one period then the money can disappear because the money you earn is the money you pay and and basically you can take it out of the picture you can say you can think of it as suppose I just write a note that okay when production comes takes place I will give you the wheat equivalent of money then money can disappear and basically what you have is a barter economy and one important insight is that modern economic theory is purely a barter economy even though what we live in is a monetary economy that's where real business cycles and modern macro comes from they are building a theory of a macro which is based on barter there are there is no real money in the system in the modern macro so but if there is timing money must be paid first and then earned later this makes a big difference for us the critical insight is that in economic theories they write the production function as a function of capital and labor but we need to put in money into the production function because without money nothing will get produced and if there is insufficient money then the output that will be produced will be less than the what was possible this is called potential output in economic theory potential is what was possible to produce an actual may fall short of the potential so there is a lot of theory which can be said but as I said I'm trying to skip this lecture very simple so some of the consequences of the idea that money is necessary for production is that money must be present to allow production to take place if there is insufficient money then there will be unemployment of resources people there will be farmers there will be land there will be seeds in the market but the market but the farmer cannot buy those seeds there will be labor but they will not get jobs because the farmer doesn't have money to hire them even though if the money was present he could hire the money and he could borrow the money and repay profitably after production but there's no money so he cannot do it so one of the critical consequences that unemployment will take people will not be able to find jobs to feed themselves even though if they take the take those jobs and this is where the idea of helicopter money comes in suppose that somebody runs around with a helicopter and drops money on the economy suppose it's just tokens he drops papers and says this paper will be equivalent to gold and suppose that everybody believes this then the farmer can produce wheat he will be able to hire the people and then the laborers will be able to use the money by wheat and the farmer will have wheat in the end so everybody will be happy and the token money will disappear in the end you can make it so that any the money came in there was a promise to pay gold for it and the money just gets all used up the laborers are paid wages and then when the wheat is produced they buy the wheat and the money just disappears suppose that the farmers borrow one or two dirhams of token money they pay then they produce wheat and the laborers use their token money to buy the wheat and the farmers use the repayment to repay their loan so now the money disappears there is no money anywhere because the original loan that came in as a token money has been repaid by the same token money it was never actually cashed nobody actually went to go and and say okay I have this token money give me the gold and and yet with this token money production took place so this is one very important thing to understand that this money token was used and it brought a lot of benefit and it ultimately disappeared from the economy from the accounting and everybody benefited so that is one of the reasons why use of token money is important now so this is one part of the picture which Keynes said that if there is insufficient money there will be unemployment if there is too much money then there will be inflation this is what the Keynesian theory says but actually this is not true access money can have inflationary effects but it can also have many other kinds of effects that we will discuss somewhat later now as I said we will give many examples of why money matters in the long run and in the short run one of the examples which you see a lot in history is that even when gold and silver were in use as standards gold and silver were too expensive to use for daily transaction you couldn't buy eggs for it with it and you couldn't buy small things with it so but markets need this money so people invented different kinds of token money for day-to-day transactions in the USA UK Japan and many other economies throughout the world you can find periods where money is in use and it's either gold or silver or some other type of money but it's but the units are too large for use in daily transactions so people invented different kinds of token money in Japan there was a wood money in use in UK they had different kinds of private parties issue far things which were very small units of money and they were all token in Islamic civilization this was called Fulus Fulus was small change and it was token money and basically you circulate in a small area the governor of the city would issue some tokens and they would be used by the citizens but basically so this was token money because again the point that I want to make here is that the token money came into existence because of the needs of business the needs of the economy the economy needed small amounts of money and these small change were not available in the gold and silver so token money was created and in Islamic civilization nobody everybody has approved of the use of Fulus as money so one of the myths that is taught in textbooks is that the government controls the supply of money so what they do this story almost anyone who is an economic student should probably know this that the government creates high powered money and then there is a multiplier and you take the high powered money and multiply it by the multiplier and you get the stock of the money in the economy and so according to this theory which is false the government can control the total money in the economy by changing the amount of high powered money they create now the truth is that in most financially advanced economies today the governments create only a very small amount of money less than 5 percent and financial institutions which were mainly banks but since the 90s there has been thing called shadow banks which are sort of not banks but bank like institutions which also get to create money these things create 95 percent or more of the money and how do they create this money this is not explained in textbooks and this is very critical to understanding money so so again this is this myth of the money multiplier hides the role of the banks in creation of money because it says the government is in control banks have nothing to do even in books textbook you can find that bank written explicitly I remember reading it when I was studying that banks do not create money this is literally false banks do create money and actually there was a paper written by the bank of England recently research paper in which they said that what the textbook right is false and banks actually do create money so this modern story to understand this we have to go back to the ancient story of the creation of the bank of England now what I would like to say is that there are many many many different ways of creating money and they have been used in history but what happens is that once a successful method of creating money emerges and what do I mean by creating money I mean creating trust in money you have to have an institutional structure which lets people trust the money that they are using and so once a particular success has been recorded then there is a bandwagon effect everybody say okay we have a successful way of creating money so let's just follow this instead of experimenting so there was a period actually when the bank of England was created there was a huge number of experiments going on on how to create money because there was a shortage of money and people needed money for the economy but there wasn't enough money available so people were trying many different things to create money and some of these were some of these failed some of these had partial success for a while and then there was failure so then the bank of England came around and it managed to successfully create money and then basically it was widely imitated so the all the other options were lost now it is very possible that one of these options was a better option this is called a bandwagon effect if you remember the in the mobiles and in the computers there's macintosh and there's windows there were many many operating systems but once one of those systems became popular then all other systems were abandoned because everybody jumped on the bandwagon so that's why we need to study the history of the bank of England because this is the model which emerged and became successful and then it was globally imitated so today throughout the world the pattern of trust the pattern of the institutional pattern used to create trust by the bank of England is now in use throughout the world even though this is not a good model as one of the governors of bank of England said the banking system we have in place today is the worst possible system and we need to find a better system but because alternatives are not around so people and and it's costly to experiment suppose we try a different structure and it doesn't work this will cause an enormous enormous economic catastrophe like in India they tried this experiment of cashless economy and it didn't work it collapsed it caused lots of hardship to millions but mostly because the hardship was on the poor so it didn't matter but anyway they they still finished that experiment so now to go back to the history of bank of England we understand that whatever if you historically kings needed money lots of it for wars but they could not they could raise only a small amount by taxation and it was difficult to force people to give up money first of all people didn't have much money technically kings could borrow money from goldsmiths or others wealthy parties but there was a problem with this because kings were all powerful so if they borrow money they didn't have to pay back because they could say oh this is the law now it's mine so in general kings could not collect money directly from the people so what they would do is tax the aristocracy so the other wealthy people so there was there was an aristocracy the wealthy people which were few in the economy and king would be chosen again among them and because the king would have a lot of power so he would take his enemies and just possess their land so ultimately the parliament was created to restrict the powers of the king and one of the critical things that happened in this process was that the king was the power of taxation was and creation of money was taken away from the king and given to the parliament so the king had to submit a budget to the parliament that this is what i want to do and this is the money i need so please approve my raising this money from taxation so if the parliament approved then the king would get the money but if the parliament didn't approve then the king would not get the money so in 1690 there was a battle in which the french navy crushingly defeated britain king william was in power and in order to protect the england he needed to he needed a lot of money to build a navy so basically he calculated that he wanted 1.2 million pounds and he was willing to pay 8 percent interest but nobody was willing to give him this loan the money was available in the private sector but nobody wanted to give him because they didn't know whether he would be able to pay back and even if he was able to pay back maybe he didn't he wouldn't pay back and use power and so the financiers came to him with a scheme they said that we will give you the 1.2 million you want but you have to give us the power to issue money so king had no choice and he did because he needed that money so he said okay we will create the bank of england and the financiers will get the power to create money in england in the name of the king so this would be official money but created by the private source and also he promised to pay the 8 percent in gold via taxation so but the bank of england said that we will also collect this money on your behalf so they also got the authority to collect taxes on behalf of the king so they could get they they would ensure that they can get 96,000 pounds they could raise it by taxes and they could create new taxes to acquire this money so this is the king so how this happened this is this is of importance to understand the king issued the bank of england an IOU he says I will pay you he gave them a note think of it as a piece of paper in which he wrote the king of england promises to pay 1.2 million pounds of gold in five years time so this is a debt this is a note a promise to pay now the bank of england issues a paper note saying that this is one pound of money of england this is one pound of money of england and this money is backed by the promise of the king what is the meaning of this that five years later the king will pay us gold and we will give you one pound of gold and return for this one pound paper note so technically this the king has promised us and the king's promises good is gold that's what they said so this is called this is called monetization of debt the king's debt was converted into money the bank of england issued money of the realm the england pound notes and these are these are to be used as circulating money throughout england and they are backed by the promise of the king promise of the king is indirect here because this is the promise that 1.2 million pounds of gold will be paid in five years and actually both the banks and the king know that the king will never pay this promise and the bank actually built this into the note they said that if you in five years time we will give you another loan of 1.2 million so that you don't have to pay the original so the original will never get paid so but so this is one part so part of the the as I said the issue is not the gold behind the currency issue is how to create the trust so one part of the gold one part of the trust that was created by the bank of england was that okay this is a paper note it is backed by a promise of the king so this is only halfway there but it is important the note had official authority it was issued by england on behalf of the sovereign so it had the authority of the state this was not enough but the bank of england also had another weapon to create trust they had a lot of gold they didn't have 1.2 million pounds but they had half a million pounds say so with this what they did was that anybody who wanted to convert that paper now suppose somebody came into the bank and they said okay you have given me this paper which says this is one pound of gold so give me the pound of gold so actually the bank of england could say look this gold is going to come into our hands five years later when the king pays so i can't pay you but then that would have been very bad for the trust in the paper so what the bank of england did was it anybody who wanted to cash it they would give them the gold so paper was freely convertible into gold and there was no problems so when people saw that yes anybody can go into the bank england ask for gold and they get it and people tried and they got it and even they were attacks on the bank of england the other banks were jealous of this privilege and they gathered a large amount of notes and then they took them all at once to see and the bank of england was aware that this kind of thing would go on so they accumulated a lot of gold for this purpose they would borrow it and so they would just cash every note that was presented so this process created trust in the paper so after people came to believe that the paper can be cashed for gold they stopped cashing it because now the paper is good and gold and paper is much more convenient to carry around than gold gold is much more vulnerable to theft and to many other is difficult to carry around but paper is easy to carry and is difficult to you is much more easy to protect so the notes began to circulate once these notes began to circulate the bank of england had an enormous advantage they could print a lot of money without backing generally speaking so if they have so one of the things they did was they took this these notes 1.2 million pounds and they gave it to the king that's what the so this money creation is a very strange and very paradoxical thing it's very hard to understand the king issued an iou and the bank issued notes backed by this iou and they lent this money to the king at eight percent interest this is just any hard to understand any the king the king gives the iou the bank of england creates notes worth the bank of king issues an iou of 1.2 million the bank of england issues pounds worth 1.2 million which are backed by the iou of the king and they turned around and they lent this paper to the king at eight percent interest what is happening here because the it's just the it's just the king's iou which is being lent back to the king himself but there is a difference here that the sovereign notes issued by the bank of england were backed by a promise of the bank of england to convert them to gold so now this promise which was actually carried out and the notes were converted but there was not enough gold there to convert all of them but they were never required to convert all of them so basically what's happening here is that the bank of england successfully created trust in the money and this is the crucial thing what the bank did was to discover a mechanism for creating public trust so what happened as a result of this money creation there's there's lots of complex details and I have discussed these details in link that I gave but I'm just going to try to keep things as simple as possible so the king was able to get these 1.2 million pounds as loans backed by his own promise and these were usable in the market he could buy things with it he could even buy on the foreign market because these things were actually convertible to gold whereas his own promise would not have been convertible to gold so he built up a huge navy this created industrialization because they had to build ironworks to make the nails and other material needed for the ship building they had to make advances in agriculture to feed the navy and basically all of this change was very beneficial to transform the economy of england and basically this measure led the kingdom of great britain to become among the most powerful countries in the world so this trick of creating money from nothing was of central importance to the power of the uk and it made the uk dominant power in the world and today in a similar way the us dollar unbacked by anything made us the dominant country in the world and enabled them to fight trillion dollars wars because they were able to just print money to finance them unlike anybody else so this token money has been of great value although even though it has caused a lot of harm to the world but it has had a lot of power so as I said the creation of fiat money has been closely linked to war king of england created this token money for use in war against france american civil war between the south and the north both parties issued token monies to cover the war expenses the confederates lost and so the money they issued became of zero value because the money was created as a promise to pay under the assumption that we will win the war and if they won the war then the money would have been honored by the government but the government was destroyed so the currency did could not be valued but the greenbacks which were issued by the north continue to be legally valid instruments although they have been retired so again there was no backing for these currencies but the trust that the our party will win the war and then they will be able to honor whatever debt is there so what that the lesson that I am trying to draw here is that when in an emergency like war you need a lot of money you create it by trust you say that okay I need to here is a note and I will pay after I win the war and so this circulates and this makes it possible for you to conduct the war you have to hire soldiers and you have to do a lot of buy weapons and so on and so you do that by issuing notes you don't have gold for this because it's an unusual and large expense and so currency is created by trust if people think that you can win the war then they will honor your note people think you can't win the war then they will not honor your note in the south versus north the civil war towards the end of the war the confederate note lost all value because people thought that the the south was going to lose and so these notes were not going to have any value so basically money is based on trust you can see it clearly in emergencies like war but the same is true in normal times but it is not so obvious so now I would like to ask about the what happens if you issue unbacked currency what makes the value of its stable so the crypto coins today show that anybody can issue money and these are unbacked and they are based on trust and the trust exists people are using crypto today but the value of crypto fluctuates enormously because there is no link to any reality so this is not good quality for a currency today we have pakistan in economic distress because there has been a huge variation in the usd to pick our ratio so the question arises that okay so we are going to use token money how can we keep the value stable and this amounts to basically making sure that inflation is 0 percent and then again the suggestions comes up that okay we can keep it stable by tying it to something which is stable in value like gold but this argument is illusionary the price of gold has been stable for long periods of time but there are periods of time in which it was highly unstable and this happens in war times when the demand jumps and also when new gold mines are discovered so a value of gold not necessarily stable but the more important argument against gold backing is that the gold back currencies cannot flexibly adjust to the demands of the economy so what we need to do is to create trust in our currency and we need to be able to create trust without giving using gold backing to do this we need to understand inflation again economists have no idea what inflation is how it is called the standard theory is a myth the standard theory was created by Friedman that inflation is always and everywhere a monetary phenomenon more money more inflation less money no inflation so this is false money does money has an indirect relationship to inflation inflation is caused by rising prices prices are markup over costs so basically inflation is caused by increasing costs and monetary policy has two goals one is to keep the exchange rate stable so that the international trade prices are stable and the other is to keep the provide enough money for domestic needs so these two goals are in conflict if you try to keep the exchange rate stable then you have to have less money you can't increase money because if you increase the amount of rent a lot of pkr then the dollar rate will the value of rupee will go down but suppose the domestic economy wants to have more pkr then you have to either let the rate slide or you have to let the domestic economy suffer so historically the gold standard was used to keep the international trade rates stable but also this caused a lot of suffering in the domestic economy but this was not a problem for england because the aristocracy didn't suffer the working class has suffered and so they didn't mind the aristocracy keeping the gold standard the gold standard was favorable to the elites the powerful and the wealthy and harmful to the working classes and it stayed in place for a long time because nobody cared about the working classes thought so this is again a very complicated story and i've given a couple of articles about it but basically the gold standard stayed in place but it was destroyed by the world war is because the gold stocks were depleted so in the second world war the breton woods agreement created the usd standard and then the vietnam war caused so much spending of dollars by the usa that the usa was forced to go off the dollar backing for the gold so then we have the floating currency so the critical thing to understand here from the point of view of the sharia is that if you want to give a ruling about money money has changed four or five different times in the 20th century the nature of money it was gold back then between the wars there was a chaos period then after the war there was us dollar based currency and then uh nixon shock in 71 led to floating currencies and then you had deregulation in the rig and thatcher error which led to the rise of shadow banks and other kinds of money came into existence so without understanding this you cannot give a sharia ruling on money so i'm taken more time than i had planned but we are nearing the end so basically we need to prevent inflation and this is a complicated process that requires many steps but the first step is to avoid imported inflation if the cost of uh energy goes up and you as in pakistan are importing energy then you will have inflation this has nothing to do with monetary policy so uh the only way to avoid this inflation is to become self-sufficient in energy and in food basically in essentials you should not rely on imports if you rely on imports then you will always be vulnerable to the threat of imported inflation and nothing you can do with monetary policy will prevent inflation so this is again contrary to the freedman rule that inflation is a purely monetary phenomena inflation depends on cost if you have essential imports and they become expensive you will have inflation so modern monetary theory offers a way we can avoid we can have zero percent inflation and for that we need a sovereign currency government must never take must never borrow in foreign currencies so what happens if you have need imports and you don't have enough dollar exports again the government should not borrow in dollars what is a when you borrow in dollars you are promising to pay dollars in the future how will you generate these dollars you will generate them by export earnings in the future so whatever you plan to export tie that use that as payment say that i will i will give you whatever i earned from a certain block of exports so it's possible to convert dollar loans to promises to pay in domestic currency or in domestic resources only in this way can you have complete control of monetary policy there are other steps we can take there is a article in modern monetary theory which says that the natural rate of interest is zero and basically modern monetary theory is islamic in the sense that it argues for a zero interest zero inflation and zero unemployment and it explains how you can do it we need to control the value of money the value of money is determined by wages i'm going to go skip these because we are basically one of the problems that is not recognized by modern economics but is very important in islam is that you have to differentiate between needs and wants so commodities which fulfill our needs are important and these should be part of the gnp but commodities which are luxuries luxuries these should not be counted as gnp and basically capitalism sets up a system where people are encouraged to expand their needs and to make their wants into needs because capitalism produces a lot of surplus and to sell that surplus it has to make people desire that surplus so capitalism is a very consumerist system where everyone is turned into a consumer because without that the system would not work you would not be able to produce massive amounts of surplus and if you produce it no one would buy it so we need to correct the measures of gnp to take care of only the basic needs so one of the critical aspects of the modern monetary theory is the job guarantee everyone can be given a job and the main insight here is that we can create the state can create money if it has a sovereign currency and if it creates money it can use it for socially beneficial purposes and one of these beneficial purpose is to give a productive job to everyone who wants one and this will not be inflationary because you will produce money but you will also produce goods by use of that labor and so the money will be offset by the goods so basically money is free to produce if you if it has token money and so we should produce large amounts of it create as much social welfare as possible but this has not been done historically in instead the privilege of creating money has been captured by a very small financial elite and it has been used to create concentration of power and wealth in a very small number of hands and this elite has recognized the central importance of the power knowledge connection and they have created the textbooks and prevented the truth about money from reaching the public so today economists as a whole believe a lot of myths about money so how can we create money to use for public welfare instead of for the private use by financial institutions there is a debate in the west about what we need to do and that's basically to take away the power of money creation from private banks and give it to the government but this is not a good solution because governments throughout the world are also corrupt and government lack the information needed to serve the public interest so there is a solution I have given which is based on three partners based on communities and Islamic banks and governments and this requires Islamic banks to be instead of being a profit-making making commercial bank like the western banks it should be in the business of producing money for the benefit and service of the community and I have summarized how this would work in a new vision for Islamic banks much more is possible using money creation I have sketched the elements of an Islamic monetary policy here which would be used community-based money creation for projects of social value and I've given some suggestions some specific ideas which can be used and a small and easily implementable ideas a skill loan where you banks provide money to create skills in people which would enable them to get jobs but a much more radical and revolutionary idea is Islamic bank could give a life loan to a person any child who is born gets enough money for 20 years to enable that person to become a productive member of society and then when he or she starts earning money they can repay the loan this is like your 30-year mortgages in the USA where you take a huge chunk of money at one time and then you pay it over the lifetime for 30 years so like that a large loan can be given to sustain all you know you pay for schooling and health and clothing and housing and education until the person whom you have given the life loan to becomes a productive member of society and then you can get repayment so all of these are ideas which can be implemented if we put the if we think about seriously about money creation for public welfare instead of money creation for welfare of the financiers okay so that is the end of this lecture and I am going to open the floor for discussion and questions I have taken a little bit longer than usual so all right so that's the end of my lecture and now we are open for questions I hope that Henry yes can you unmute or and ask yes yes Henry salamu alaikum sir alhamdulillah Henry is an old student of mine we have very little time so let's focus on questions related to the lecture yes sir ibn khaldun says in his book mukaddimah yet rich country rich country is not the country has huge money but rich country has is a country that huge productive sources domestic productive sources that is correct so from your lecture I just remind to my mind that what ibn khaldun says for 500 years ago come to the reality in my mind thank you sir yes that is correct that is correct that you see this money is a myth the government needs money to development no we need real resources money is an artificial resource you can produce as much of it as you want so the real resources do you have land do you have people do you have material resources so if you have all of those if you have trees you have soil you have seeds you have people who have the skills then what's the problem why why you are saying that we don't have money to hire people you don't need money you print the money you need and that's that's really the one of the central messages for mmt modern monetary theory yes thank you very much sir okay any other questions all right if there are no more questions we have used up almost 90 minutes so we can stop is there any message in the chat oh i see the chat has been aslamu alaykum sir can i ask a question yes please go ahead thank you so much sir for such a nice lecture it really answered a lot of questions um i recently attended a talk and um and i asked the question that some banks do create money like the conventional banks so the speaker said that yeah they if there is a bank they will definitely create money um into the economy and there was an option available that banks could work as an asset management do you think that if banks follow the asset management model they would not create money into the economy and it will be beneficial for real economy to connect with financial system uh banks yeah the job the the job of banks in modern economy is to create money so no bank can avoid doing that as far as asset management is concerned this is just a way of making more money and this is the standard profit orientation of banks and what i'm saying is that in order to create genuine islamic banks the motivation should not be to make profits it should be to provide service to the community so how that can be done requires thinking in a very different way and so asset management is definitely not the way to go so let me ask fatma sumru yes fatma can you unmute yourself and ask the question aslamicum aslam sir what about the importance of crypto money in today's economy crypto is useless it's not important and it is not a good model as i said it doesn't have tie to anything real and so its value is very erratic and variable and we have seen that so one needs uh that that's not helpful for us and i've discussed this in detail in a number of other lectures thank you all right hamid hamid charif thank you sorry uh i muted you by accident and mute yourself again again yes okay yes i can hear you thank you i'm saying aslamic first and thank you for a very insightful lecture i have a quick question that during the covid would you agree that the way that the major powers have printed money a lot of ostensibly to address the social crisis to what extent can we find evidence for some of the ideas you have suggested in your lecture that printing money can in fact be used for social for social goods yes i think that there is a lot of evidence that a lot of different governments nearly all over the world printed money token money without any backing and that was very helpful for the public interest because the economies would have collapsed without it and especially in pakistan we did a especially good job in terms of supporting people who were put into crisis by the uh by the covid so yes uh money can be created for public service and uh oh anas sarha thank you for your comment i'm happy to hear this uh there is a comment by putz gundrat about uh mmt conference in the um chat so i'm just going to repeat that i don't know what's happening in the chat i'm just repeating the comments so this is for mmt there is a lot of overlap between ideas of modern monetary theory and islamic ideas and actually i'm working with some experts in mmt to on on the general topic of mmt meets islam if there is any hope of creating a zero interest economy today it requires a theoretical framework and this theoretical framework is now available via mmt so this is definitely something very worth studying for muslims so shahid sultan asked this chat question the definition of bay in sharia calls for real counter value on both sides the real payment is inevitable why don't we simply go for commodity or commodity back money so i think you did not listen to my lecture uh please go over it once again because the whole lecture was answered to this question so anything else any other questions all right so i think we will um quit here i don't see any other questions all right so